In a survey conducted by Charles Schwab, nearly half of executives surveyed stated that they were afraid of making a mistake when they exercise or sell their stock awards. The primary reasons cited for not exercising or selling included concerns about market conditions and the potential tax implications.
While it may seem complex and difficult to understand, a financial advisor can help you balance the risk and reward in your equity compensation structure.
Understanding Executive Equity
As an executive, you are thoughtful and strategic in your decisions that ultimately impact the success of the company. In return for your hard work and dedication, you are rewarded with a comprehensive compensation package, inclusive of salary, bonus, employee benefits, and equity.
Equity compensation is a long-term incentive (LTI) and can be a means for you to build significant wealth over time. This incentive ultimately can provide you with shares of company stock, aligning your performance with that of the company and is an incentive to promote longevity among top talent.
The common types of executive equity grants include stock appreciation rights (SARs), restricted stock units (RSUs), and performance share units (PSUs).
Each type of grant operates very differently, and comes with its own vesting timeline, exercise options, and sometimes even an expiration date. Over a long period of time, your stock awards can really add up. Coupled with your already busy professional life, it can be overwhelming and difficult to keep track of what stocks should be acted on without help.
Executives can feel more confident in decisions made about their equity compensation with the help of a financial advisor, according to that same Charles Schwab survey.
Tax Implications
Each stock award has different tax implications which require thoughtful, strategic planning.
“It’s important to think about what you might need this year that’s different from a cash flow perspective,” said Kathy Christensen, CPA/PFS, CDFA® Partner & Managing Advisor at Connecticut Wealth Management. “Always be sure to consider the financial impact to help guide your decisions and actions.”
For example, are you looking to support your kids through college, renovate your home, or starting to think about retirement? Your personal financial plan should be closely evaluated against your current goals and how your equity and any resulting tax consequences may impact it.
Risk Management
Stock concentration is another factor that requires close attention. As a long-standing executive, you’re likely heavily invested in company stock. Diversification is key, and generally speaking, your concentration should be limited to around 5 percent.
“However, for many executives there are requirements on how much stock they must maintain in the organization,” said Christensen. “This is where an advisor can provide value – helping to mitigate your exposure within the context of your financial plan and any other requirements.”
Oversight of stock vesting schedules and expiration dates, as well as access to independent company research are two key drivers of effectively managing your personal wealth and the tax impact. Doing so can also help to ensure that you are not leaving anything on the table if you leave the company.
Trading Blackouts
In addition to obligations around holding company equity, certain executives may also have blackout periods for trading. Typically, this only allows executives to freely trade company stock in four short windows throughout the year after quarterly company earnings are reported.
“If your company allows them, a 10b5-1 plan gives you the ability to trade during these blackout periods,” said Christensen. “This is a prearranged structure that allows you to sell stock and exercise options within the set parameters, effectively allowing you to manage your shares and still adhere to insider trading regulations.”
Wrapping Up
“Due to the complexity and intricacy of stock compensation plans, you should never have a set it and forget it mentality,” said Christensen.
Decisions large and small should always be made within the context of your financial plan. It is critical to consider how significant life events may impact this plan – such as your retirement, inheritance planning for future generations, or changing careers.
At Connecticut Wealth Management (CTWM), our team of advisors has experience working with executives from a wide-range of companies, both local and national. We take a comprehensive approach to planning and will collaborate with you to manage your vesting schedule, identify optimal opportunities to exercise or sell, and analyze the potential tax impact of your stock awards.
Interested in learning more about how CTWM can help you navigate your equity compensation? Contact us at 860-470-0290 or contact us today.