The Pandemic and Equity Compensation

COVID-19 has completely upended Americans’ financial lives, so it should be no surprise that many people have resorted to exercising stock options and other forms of equity compensation to address pressing needs.

Charles Schwab has published its “2020 Equity Compensation Participant Survey,” which is the latest update in an annual series of reports that track the behaviors of equity compensation plan participants.

Naturally, many of the questions in this year’s survey were focused on the coronavirus pandemic, and, unsurprisingly, the pandemic has driven many people to make decisions about exercising or selling equity compensation.

The Charles Schwab analysis finds 43% of survey respondents have exercised or sold equity compensation at some point in their careers—very many of them recently. In fact, out of this group, two-thirds (67%) say the COVID-19-related market volatility and economic downturn directly influenced their decision.

Discussing the survey findings with PLANADVISER, Amy Reback, vice president of Schwab Stock Plan Services, says there are some dramatic trends tied to respondents’ ages. Far and away, she explains, Millennials are more likely than other generations to have exercised or sold equity compensation due to the pandemic and related financial stress. Among those who have exercised or sold equity compensation holdings, 95% of Millennials say the pandemic influenced their decision, compared with 44% of older generations.

“Without question, 2020 has introduced an unprecedented level of uncertainty, forcing participant investors to reprioritize their long- and short-term financial needs,” Reback says. “For many, reprioritizing those needs is a practical response to an unexpected event such as a furlough, reduced income or unexpected medical expenses. These are difficult, confusing decisions within what are arguably the most challenging circumstances in our living history.”

The survey data suggests a slight majority of participants are planning to use their equity compensation for retirement (51%), but there was also a slight uptick overall this year in those turning to their equity compensation to help meet immediate financial needs, such as paying off debt (9%, up from 5% in 2019) and short-term emergencies (7%, up from 5% in 2019).

“Millennials have experienced a more pronounced impact compared to other generations and may be in more need of help in developing a financial plan,” Reback says.

Reback says another striking trend seen in the data is that equity compensation plays an increasingly important role in the employer-employee relationship. More than three-quarters of respondents (77%) say equity compensation is a very attractive benefit, and an increasing number consider it to be the main reason or one of the main reasons they took their current job (37%, up from 28% in 2019). Of note, Millennial respondents are the generation that’s most likely to identify equity compensation as the main reason or one of the main reasons they chose their current employer (53%).

“Offering equity compensation automatically gives employees a stake in the future success of the company and helps employers to attract and retain the best talent,” Reback says.

Reflecting on this dynamic, she argues employers that offer equity compensation beyond the C-suite as part of their overall employee value proposition can significantly differentiate themselves from those who only offer health and retirement benefits.

“It’s going to be very interesting to see how the competition for talent impacts employers’ decisions about making equity compensation available to more people than was traditionally the case,” Reback says. “Right now, technology companies are leading the way on this, and this is part of the reason why they are winning the battle for the best talent. I expect other types of employers will start to embrace the provision of equity to attract and retain talent.”

The Schwab data suggests younger workers are increasingly comfortable negotiating for better access to equity-based compensation.

“The percentage of people who say they are comfortable negotiating for equity compensation jumped 8% year-over-year, reaching 77% in the 2020 survey,” Reback observes. “It is a very generational dynamic, I think. When I came into the workforce, it took a long time to even get comfortable talking about salary or bonuses. So, being confident in your ability to ask for equity compensation on top of these things, that is a real and positive generational change.”

The average vested value of participants’ equity compensation is $75,483, which is down from $97,711 last year, while the average total value of equity compensation is $130,018, which is down from $149,835 last year. Year-over-year declines in value are potentially the result of lower share price valuations for individual organizations and of participants exercising/selling their equity compensation.

“Equity compensation often represents a substantial amount of an individual’s wealth and the stakes are very high,” Reback said, pointing to the importance of data that shows there is widespread demand for education and advice about equity compensation. “Participant investors are more engaged with their finances than ever before due to the pandemic, and it’s our mission to provide the guidance and resources they need to achieve their goals, despite this crisis.”

The new Charles Schwab report was published the same week that Fidelity Investments circulated its own employee stock purchase plan (ESPP) analysis. Echoing many of the Charles Schwab findings about the growing importance of equity compensation to a broader base of workers, Fidelity’s research demonstrates that when employees have access to both equity compensation and a traditional 401(k) plan, in an integrated environment, combined participation is associated with better retirement savings behaviors and greater overall financial wellness.

Fidelity’s data shows that employees in both plans contribute an average of 12.5% and 6.3% of their salary in their 401(k) and ESPP, respectively, while employees who only participate in their 401(k) contribute an average of 8.8% of their salary.

Notably, the higher contribution rate for employees in both plans is consistent across all income levels, not just among executives or highly paid staff. For example, Fidelity’s data shows, employees with annual salaries between $25,000 and $50,000 who participate in both plans contribute an average of 8.3% and 4.7% to their 401(k) and ESPP, respectively, compared with a 7.4% contribution rate for employees that only participate in their 401(k).