One of the best things about working in the Pharmaceutical industry is the plethora of long term incentives that are typically offered to employees.
If you've been in the industry for a while two types of benefit that you're likely familiar with are Stock Options and Restricted Stock Units (RSUs).
These are a great way for an employer to give you a benefit directly tied to the company's performance.
Often times these are granted to employees as a bonus during annual evaluations.
And depending on the company, you might actually get the opportunity to choose which type of benefit you receive.
If that happens which of the two should you choose?
Stock Options?
Restricted Stock Units?
Which one is actually the better choice?
Stock Options
If you haven't already I highly recommend watching my video discussing "What the Heck are Stock Options?" but to give a quick summary a stock option is not actually a stock.
Instead it's the "option" to buy a stock at a specific price.
For example if a stock is valued at $100 and you can buy it for $90, your option is worth that $10 difference.
This changes the dynamic of how a Stock Option is valued compared to a stock and gives Stock Options something called leverage - meaning there is much more upside potential if the stock does well.
On the flip side though it is just as possible that the stock doesn't rise or even goes down and the option remains worthless.
Often times when you receive a Stock Option the initial value is $0 with the hopes that it will grow in the future.
RSUs
RSUs are more comparable to actual stock. If you are granted a certain number of shares the value of those funds will rise and fall in the same way that the public stock would.
If that stock price goes up the value of your RSUs will go up, but because of the lack of leverage they will go up at a slower pace when compared to a Stock Option.
On the flip side though if the stock stays stagnate or goes down it is far less likely that those RSUs will become completely worthless. (Unless something extremely bad happens and your company is now out of business)
The way these are valued also means you can see the immediate value of that investment from the first day you are granted your RSUs, as opposed to Stock Options that are usually starting at a $0 value.
So which is better?
It's important to note that there are a number of other differences to consider when making this type of decision - how they are granted, the vesting schedule, the tax implications and a number of other factors are areas you should think about it.
Many of these factors will vary from company to company so a one on one conversation might be more helpful if you're in this situation.
But for most people that ask me this question I find they are looking for one thing - which has better earnings potential?
Simply put a Stock Option has a higher return potential if the company does well but also comes with the large risk of never having any value.
Whereas a Restricted Stock Unit has less overall risk of being worthless, but also has less return potential in the event the company does well.
If you are more aggressive and are optimistic about the future of your company Stock Options might be a good fit.
However if you don't like risks and don't believe there is much growth potential at your company RSUs might be the route to go.
In some cases employers might even let you do a 50/50 mix - so sometimes you can even get a bit of both!
And if the idea of putting money into your companies stock leaves you with a mix of concern and uncertainty, you’re not alone.
That’s why it’s critical to step back and evaluate your position with objective, research-backed insight.
You can receive a complimentary Morningstar report on your company stock when you schedule a brief intro call with me.
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