At a Glance:
- Two of the most common financial planning issues for CEOs involve having a highly concentrated stock position and stock option planning.
- Having worked with the extensive portfolios of CEOs for decades, our team specializes in implementing strategies to address these unique needs.
- Use of exchange funds, implementation of an index proxy sell-off strategy, considering restricted stock units, and deferring compensation are four tips we offer CEOs.
I was recently sitting down with the CEO of a sizable company to work on some financial planning, and we finally got to the point at which we were reviewing his employee-owned stock. Like many other CEOs, he had developed a highly concentrated stock position over the years. He actually didn’t realize the amount was that large in comparison to his overall financial portfolio, which is another commonality among CEOs, especially because many are required or strongly encouraged to own a certain amount of company stock to ensure a vested interest in the company’s success.
Two of the most prevalent issues we run into when working with CEOs and other top-level executives are a highly concentrated stock position and questions around stock option planning. We have found that these are reoccurring within the executive community, so we have developed some expert financial tips for CEOs to combat these common issues. Let’s take a look at these in more detail.
Employee Stock and Stock Options Strategies: 4 Financial Tips for CEOs
#1: Use an Exchange Fund for Concentrated Stock Positions
As we mentioned before, a highly concentrated stock position is a common occurrence in the CEO community. Not only are you compensated through employee stock options, but many times, you are encouraged to own a sizable percentage of company stock. This can create a financial planning headache if you aren’t prepared.
There are three main considerations to make before increasing your employee stock concentration, including future solvency of the company, market volatility, and your wealth concentration. An expert financial advisor can assist you in analyzing these considerations and determine if you should put a diversification strategy in place. One strategy that is highly effective for diversifying the concentrated stock position of a CEO is an exchange fund.
An exchange fund is set up in collaboration with other large stockholders in an effort to diversify everyone’s highly concentrated stock position. The benefit of using an exchange fund is that it gives you instant diversification. Essentially, it pools everyone’s concentrated stock into a fund in which every contributor is given the equivalent amount of shares (ownership) as the dollar amount of stock they brought to the table. It also defers your capital gains taxation from your concentrated and likely low cost basis stock until you sell your shares of the fund. This is another benefit, making use of these funds a worthy expert financial tip for CEOs.
#2: Use an Index Proxy Sell-Off Strategy
If you choose not to participate in an exchange fund for whatever reason, but still seek to diversify your concentrated stock position, then another strategy to consider is an index proxy sell-off. This is a strategy that utilizes software, implemented by an experienced executive financial advisor, that sells off your concentrated stock at precise times. These times correlate with your ideal market price as well as your ideal timing. These times may also include a strategy to lower or minimize any capital gains taxation you might otherwise incur with a basic sell-off.
This strategy takes into account the capital gains taxation you have accumulated over the years, even to the point of selling particular shares for a loss to offset other large capital gains. This can be an effective strategy for CEOs and one to speak with your trusted wealth manager about.
#3: Consider Restricted Stock Units
One of the newest trends that we are seeing in the executive compensation space, specifically with equity compensation, is the offering of restricted stock units. Companies like Microsoft and other tech-based businesses have paved the way by offering restricted stock units to nearly all of their employees in the early days.
Restricted stock units (RSUs) are similar to stock options, but different in certain ways as well. RSUs are set on a vesting schedule. Once the RSUs are fully vested, you are paid the shares due or the cash equivalent of the market value at that time. The other large benefit of RSUs is that you have the option to withhold a certain number of shares to cover the income tax owed for that given year. RSUs are fully taxable as income, so that can alleviate a large tax bill at the end of the year for most executives. This benefit alone makes it one of the top financial tips for CEOs.
#4: Defer Your Compensation
If you find yourself burdened with excessive taxes during your hard-working years from executive compensation, compounded by a growing company that is offering you employee stock options, you may want to consider deferring your compensation.
Deferred compensation can be a common practice among CEOs, but not many advisors make a point to discuss it with their executive clients. This is one strategy that can have a major impact on taxable income as well as retirement income. If you defer your income to an age at which you want to retire, your deferred compensation can make up for the lack of salary you would be drawing from your employer at the point in which your income tax level would be dropping.
This is a great compliment to most executive’s retirement planning, but there is one major consideration to make before enacting this strategy. You will want to be very confident that your employer will continue to stay financially solvent throughout your retirement if you defer compensation until that point. It doesn’t do you much good to essentially be granted an “I owe you” from a company that goes out of business.
More Financial Guidance for CEOs
In the end, all of the strategies and considerations we have mentioned here are the reasons for involving an experienced executive financial advisor early on in your financial planning process as a CEO. These top four expert financial tips for CEOs will take you into the beginning stages of planning. For those executives looking to properly set themselves up for success now and in the future, it is imperative to solicit the guidance of an executive financial advisor when executing these tips.
K. Wade Carpenter, CFP®, AIF®, ChFC®, CLU®, is an innovative wealth manager serving corporate executives and entrepreneurs from coast to coast. Throughout his more than 25-year career, Wade’s focus on C-level clients has made him a top strategist in financial planning for CEOs.
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