Navigating Employee Share Schemes
Employee share schemes, like equity compensation, options or performance rights can be an incredibly rewarding part of your compensation. For employees working at high-quality companies, they offer the opportunity to participate in the business’s success and create long-term wealth. But if not carefully managed, they can also become a source of financial risk and emotional stress.
In this article, we explore how to manage employee equity thoughtfully and how to turn concentrated exposure into a diversified, durable wealth strategy.
The Wealth Creation Opportunity
For those working in innovative, fast-growing, or high-performing companies, employee equity can be the most valuable part of their financial picture. These schemes align employees’ interests with those of shareholders, rewarding long-term contributions and allowing employees to benefit directly from company success and their contributions.
As equity vests over time and companies grow, it’s common for employees to accumulate large and concentrated holdings in their employer’s stock, often far more than a rational investor would allocate to a single position within a diversified portfolio. This creates exposure to idiosyncratic risk – the risk specific to one company, its leadership, or even sector sentiment.
Importantly, this risk isn't always tied to the business’s performance. A founder scandal, regulatory change, or sector backlash can damage a company’s fortunes quickly and significantly. For instance, internal turmoil or reputational issues at companies such as Mineral Resources have led to rapid declines in market capitalisation despite arguably little change in the company's operational outlook.
The Psychology Behind “Holding On”
Managing exposure isn't just about numbers, it's about psychology. Employees often feel a deep loyalty to their company, a belief in its long-term story, or a fear of missing out on future growth.
This can lead to some common biases that may prevent decisions:
Endowment effect: Overvaluing what you already own.
Status quo bias: Avoiding change, even when it's rational.
Anchoring: Fixating on a past high point in the share price.
Illusion of Control: Tendency for people to overestimate their ability to control company outcomes.
Being aware of these biases is the first step toward making more objective, rational financial decisions. This often can take a conversation to reflect on these factors, bouncing ideas off an independent and unbiased view.
A Simple Strategy to Manage Concentrated Positions
Managing a concentrated equity position isn’t about abandoning faith in your company but protecting your broader financial future. The aim isn’t necessarily to sell out entirely, but rather to balance opportunity with diversification and discipline.
Here’s a practical five-step approach to help manage your exposure effectively:
Assess Your Exposure
Start by quantifying your total exposure to employer equity. Include both vested and unvested shares or options, and assess how this compares to your total net worth or personal balance sheet. Is this exposure 20% of your wealth? 60%? Understanding this context is the foundation of sound decision-making.
Set a Target Allocation
For many employees, working at their company is more than just a job, it’s a core part of their identity. Some may never want to fully divest their holdings, and that’s okay. What matters is setting a long-term target exposure that you’re comfortable with, usually no more than 10–15% of your overall investment portfolio. This allows you to retain conviction while reducing the impact of any single company on your future financial security.
Understand Your Constraints
Next, map out any restrictions that may affect your ability to act. Consider vesting schedules, trading windows, and lock-up periods, as well as the tax implications of any sale. Timing really does matter, especially when aiming to maximise after-tax outcomes or preserve eligibility for CGT discounts.
Create an Exit Plan
No one rings a bell at the top of the market. Waiting for the “perfect price” can result in inaction and missed opportunities. Instead, accept that markets are unpredictable, and take a disciplined, gradual approach to selling down shares that exceed your target allocation. Spreading sales across time can help manage both market volatility and tax obligations, reducing the stress of trying to time the peak.
Reinvest Diversified
The proceeds from any sales don’t need to dilute your long-term goals, they can help enhance them. By reinvesting into a diversified portfolio, you can introduce more sectors, asset classes, and sources of return. Done well, this doesn’t mean compromising on returns, it means building a portfolio that is more robust, resilient, and aligned to your objectives. Over time, diversification helps smooth returns and reduce risk.
The Value of Advice
Equity compensation often comes with complex and nuanced tax rules. You might be taxed when shares vest, when you exercise options, or when you sell and each event can have a very different impact on your financial position. Timing the realisation of gains, particularly when seeking to maximise capital gains tax concessions, can significantly affect your outcomes.
Yet these moving parts aren’t always obvious or easy to navigate. That’s where expert guidance can make a meaningful difference.
A trusted financial adviser can help you:
Model the tax and cashflow implications of your equity decisions
Assess concentration risk with objectivity and context
Design a personalised investment plan aligned with your goals
Stay disciplined through market cycles and emotional decision points
Ultimately, this is about more than just selling shares. It transforms a concentrated opportunity into a diversified, resilient foundation for long-term wealth.
Employee equity can be one of your most powerful financial assets, if managed with clarity and strategy. You take control of your financial future by recognising the risks, accounting for behavioural and tax factors, and reallocating with purpose.
If you’re sitting on a significant holding in your employer’s stock, now is the time to ask:
Is this building my wealth, or putting it at risk?
A conversation with an adviser could be the first step toward a smarter & more secure future.
General Advice Warning:
Any general advice on this page does not take account of your personal objectives, financial situation and needs, and because of that, you should, before acting on the advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. Information contained on this page was correct at the time of posting.