How does stock compensation work?

In today’s article, I share with you my learnings over the past couple of years since joining a company that gives you stock as part of your compensation.

Apr 18, 2024

When I joined Microsoft I had no idea how getting stocks as part of your salary and compensation worked.

It was the first company I joined that had stocks as part of their pay packet and I had no idea what they meant in terms of cash into my bank.

In fact, the entire concept was confusing, and everyone was talking to me about them like I knew what they were.

It took me a little bit of time and asking a lot of different questions to understand the differences and what it all meant, but I got there in the end.

In today’s article, I share with you my learnings over the past couple of years since joining a company that gives you stock as part of your compensation.

Unvested vs Vested

The first difference to note is unvested vs vested.

Unvested stock is stock that you are essentially promised from the company, providing you stay there for the duration that it takes to get vested.

So say you are given £50,000 worth of stocks over five years, you will typically get than in quarterly chunks, so you would get £2,500 every three months.

And once you get that paid to you, that means that that is then when it becomes vested stock.

I think of it as unvested stock is stock you are promised and vested stock is the stock that you have at your disposal.

On-Hire Stocks

The first type of stock we are going to be talking about is on-hire stocks, these are typically stocks that you are given when your given an offer at the company, similarly to a sign-on bonus.

The main difference with this type of stock is you typically won’t get any vested stock until you have been with the company for the first year.

As this figure illustrates, say you are paid £50,000 of on-hire stock…

At the end of Q4 in year one, you will get £10,000 worth on stock.

Then after than you will receive £2,500 at the end of each quarter.

Special Stock Award

The next type of stock award is something that you might get randomly due to either winning an award or being recognised for going above and beyond in your role.

Similarly to the on-hire stock, you typically get paid this as a one off, but the difference is you are paid this on a quarterly cadence from the start.

You could potentially get multiple special-stock awards, it just depends on your performance, however they would each be separate from each other.

Annual Stock Award

Annual stock awards differ slightly in that they accumulate over the years if you are paid them each year.

For illustrative purposes say that you are paid £50,000 each year of annual stocks:

In year 1, you are paid £2,500 quarterly, so by the end of year 1 you have £10,000 vested stocks.

You will still have £40,000 of unvested stock, plus the £50,000 worth of stock you’ve now received from your annual stock award for year 2.

This brings your total unvested stock to £90,000

Quarterly, you now will be having £5,000 that’s from:

£2,500 - paid quarterly from year 1 annual stock award
£2,500 - paid quarterly from year 2 annual stock award

And if we repeat for year 3, we then have £7,500 that’s from:

£2,500 - paid quarterly from year 1 annual stock award
£2,500 - paid quarterly from year 2 annual stock award
£2,500 - paid quarterly from year 3 annual stock award

This will reach a peak point at year 5, because then the year 1 stock awards will be fully vested, meaning that in year 5 we would get £12,500 that’s from:

£2,500 - paid quarterly from year 1 annual stock award
£2,500 - paid quarterly from year 2 annual stock award
£2,500 - paid quarterly from year 3 annual stock award
£2,500 - paid quarterly from year 4 annual stock award
£2,500 - paid quarterly from year 5 annual stock award

And in year 6, we would also get £12,500 that’s from:

£2,500 - paid quarterly from year 2 annual stock award
£2,500 - paid quarterly from year 3 annual stock award
£2,500 - paid quarterly from year 4 annual stock award
£2,500 - paid quarterly from year 5 annual stock award
£2,500 - paid quarterly from year 6 annual stock award

And so you can see it’s reached a peak of £12,500 per quarter which equals £50,000 per year.

So it actually takes you working there for five years before you actually receive the full compensation that it says you get as part of your salary and compensation!

Another thing that’s also worth noting that if you leave the company, you will also lose any currently unvested stock.

Shares vs Cash

Now, we’ve talked at a fix figure of £50,000, but in reality that’s not quite how it works…

So you are usually awarded a fixed sum, but you are then paid the shares at the time you were awarded that figure.

So, say you were awarded £4000 worth of shares in 2024, and that equated to £1000 per share, that would mean you were awarded 4 shares.

But say in 2025, you haven’t sold any of those shares, and each share has dipped to £750, you now have £3000:

And say in 2026, you still haven’t sold any of those shares, and each share is now £1,250, you now have £5000:

Basically, if you choose to keep your shares into your stock account, the price isn’t fixed and will change dependent on the share price and so that’s always just something to consider when deciding where to keep your money.

And that’s all from me!

I hope you found this article useful, if you did please can you give it a like and a re-stack, and don’t forget to check out my video where I also break this down there: