|
Key Takeaways:
· What are common benefits of executive compensation packages? They offer more than salary, from tax perks and discounts to flexibility and ownership in company growth. · How can you help avoid concentration risk in executive compensation? By diversifying over time so your wealth isn’t tied too heavily to one company. · What is a 10b5-1 plan? A preset trading plan that lets executives sell shares on a schedule, even with insider restrictions.
|
Executive compensation packages can be some of the most powerful (and most complex) tools in an executive’s financial life. Salary and bonuses may be familiar territory, but once you add RSUs, PSUs, stock options, performance units, deferred comp, and severance agreements, the picture quickly becomes more layered and complex.
One of the most intricate situations we’ve navigated involved an executive approaching retirement with eight distinct forms of compensation spanning two companies, including a 401(k) with after-tax contributions and two different types of deferred compensation plans. Each type had its own vesting schedule, tax implications, and payout dates, and not all of them vested upon retirement. The question wasn’t just “when can I retire?” It was, “how can all these different pieces fit together to create a sustainable monthly income?”
At first, he wasn’t certain that these pieces would be able to come together to create the necessary income stream to retire when and how he wanted. When we mapped the different pieces out, met with plan sponsors to understand the nuances of the different plans, and implemented regular check-ins, the full picture came into focus. Within three months, he gave his notice, confident that the retirement he wanted was both possible and sustainable long-term.
Related: Retirement Planning for High Achievers
Stories like this remind us that an executive compensation package is never just about the dollar figure on a statement. Each piece, from grant dates and strike prices to vesting schedules and even severance terms, can carry opportunities, risks, and ripple effects across the rest of your financial life.
The Value Beyond the Dollar Amount
When most people think about their executive compensation package, they focus on the number of shares or the headline value. That’s a reasonable starting point, but it captures only part of the picture. Hidden value often exists in several forms:
- Tax treatment advantages. Certain types of stock options, like incentive stock options (ISOs), can qualify for capital gains treatment instead of ordinary income. Even though these funds are typically subject to a holding period, that difference may amount to tens of thousands of dollars when you’re in a higher earning year. We work with you and your tax professional to help you determine when to exercise and how to follow any necessary timelines or rules needed to qualify for those tax advantages.
- Discount opportunities. Stock purchase programs may allow you to purchase shares at a discount, sometimes up to 15% below market price. Even after factoring in taxes related to the discounts, you can generally expect a bigger bang for your buck.
- Flexibility and control. Having the choice to hold or sell shares gives you the ability to align decisions with your goals. RSUs, for instance, are taxed as income when they vest, but if sold immediately, you may avoid or minimize capital gains exposure.
- Participation in growth. As an executive, ownership isn’t always just financial. It can feel deeply personal, especially when your wealth grows alongside the company’s success.
Compensation is also surprisingly versatile in that your equity can often be redirected toward other goals. Many people are surprised to find they can use their stock to fund charitable goals, provide liquidity for a major purchase, or create an income stream to be used in retirement.
Different Mindsets Around RSUs
Restricted stock units (RSUs) are the most common type of equity compensation we see, and clients usually fall along a spectrum of strategies:
- Treating RSUs like a bonus. Some sell immediately when shares vest. Taxes are withheld upfront, concentration risk is avoided, and the proceeds can fund expenses or be reinvested in a diversified portfolio.
- Holding everything. Others are confident in their company’s future and keep every share, sometimes paying taxes out of pocket to avoid selling at vesting. This works best for those already diversified elsewhere. The key is timing: selling within a year means short-term capital gains; waiting a year qualifies for more favorable long-term rates.
- The hybrid approach. Many choose a middle ground, like selling 80% of vested shares while keeping 20%. This covers taxes, builds diversification, and still allows participation in company growth. Identifying a target ratio can help create a repeatable, disciplined plan that’s flexible enough to adjust as circumstances change.
There’s no single “right” choice. The key is having a strategy that fits your goals, risk tolerance, and tax situation.
We’ve also seen how emotions can play into these decisions. One client who had spent decades at a Fortune 100 company had built up a large position through the company’s stock purchase program. From the start, he told us he never wanted to sell unless there was a very good reason. Rather than push against that, we worked together to define what “a good reason” looked like.
Over time, he became comfortable selling shares to fund meaningful goals, like his retirement and his children’s futures. And in retirement, the stock became a steady income source with minimal tax impact. By reframing the conversation around how the stock could serve his life, instead of just treating it as numbers on a statement, he was able to honor his loyalty while still moving forward with confidence.
Risks That Deserve More Attention
Equity compensation can be exciting, especially when your company is thriving, and the stock price keeps climbing. But one of the most valuable exercises we walk through with clients is asking: What happens if this stock goes to zero?
That question isn’t about creating fear; it’s about clarity. Seeing how your plan looks without the company stock makes it easier to decide whether holding on is worth the risk, or whether selling some now could potentially help provide lasting security.
A few common risks associated with executive compensation packages include:
- Concentration risk. When your salary, bonus, and portfolio are all tied to the same company, your financial future depends heavily on a single source of success. Diversification helps reduce that vulnerability, and we often work with clients to determine what portion of their net worth can reasonably stay concentrated in one company.
- Complex tax implications. Each type of equity has its own rules: RSUs are taxed at vesting whether you sell or not, which can create “phantom taxes.” ISOs may trigger the Alternative Minimum Tax (AMT) if not carefully managed. Timing decisions on exercising or selling can make a major difference in outcomes.
- Liquidity challenges. Equity value doesn’t always translate into cash. Privately held stock can remain uncertain until an IPO or sale, and even public company shares may be subject to blackout periods or insider restrictions. Knowing when you can actually access funds is crucial to realistic planning.
Equity can be a powerful wealth-building tool, but understanding these risks is what allows you to use it with confidence and build a plan that holds up in any market environment.
Vesting Schedules and Timing Nuances
For some, there’s an added layer of complexity: access to material nonpublic information. If you’re “in the know,” whether at a publicly traded company or one preparing for an IPO, trading your own stock isn’t always an option. In those cases, a structured plan called a 10b5-1 plan can help.
A 10b5-1 plan allows you to set up, in advance, how many shares you’ll sell and on what schedule. Once it’s in place, sales happen automatically, reducing compliance concerns while still giving you a way to turn equity into usable cash. For many executives, it’s a valuable tool for creating certainty in situations where flexibility is limited.
When Careers Shift: Severance and Transitions
Moments of career change often bring executive compensation into sharp focus. One of the first questions we ask when a client is leaving a company is simple:
What happens to your equity compensation?
The answer depends on the details. Some equity may be forfeited, especially if it’s unvested, but vested shares are often retained. That’s where tracking vesting schedules ahead of time becomes so important, so you know what you’ll keep, what you’ll lose, and when it all becomes available.
Severance packages can also add another layer of complexity. We work with you to review any documents, clarify what happens with existing equity, and understand how these pieces interact with the rest of your financial picture.
Once the dust settles, the core questions look familiar: What role will this stock play in your future? Should it be held, sold, or redirected toward other goals? Even after a transition, it’s important to align each piece of compensation with the life you want moving forward.
Putting the Pieces in Place
For many of you, we’ve already mapped out how your compensation fits into your larger financial life by identifying the risks, exploring strategies, and creating plans that bring clarity and confidence.
We proactively revisit your executive compensation and long-term incentive plans with you as opportunities and questions arise, identifying new risks, refining strategies, and helping ensure your plan evolves alongside your career and goals. If anything here resonated with you or raised new questions, we’re always happy to continue the conversation.
_________________________________________________________________________________________________________________________________________________________________________
And if you’re not yet working with us, we invite you to learn more about our Financial SWOT Session. This strategic analysis offers a chance to see your executive compensation package, and your broader financial life, through a sharper, more strategic lens.