Employee Stock Options for Australian Expats in the US – In the quest for better employment benefits, Australian expats are increasingly looking beyond their borders.
While receiving company stock options as part of one’s remuneration might be rare within Australia, it is a common practice in many international companies with expats.
In Australia, where wage growth has remained stagnant in past years, the allure of employee benefits like company stock options cannot be underestimated for Australian expats.
Large multinational corporations often offer these benefits to attract and retain top talent. Understanding the advantages they provide can empower you to make informed decisions about your career and financial future.
This article explores the uncharted world of company stock options, shedding light on what they are and the important considerations that accompany them.
What are the different types of stock incentive renumeration?
Non-qualified Stock Options (NSO)
A NSO is a form of employee stock option that grants the employee the right to purchase a specific number of shares from their company at a pre-determined price within a set timeframe.
The price at which NSOs are offered is typically set equal to the market value of the shares on the grant date (when the options become available).
It’s important for employees to be aware of the expiration date, which represents the deadline for exercising these options. Failing to exercise the options before the expiration date results in the forfeiture of those options.
Why choose NSOs? One key factor driving the preference for NSOs is the anticipation of potential growth in the company’s share price.
This anticipation creates a valuable opportunity for employees to exercise their options at the pre-set share price, ideally lower than the prevailing market price.
The employee can then elect to sell the shares at market price immediately, or hold onto them to sell later.
It’s important to note that you pay ordinary income tax on the difference between the grant price and the price at which you exercise the options.
Incentive Stock Options (ISO)
Similarly to NSOs, ISOs provide employees with the opportunity to purchase company stock. However, ISOs offer an additional advantage by granting employees the right to buy shares at a price typically lower than the current market value.
Given the discounted price at which ISOs are granted, it becomes an attractive scheme for employees to exercise these options and enjoy the resulting capital gain.
Additionally, one significant benefit of ISOs is the potential for favourable tax treatment on any profits generated.
Unlike NSOs, the profit from ISOs is generally subject to the capital gains tax rate, which is typically lower than the rate applied to ordinary income.
This tax advantage further enhances the appeal of ISOs as a valuable employee benefit.
Restricted Stock Units
A RSU is an award of stock shares, usually given as a form of employee compensation and have gained popularity as an alternative to traditional stock options.
Unlike stock options, RSUs do not require employees to purchase the shares. Instead, RSUs are granted outright, but they come with specific conditions that must be met before the shares can be transferred to the employee.
RSUs typically have a vesting period during which the employee must fulfill certain conditions, such as remaining with the company for a specified period of time.
Once the RSUs are vested, they hold tangible value, which is often determined based on the market value of the stock on the vesting date.
The remaining shares are then received by the employee, who retains the right to sell them.
Unlike traditional stock options, when an RSU vestment is received, the value of that employee’s vestedment in stock is counted as ordinary income for that year.
This usually requires a portion of the shares to be withheld to cover the income taxes linked to their value at the time of vesting.
If the employee chooses to sell the stock at a later date, the difference between the sale price and the market value at the time of vesting is treated as a capital gain or loss.
What is a vesting schedule?
When it comes to employee compensation, the vesting schedules play a significant role in determining when you gain ownership or control over your company stock options/units.
Put simply, a vesting schedule is a pre-determined timeline of set conditions which serves as a roadmap, outlining the milestones or duration that employees must fulfill to gain complete access to the benefits offered.
A common vesting schedule is three to five years and act as a strong retention tool for employees.
Case study example: John’s Experience with Exercising Google NSOs
To provide a concrete illustration of the potential benefits of Non-Qualified Stock Options (NSOs), let’s examine the case of John, a software engineer at Sabre a large tech company in California.
When John joined the company, he was granted 1,000 NSOs at an exercise price of $100 per share. At that time, the company stock was also trading at $100 per share.
As John closely monitored the company’s stock performance, he noticed that the share price rapidly increased over the years.
After three years, the market price reached $250 per share. With this significant appreciation, John decided it was the right time to exercise his NSOs.
By exercising his NSOs, John was able to purchase 1,000 shares of Sabre stock at the pre-determined exercise price of $100 per share.
Given the current market price of $250, he effectively gained an immediate paper profit of $150 per share or $150,000 in total.
John now has several options regarding the shares he acquired. He could hold onto them, anticipating further growth in the company stock price and potentially enjoying additional gains.
Alternatively, he could decide to sell some or all of the shares immediately, locking in his profit.
Throughout the process, John sought guidance from a financial planner to understand the tax implications associated with exercising NSOs and selling the shares.
John’s decision to exercise his NSOs at the opportune time allowed him to capitalise on the growth of Sabre’s stock.
By purchasing shares at a lower exercise price and selling them at a higher market price, he achieved a substantial financial gain.
This example demonstrates the potential benefits that NSOs can offer employees, enabling them to participate in the success of their company and amass wealth over time.
Concluding thoughts
Throughout your professional journey, it is highly probable that you will accumulate a substantial amount of company stock, be it through RSUs, NSOs, ISOs, or a combination of these equity based benefits.
This presents an exciting opportunity to grow your wealth, particularly in the case of large companies or high potential startups.
However, it’s important to recognise that relying heavily on a single company’s stock can expose your wealth to undue risk. This concentration of risk can be mitigated through diversification.
By spreading your investments across various assets and industries, you can reduce the impact of any individual company’s performance on your overall financial well-being.
Diversification is a prudent strategy to ensure a more balanced and secure asset spread.
It is worth emphasising that beyond the benefit types covered in this article, there exists a wide array of other company stock benefits, each with their unique treatment and characteristics.
These include Direct Stock Purchase Plans (DSPP), Employee Stock purchase Plan (ESPP), Employee Share Scheme (ESS), and many more.
Familiarising yourself with these additional options can provide a broader understanding of the various ways to participate in stock ownership, however understanding the intricacies can become increasingly difficult when you begin to consider your expat status and/or repatriation home.
It is advised to reach out to a professional who understands these benefits and its relation to Australian expats to ensure you cover all bases.