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Financial Planning for Executives: How Multiple Employer-Stock Plans Should Be Incorporated into Your Financial Plan


Listen to the audio version here.

Many executives at the Director level have multiple stock plans as part of their compensation. While this seems fantastic at first glance, it can complicate your retirement plan in the long-run – and make it harder for you to create a flexible strategy that helps you meet your goals. 


Why Do You Have Multiple Employer-Stock Plans? 

When we look at how executives are compensated, we find a few things: 

  1. Base salary. This base salary is typically high in comparison to the national average, and allows for a reliable source of income, even in the case of an economic downturn or dip in the company’s financial performance. 
  1. Bonus plans. While bonuses aren’t exclusive to managers and directors, the typical pattern is for bonuses to grow as you climb the corporate ladder. Sometimes, a bonus is merely an extension of your salary, as part of it is non-negotiable (or it doesn’t vary with company performance). 
  1. Stock options. Finally, we see many executives in today’s corporate world being compensated with some form of stock option, unit or award. These aren’t the same as your company 401(k), as the shares or holdings are exclusively from the organization you work for. 

Employer-stock plan awards are a way for your company to continue to compensate you beyond a traditional base salary and bonus structure while still ensuring that your interests are in line with those of your employer’s shareholders. Sometimes, your stock plan will be based entirely on options. In other plans, it can be Restricted Units or Awards. These plans all have different rules and can be offered in tandem with each other. By companies having multiple plans, they can offer certain employees better incentives by designing plans just for them and their peers. 

While having company stock as a large portion of your compensation can be a good thing, it offers less flexibility when it comes to retirement planning. Before you start incorporating your stock into your financial plan, look at a few key things. 

 

#1: Timelines 

To know how your owned stock or stock options play into your financial plan, you need to know the timelines of each item that comprises your employer-stock plan. If you have multiple employer-stock plans, you need to check when each of them vests. Some plans don’t vest for up to five years, so it might be longer than you were expecting in realizing the financial benefit of being included in the stock programs.  

Next, you’ll want to understand how you’re able to access the stock in your plan. Are you permitted to “cash in” at any time? Is your company stock part of your employer’s retirement plan? Do you simply have the option to purchase company stock at a discounted rate as part of your compensation model or executive benefits package? These questions are going to help you define when you’re able to access your money, and how much of it you can count on when building a financial plan and retirement savings strategy. 

 

#2: Value of Stock Awards 

Many executives make the mistake of valuing their stock awards as part of their total net worth or income. This is an error, because that money isn’t necessarily yours should you choose to leave your job. It’s also problematic because stock values can be taxed in different ways – which could hurt you should you choose to exercise them. 

Your first step when it comes to understanding the value of your stock awards is to understand what happens should you leave the company. Many employers offer a 90-day period for you to exercise any existing stock award grants. This is often true both if you leave the company voluntarily, or if you are let go and/or bought out. Sometimes, when you go through a corporate acquisition, your vesting is accelerated, and you’re given the opportunity to exercise your awards in a timely manner.  

Your next step will be to fully understand how your stock awards are taxed. Restricted Stock Units are the easiest to understand as when they vest, the market value of the award is added to your W2 and it is taxed as income. 

Stock option grants get a little trickier. Stock option grants can either be incentive stock options (ISOs) or nonqualified stock options (NSOs). ISOs have more complicated rules than NSOs, and not following the rules correctly can lead to a higher tax bill. It is prudent to understand the rules - or find a professional who does - of each of these options before exercising any units. 

 

#3: Stock Concentration 

Although there isn’t any one “right” percentage of company stock that’s wise to keep in your portfolio, the general rule of thumb is no more than 10%. If part of your executive compensation package is stock options or owned company stock, you should take a closer look at your holdings. Depending on where you work, you may not only have company stock as part of your compensation, it could also be part of the shares in a mutual funds within your 401(k).  

Beware of becoming over-invested in your own company’s stock. Even if you work for the best company in the world, and you’re confident that they’ll never experience a financial downturn, you need to protect yourself against all scenarios – not just the one you foresee happening.  

Just after BP went through their oil spill fiasco, I worked at a financial planning company that has a large concentration of BP executives on their client roster. A seemingly strong company with a plethora of stock plans was now being tossed around in the wind. Executive stock plans were becoming worthless and the (unrealized) net worth of these executives was tumbling. Don’t be complacent in thinking it can’t happen to your company – it can happen anywhere, at any time. 

Don’t Be Afraid to Diversify 

There’s nothing wrong with having employer-stock as part of your executive compensation plan. However, if you don’t take the extra time required to understand the rules of your stock plan, it can put your best laid financial plans at risk. At the end of the day, you need to look out for yourself – not your company. If you find that the stock plans that are part of your compensation aren’t going to benefit you in your long-term retirement planning, it may be time to diversify and protect your interests.