My client wanted to buy a boat. He’d been dreaming about it for a while. After spending the past five years working 60-hour weeks as a top-level executive, he decided now was the time to reward himself and his family. In talking with some of his colleagues, he came upon the idea that he could finance his boat by exercising his stock options. He came to me to discuss the best way to do that.

While I do help clients use income from exercised stock options to purchase boats, vacation homes, and other fun things, I always caution that stock options shouldn’t be treated as a savings account. To truly maximize the income potential from these benefits, you need to identify the best time and method for exercising your stock options as part of your equity compensation strategy. On many occasions, I’ve seen clients’ stock go up 10 percent in value, but the value of their options went up 20 or 30 percent. Had they not done any planning to be aware of this change, they could have missed out on the optimal time to exercise.

Below, you’ll find our extensive resource for developing equity compensation strategies. Here, you’ll learn about the many factors that affect your strategy and the methods for exercising your stock options. We’ll also cover the value a trusted wealth manager can offer as you develop and implement a strategy that maximizes the rewards from your years of hard work.

Many factors drive equity compensation planning strategies.


Part of the process of developing an equity compensation strategy is considering the many factors that will inform when and how you will exercise your stock options. You really can’t make educated financial planning decisions about your equity compensation until you’ve considered the following factors:


Understanding the true value of your options is a key part of your equity compensation strategy. When you are able to understand the value of your stock options, you are able to make a more informed and data-based decision about what to do with them.  

Simply checking the stock ticker symbol for your company weekly or even daily will not actually give you the true value of your stock options. One method commonly used to hypothetically value a stock option is the Black-Scholes model. The model is usually based on six variables:

  1. Volatility: The fluctuation in the stock price.
  2. Option type: Non-qualified or incentive.
  3. Underlying stock price: The current market value of the option on which the derivative is based.
  4. Time: The period during which the stock price is measured.
  5. Strike price: The predetermined price at which the option can be exercised.
  6. Risk-free rate: The theoretical rate of return with zero risk.

Part of coming up with this number is accounting for how long the option has to expire and factoring in how much growth potential it still has. Here’s an example of how this works:

You look at a non-qualified stock option with a strike price of $20 and a current market value of $30, plotted over a five-year span using a risk-free rate of 5%. By adding volatility into the model, you are able to see the approximate value of exercising and selling your stock option over that set period of time.

This is a quite basic explanation of the Black-Scholes model, which can go into much more detail. However, this gives you an idea of how the model can be beneficial in determining the value of your options and the many variables that affect an option’s value.


The client I mentioned earlier was concerned about purchasing his boat. However, he didn’t necessarily consider if now was the right time to exercise his options. Rather than exercising and selling your stock options at a time when you want or need extra funds, you should consider selling at the most optimal time to generate the greatest ROI for yourself.

To determine this, you need to consider the strike price relative to the current market value so that your timing matches up with your goals of exercising. Because stock options are part of your equity compensation plan, you have essentially already paid for the stock up to the strike price. So if you exercise when the stock is trading higher than the strike price, you instantly gain value in the market.

Your vesting schedule is also something you need to consider when thinking about the timing of when you exercise. You need to be 100% vested before you can exercise all of your shares. For most vesting schedules, this takes four to five years.

Timing plays a big role in when you exercise your stock options, especially in volatile markets. You should plan to evaluate your options at least quarterly to best plan the timing for executing your equity compensation strategy.


Anytime you are considering exercising your company stock options, you need to first think about the rules regarding the exercise of your options. More often than not, you have a window of time when you can exercise your options, which is called an open window period.

Companies report earnings every quarter. Yours is likely no different. The company will typically do that via a quarterly earnings report so that the public knows what’s going on internally. As an executive, you then have one to four weeks during which you can sell stock and stock options before you go into a blackout period until the next quarter. This is to protect you and the company so you can’t act on insider information.

You should consider timing your meetings with your executive financial advisor about equity compensation and stock options to coincide with your open window periods. Even if you aren’t actively considering exercising your options, it is good to evaluate them at least a few times a year during the times when you can take action, in case you choose to do so.  


Equity compensation and the exercise of stock options can result in a large tax liability that is often overlooked by executives. Non-qualified stock options are taxed at your ordinary income rate in the year in which they are exercised. This is important to note because you could unknowingly bump yourself into a higher tax bracket if you don’t plan ahead. Incentive stock options, on the other hand, are taxed at a long-term capital gains rate, with a maximum rate of 20%.

One of the critical steps to take before exercising options is to work with a certified public accountant in conjunction with an experienced executive financial advisor so you can be proactive rather than reactive in developing a tax strategy for your equity compensation.


How is your net worth made up? Is the majority of your wealth held in your company stock? If so, you may need to consider some form of diversification. While it is certainly good to have a vested interested in your company as a top-level executive, you don’t want to bet your years of service and life savings on the profitability and longevity of one individual company.

One way to look at the idea of portfolio diversification is to find out the amount you would need outside of company stock to survive if your company stock was completely gone. This can help you feel confident your entire livelihood isn’t relying on your company.

There are multiple equity compensation planning strategies to execute.


Once you’ve accounted for the factors that affect your strategy, it’s time to decide what to do with your stock. There are three main strategies to execute:


If you don’t have a need for additional income, and you have faith that your current company’s stock price will continue to grow, you may be best suited to hold onto your stock and enjoy the ride for the time being.  


If you have a need for additional income, and you have taken the time to examine your company’s current stock price and confirmed it makes sense to sell, you may be best suited to sell your stock and generate extra income for you and your family.


For executives who would like to reduce their overall exposure to company stock, a stock swap could be beneficial to consider as part of your equity compensation strategy. The idea here is that you use old shares of company stock options to buy new shares.

For example, a stock swap could make sense if you own shares of company stock that have a cost basis (the price at which you purchased the stock) lower than the current market value. By exercising your shares with a stock swap to purchase new company stock shares, you would own a lesser amount of shares with a lower cost basis but the same amount of current market value.

Now that you have an idea of the factors that drive your strategy and the methods you might execute, see below an extremely simplified illustration of how the thought process might look when you’re deciding if and how to exercise your stock options. Even from this simple chart, you can see how complex the process can be once you begin to account for all of the factors that can affect your strategy.

This chart doesn’t even account for the tax impact of exercising your stock options, and it certainly doesn’t consider all of the facets of your unique financial situation that will also drive your strategy. This is why enlisting the help of an executive financial advisor who specializes in equity compensation planning is so important.

Exercising Stock Options Decision Process
An executive financial advisor brings great value to the strategic equity compensation planning process.


As a top-level executive, you likely work with advisors and consultants on a daily basis within your business for the insight and perspective they bring. Working with a financial advisor is no different. They bring a unique perspective and years of personal financial planning insight into your situation. Two of the most irreplaceable benefits an executive financial advisor can offer you in developing an equity compensation strategy are reports and big-picture perspective.


An executive financial advisor will typically evaluate all of your stock options on a quarterly basis and include these insights in a report.

This report should:

  • Identify the ideal time to exercise options in that given year, accounting for considerations such as value, timing, rules, taxation, and how it relates to the rest of your financial portfolio. This report will help keep your equity compensation strategy in the forefront of your mind.
  • Account for your risk tolerance as an investor, whether your personal preference is conservative, moderate, or aggressive. For example, a more aggressive investor might be okay with holding a larger portion of their net worth in company stock.
  • Consider whether you are a short-, mid-, or long-term investor. The time you have until work becomes optional for you can help determine how much and when you sell your company stock.
  • Assign an insight ratio (time value divided by the Black-Scholes value expressed as a percentage) to every single option that you possess. This will show you potential outcomes for each option.

Your advisor’s report will provide you with a clear understanding of exactly which options make sense to exercise and at what time to best optimize your value. Your report will also outline regulations and guidelines that are specific to your equity compensation plan document, such as a vesting schedule, to ensure that you stay compliant with your organization’s rules. Lastly, it should provide you with a method for exercising your options.


What is most important to you? The answer to that question should inform all of the financial planning you will ever do. Most top-level executives I work with would trade wealth for more time with family and friends any day of the week. When you are in the grind of work as an executive, it’s easy to lose track of the big picture and the reasons behind all of the work you’re doing. This is one of the biggest reasons to work with a trusted advisor—so they can help you plan your finances around the things that matter most to you.

As a top-level executive, equity compensation is likely a large portion of your overall wealth. However, if you’re like many other busy executives, you haven’t necessarily taken the time to develop a strategy around this large asset. By understanding the factors that drive equity compensation strategies and the methods for exercising your stock options, with a trusted wealth manager, you can optimize, leverage, and reap the rewards of your hard-earned equity compensation.


What do you want your success to help you accomplish next? No dream is too big. Contact Wade and the Carpenter Team today for strategic wealth management advice that will enable your goals now and into the future.