by Tim Golas, Spurstone Executive Wealth Solutions
You’re busy, we get it. With work and home demands, managing your wealth can often be seen as just one more thing for you to do. As a result, it often gets pushed to the back burner.
You have good intentions and the reality is that your stock compensation (equity awards, restricted stock, performance shares, etc.) can represent a large portion of your net worth. Your future financial independence may hinge upon these assets so it is important for them to be managed properly.
In today’s post, we are going to provide you with 5 easy tips for managing your equity compensation. These will cover the basics to help keep you on track.
Time is something we can never get enough of. This is particularly true for recipients of stock options and other forms of equity compensation. You should know your vesting and expiration dates. Vesting dates may have tax implications and will open up your liquidity options. Expiration dates are when your options will expire worthless. It is prudent to not wait to exercise options too close to your expiration date due to the risk of unrecoverable negative market movements.
Leverage can be a wonderful and equally devastating reality when it comes to your stock options. Percentage movements in the underlying common stock are magnified for holders of Non-Qualified Stock Options (NQO) and Incentive Stock Options (ISO). It is important for you, and your advisors, to have a solid understanding of the leverage effect to your specific holdings and plan accordingly.
3. Taxes (especially state)
Yes, knowing the tax implications of equity compensation is complex. Ideally, you have trusted advisors that intimately understand how equity compensation works and is taxed. With additional information regarding your goals the more appropriately these assets can be leveraged. Here’s a big tax issue a lot of executives miss: Stock option income is taxed in the state it was earned, NOT the state it is received (exercised). This is important to those folks who moved or plan to move in the future. If you were granted your options in Connecticut but exercise them after moving to Florida, the income will still be taxable in Connecticut. Know this and plan accordingly! (We regularly structure client’s income to address this)
When your company stock represents a large portion of your total wealth (typically defined as exceeding 10% of net worth), it is a good idea to evaluate the risk you are taking relative to the reward. It may be a good idea to avoid other correlated investments and consider a sale plan to diversify your equity compensation.
Understandably, many executives are required to maintain specific company holdings and may be restricted from trading so it is important to evaluate your concentration through those prisms.
5. Investment Policy Statements
Investment Policy Statements (IPS) are a fantastic resource we use in executive financial planning. Through these documents, we are able to restrict investing in specific securities (i.e. employer stock & related companies) while defining the asset classes, diversification and management strategies to implement. Too often we are introduced to new clients who maintain large employer stock positions while also investing in portfolios that hold additional exposure to that same company. That overlap and excess risk can be eliminated through the use of an investment policy statement.
When it comes to your equity compensation planning, it may get complicated. To most executives, complications often translate to time and that is the reason it is typically ignored.