Stock compensation can be both a wonderful and a malicious benefit. For many successful executives, these tools have been a source of great fortune and great pain, building dynastic family wealth while also dashing the lofty financial dreams of others. We don’t have to look too far in the rear-view mirror for evidence. In late 2007, many executives were riding high as equity markets were on a multiyear tear. Life was great, skies were blue and stock option values were exploding. Just a year later, broad markets had plummeted in the financial crisis, taking vast untold amounts of wealth and options value with it. Complexity, volatility and greed can each play a part in managing stock compensation so let’s briefly discuss these three core factors for executives and employees to consider when managing stock compensation:
First, complexity can be an understatement when it comes to equity compensation grants. With multiple award types, liquidity features and tax considerations, each type of benefit comes with its own forms of complexity. It is critical that you, and your team of advisors, intimately understands the core issues for your stock compensation including: award type, vesting dates, tax implications and volatility. Each of these create risk and rewards in your personal financial planning.
Next, stock price volatility is at the heart of the great risks and opportunities of stock compensation. Certain types of equity awards, such as Non-Qualified Options (NQO) have a substantially higher leverage factor and as a result carry much greater risk than awards such as Restricted Stock (RSA/RSU). These may dynamically change the risk characteristics of your entire portfolio and as a result should be integrated in all asset management plans.
Finally, greed is a factor that many individuals choose to ignore (big surprise). From a financial perspective, it is incredibly painful to watch substantial amounts of wealth evaporate, sometimes never to return, when that may have been avoided through prudent decision making. Emotions, and often greed, can lead to continuously seeking a slightly higher sale price which may or may not come. Don’t let greed blind your decision making and don’t confuse your love and pride for your employer with future stock performance.
Understanding and managing these three factors of equity compensation will put you leaps and bounds ahead of most other stock compensation recipients. Tying these into your portfolio and wealth management strategies can take your financial planning to the next level.
In our next release, I will be discussing a topic that is especially important for executives on the move: What happens to your equity compensation if you leave your employer? The rules may change so stay tuned to learn how to protect yourself!
Tim Golas is a Partner at Spurstone Executive Wealth Solutions, a privately owned firm focused on protecting and growing the wealth of today and tomorrows executive families. Advising executives at all levels and throughout the country, he is passionate about education, technology and efficient solutions to complex needs. For more information on how Spurstone can help secure and grow your wealth while restoring your time, please feel free to contact our office at 860-264-1111 or visit our website and fill out our contact request form.