Share options and bonus payments: Are you accidentally taking more financial risk than you realise?

If you are in a senior position, it may well be that, in addition to your basic salary, your remuneration includes other financial benefits such as bonuses, share options, restricted stock units (RSUs), and perhaps performance-related stock units (PSUs).

For many professionals, company share incentive schemes are their first experience of investing. Indeed, Fidelity research found that 43% of employees became first-time investors through their employer’s share plan.

Then there are annual bonuses, which can represent a substantial proportion of your total income and which you can easily take for granted when considering your future earnings.

All these incentives can be highly valuable and create significant wealth over time. However, they can also expose you to a specific level of financial risk that is easy to overlook.

Your financial future may be more concentrated than you appreciate

Considered separately, share options, RSUs, and bonus payments may not cause you any concern.

However, I would always caution that, taken together, they can create a significant concentration of financial risk.

To appreciate this, think about how much of your financial future depends on your employer:

• It provides your monthly salary.
• Any bonuses you receive are usually dependent on company performance.
• The value of your share options is linked to the company’s share price.

Additionally, your future career development will be linked to the company’s success.

That’s a lot of eggs in one basket.

In that scenario, your income and long-term wealth are heavily dependent on the performance of a single company, which is rarely a comfortable position to be in.

How one company can affect your financial future

There’s no doubt that regular salary increases, healthy bonuses, and a shareholding increasing in value are a powerful combination that significantly boosts your wealth.

However, with your income and much of your wealth dependent on your employer, it’s important to consider what would happen if your employer starts to struggle.

The most immediate tangible impact would be on the value of your shares. Then you may find that the healthy bonuses you’ve come to rely on are cut, or maybe not paid at all.

Ultimately, it could even result in you losing your job.

This “triple jeopardy” – bonus, shares, and salary – is something you need to take seriously if the scenario I’ve described here matches your current status.

History provides plenty of reminders that even the world’s most successful companies can experience rapid decline. Businesses such as Kodak and Nokia were once dominant global brands, yet technological change and increasing competition dramatically reduced their market positions.

Diversification should extend beyond your investment portfolio

It’s understandable if this kind of conjecture leaves you in something of a quandary.

You clearly want to demonstrate confidence in the company you work for, especially if you are in a senior position. However, you appreciate the danger of concentration risk potentially affecting your long-term financial security.

One way of looking at this is to consider your investment strategy. When it comes to your portfolio, you’ll be aware of the dangers of being overly dependent on certain stocks, sectors, or regions. As a result, diversification is likely to be a key driver of your fund selection.

There’s no reason why the same shouldn’t apply to the personal financial risk associated with your employment.

Manage concentration risk with a clear plan

Successful investing comes down to remaining disciplined and avoiding emotional decisions. I’d suggest the same principles should apply to your remuneration package.

Having a clear strategy for managing share options, RSUs, and bonus payments can help you make decisions based on your long-term financial security rather than on short-term market movements or loyalty to your employer.

That strategy might include:

• Considering company shares as part of your overall investment portfolio, rather than in isolation
• Regularly selling some shares and reinvesting the proceeds into a diversified portfolio
• Setting a maximum percentage of your total wealth that you are comfortable holding in your employer’s shares
• Earmarking bonuses for a specific financial purpose rather than as normal salary.

The most appropriate strategy will depend on your financial objectives and the role your share-based remuneration plays in your overall financial plan. The important thing is to have a plan and apply it consistently.

Don’t overlook the tax implications of your remuneration package

Share options, RSUs, and bonus payments can create complex tax considerations, so it’s important that tax planning forms part of your overall strategy.

Bonuses may increase your taxable income for the year, while the timing of exercising share options or selling shares can affect both Income Tax and Capital Gains Tax liabilities.

Understanding how these elements interact can help you avoid unexpected tax bills and make better-informed decisions.

It’s also worth considering how available tax allowances and tax-efficient investment vehicles, such as ISAs and pensions, could help you make the most of your remuneration.

Get in touch

Because remuneration, taxation, and investment strategy are closely connected, a coordinated approach is often far more effective than considering each element in isolation.

If the situation I’ve described here feels familiar and you’d like to discuss your own circumstances, please get in touch.

You can call me on 07769 156250.

Please note

This blog is for information purposes only and does not constitute advice or a personalised recommendation. The information is intended only for individuals.

Please do not act based on anything you might read in this article. This blog is based on our understanding of current and proposed legislation, which may change.

The value of your investments (and any income from them) can go down as well as up, and you may not get back the full amount you invested. Past performance is not a guide to future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

When investing, your capital may be at risk.