Incentive is one of the driving forces in the world. If someone, somewhere is doing something, chances are they’ve been incentivized.
Nowhere is that more apparent than in the workforce. Whether it’s salary, benefits or workplace perks, the companies who offer the best incentives tend to attract the best employees.
But beyond a nice paycheck and quality healthcare plan, what options do companies have to incentivize their employees? Read on for some of the most common and how you can leverage them in your financial life:
Companies that offer stock options to their employees give them the right or privilege to purchase stock in the company. Employees are often only allowed to buy a certain number of shares, and usually have to wait until a certain time to act upon or exercise their options.
They’re allowed to buy the stock options at a price set by the company. The benefit comes if the price set by the company is less than the current market price. For example, if an employee exercises his or her stock options by buying the stock at $10 a share when the market price is $20, they can sell their stock and earn a $10 profit.
Having stock options does not give you the stock – it only gives you the option to buy it. You still have to purchase it with your own money, or determine if your company provides the option of a cashless exercise.
Employee Stock Purchase Plans
Another way to incentivize employees, stock purchase plans are when companies allow their staff to buy stock at a discount and through their regular paycheck. There is often a limit to how much stock an employee can buy – both by the employer and the IRS.
Employee stock purchase plans are like having a coupon for buying stock. Stocks can be bought at a discount of 10-15% from the market price.
Employers often grant bonuses to incentivize employees, reward efficiency and share company revenue. Bonuses are rarely guaranteed and are often a sign of how well a company is doing.
Even if you’re confident in your work, it’s important not to rely on bonuses. They’re never guaranteed, and it can be dangerous to count on money that you might not receive. If you do get a bonus, use it for something practical like paying down high-interest debt, saving for a down payment or contributing to a retirement account.
Many companies offer 401(k)s to their employees and some offer a matching program. Usually, this requires an employee to make a contribution to the 401(k) and the company will match part of that contribution.
Employer contributions vary wildly. Some put in 100% of what their employees contribute, others offer only a small portion. For example, if you sign up for a 401(k) that matches 50% of what you put in up to 10%, that means the employer will contribute 5% if you contribute 10% of your income. Even if you contribute more than 10%, they’ll still only put in 5%.
The employee’s contributions are always 100% vested, which means they have total access to the money they put in. However, some employers have vesting programs that require an employee to work for a certain number of years before they can have partial or total control of the employer’s contributions.
For example, if you are offered a 401(k) with a five-year graduated vesting program, it means that every year you’ll become an extra 20% vested. If you leave after two years, you’ll only be able to take 40% of what your employer has contributed. This is one way that employers encourage their staff to stay longer. Bottom line: Always contribute enough to take advantage of the full company match.
Restricted Stock Units
A restricted stock unit is a stock promised to an employee upon a certain vesting schedule. Restricted stock units come with a vesting schedule to encourage employees to contribute to the company’s growth and ensure the success of its stock. Employees have to pay taxes on the stock units once they’ve become 100% vested in them.
Like 401(k) employer matches, this vesting program encourages company loyalty and low turnover.
Employees may be able to buy the stocks, but they can also receive them as a gift for being an employee.
When looking into employment with a company or when evaluating the benefits offered at your current employer, don’t forget to factor in these incentives as they can add great value to your financial life. I’ve personally helped many clients analyze these benefits and leverage them to efficiently pay off debt, set aside for bigger goals such as home purchases, and maximize their retirement savings. Be sure to work with a professional to factor in issues such as taxes, capital gains and blackout dates for purchases and sales when determining how to utilize these incentives in your life.
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