Executive Compensation

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Executive Compensation

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The financial planning needs of high-net-worth executives are unique. While having a generous compensation and benefits package is one of the many perks of being an executive, these packages can be complex and difficult to understand. Additionally, executives’ actions are typically highly visible, and you must perform a delicate balancing act to meet the needs, demands, and perceptions of the various constituencies interested in your company’s stock.

The Executive’s Dilemma

Risk Concentration

A significant portion of a corporate executive’s compensation often comes in the form of equity ownership in the company. Your net worth is highly tied to your company’s stock performance. High concentrations in company stock align your financial rewards with those of the shareholders, but potentially expose you and your family to undue financial risks, particularly if markets and stock prices do not cooperate.

Limited Trading Windows

Corporate executives may be prohibited from trading due to consistently closed trading windows for themselves. The lack of open trading windows can lead to financial losses for executives due to the limited lifespan of stock options or because of the taxes owed when restricted stock vests. Even when corporate insiders can trade their company stock, the high level of visibility into their actions warrants additional consideration.

Sending Mixed Signals

Sales of company stock by corporate insiders may be perceived as a pessimistic outlook for the company. Conversely, company employees, particularly those who are not financially sophisticated, may view the lack of sales by executives as a bullish sign for the company (and sales by executives as bearish).

An Open Book

Due to regulatory reporting requirements, the actions of high-level corporate executives are very visible to the markets, the public, and employees.

It’s a Balancing Act

To make the most of stock compensation, you need a financial plan that considers your goals for the income, identifies decisions you must make with your grants and acquired shares, and factors in the related tax consequences.

Understanding the Basics

1

Vesting Period

What is the vesting period of stock options, restricted stock, or stock appreciation rights (SAR)s? What goals must be met for the vesting of performance shares? How long are the offering and purchase periods of your Employee Stock Purchase Plan (ESPP)?

2

Expiration Dates

With stock options and SARs, how long do you have before the grant expires?

3

Company Requirements or Restrictions

What are other specific features of your company’s stock and its stock plan? For example: Does your company impose ownership or retention requirements for its shares, or blackout periods when you cannot sell its stock? Do the shares pay dividends? Will your company allow you to engage in hedging with its stock?

4

Looking Ahead

How do you see the future of your company’s stock and your job? How likely are you to receive additional equity awards?

5

Income Tax Planning

What is your tax bracket? Will an income spike from option/SAR exercise or restricted stock vesting push you into a higher tax bracket? Do you have capital gains or losses already from this year or loss carry-forwards from prior years?

Thinking about Advanced Planning

  • What are your goals for the income that you will receive from your stock compensation? Do you intend to use the money for near-term goals (e.g. college tuition) or long-term goals (e.g. retirement)?
  • How much of your net worth is tied up in your company’s stock? Should you sell shares to diversify, perhaps with a Rule 10b5-1 trading plan, or explore other strategies to alleviate a concentrated stock position?
  • Are you charitably inclined? Do you want to make donations or gifts of company shares or set up special charitable trusts?
  • Do you have a substantial estate and net worth, making it prudent to undertake estate planning?
  • Toward the end of the year, are you prepared to make year-end-planning decisions about your outstanding stock grants, holdings of company shares, and other investments?

Executive Compensation Strategies

  • Vesting schedule
  • Election decisions
  • Types of long term incentive plan (LTIP) compensation (SARS, NQSO, ISO, RSU, RSA, PSU, etc…)
  • Income taxation
  • Exercise timing
  • Cash flow planning
  • Black scholes valuing
  • 10b5-1 plans
  • Section 16 insider
  • Trading windows/restrictions
  • Concentrated equity risk management
  • Deferred compensation
  • Golden parachutes
  • 83(b) election
  • Executive perks
  • Coordination with estate planning
  • Coordination with estate and charitable planning
  • Year end planning decisions
  • Closely Held Businesses
  • Key Employee Incentive Plans
  • Navigating Section 280G excess parachute plan Rules

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Advisory services are only offered to clients or prospective clients where Pallas Capital Advisors and its representatives are properly licensed or exempt from licensure. This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Pallas Capital Advisors unless a client service agreement is in place.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

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