For high-net-worth executives, equity compensation is simply part of the game.
But when you’re consistently paid (bonuses, salary, etc.) in company stock, it’s easy to accumulate too much.
Today we’ll review how high-profile executives can better manage their company’s equity and actively avoid concentration risk.
What’s Too Much Company Stock?
The answer to this question will differ for every person.
However, a good rule of thumb is to contain your portfolio to 10%-15% of company stock.
When you think about it, equity isn’t the only way you’re “invested” in the company. You rely on your company to pay you a salary, give bonuses, grant equity compensation, and more. If you take a step back, it is easy to see a lot of eggs in one—golden—basket.
Therefore, it is essential to consider diversifying the company stock you receive. By doing this, you mitigate risk and create a more balanced portfolio.
But Am I Being Disloyal By Selling?
It’s easy for highly compensated executives to fall into this trap. You work so hard and are instrumental in your company, so is selling the stock cutting yourself short?
Understand that you can still believe in your company and that diversification is vital. By adopting this mindset, you prioritize the best interest of your personal financial goals (not just the success of your company’s stock).
When you concentrate all of your income on one source, you set yourself up for more volatility over time with potentially less reward. It also makes it more challenging to plan how equity plays into your larger financial goals.
Take a quick look at a high-profile company like Netflix or other stocks with large short-term volatility, and you’ll see just how bumpy of a ride concentration can be.
Know All The Equity You Have Now (And In The Future)
With companies providing more compensation packages that include equity, it’s imperative to understand what you have now and anticipate having in the future.
In many instances, you may have multiple types of equity at once, like RSUs, ISOs, and you could be eligible for your company’s ESPP. That is a whole lot of equity! To get prepared, ask yourself,
- How much company stock do you have in your portfolio?
- What type of equity is about to vest (and how much)?
- How many shares will you exercise (and cash flow options to pay for it)?
- Are you prepared for the tax implications of exercising and selling depending on the type of equity?
In addition to equity, highly compensated employees must consider non-qualified deferred compensation (NQDC) plans. Deferred comp is an executive-level benefit where you defer income that your company invests for you and returns to you at a later date.
And it’s not uncommon for that investment to include company stock. While you reduce your taxes by deferring some of your compensation, you can quickly buy too much company stock—ultimately adding more concentration risk to your balance sheet.
Plus, deferred compensation plans are relatively binding, leaving little wiggle room for altering or getting out of the plan until you retire. But every program is different. Read the fine print, so you know the rules before participating.
Keeping a running list of your equity compensation will help you stay proactive and prepared as you’re granted more options and equity begins to vest. Remember, equity can be profitable when backed by a deliberate and strategic plan tailored to your goals.
Be Prepared To Sell
No matter which type of equity compensation you have, it’s vital to make a plan to diversify, meaning you’ll have to sell your shares at some point.
Think about it—if your company gave you a cash bonus, you probably wouldn’t turn around and buy company stock. Instead, you’d invest your bonus in a more diversified manner, especially if you are considering your longer-term goals. Therefore, selling and diversifying are key.
One of the most important elements of a strategic sale is understanding the tax consequences. Each type of equity is taxed differently and requires a focused strategy to ensure you don’t pay too much.
It’s also important to understand the power of leverage in your incentive stock options. We will help calculate an optimal price and time to sell your shares so that you receive the greatest amount of value from the growth of your shares over time. Our location in the middle of Boston’s technology corridor means we serve clients with stock options in the bio-tech and technology field consistently and we’ve developed specific expertise in this area.
Some equity, like RSUs, are taxed as income in the year they vest, but others, like ISOs and NSOs, aren’t as straightforward and come with holding requirements for more favorable tax treatment. Knowing the tax rules for each equity class helps you make more well-informed decisions about buying, holding, and selling your equity.
As you create a plan to sell a portion of your company stock, it could be beneficial to use a 10B-51 Plan. These plans help you steer clear of accidental insider trading.
Depending on your current concentration levels, risk tolerance, and goals, you may also want to create a strategic buy-and-hold plan. You don’t have to sell all the stock you receive! In some cases holding for an appropriate time can be a solid addition to your portfolio.
Determine How The Equity Can Help You Reach Your Goals
Ultimately, you want to use your equity in the most advantageous way for you.
In many cases, selling your shares can boost your income (after you factor in taxes, of course).
Perhaps by selling enough shares, you free up your cash flow to invest in other areas like maxing out your retirement plans, increasing your contributions to your child’s college fund, buying a vacation house for your family, etc.
It’s always important to understand your financial goals and leverage your equity to support your larger financial plan.
A great way to do that is by working with a team that can guide you. Our focus is to help clients see their complete picture and guide them in taking steps that optimize their long-term goals.
At Wingate Wealth Advisors, we’re passionate about helping our clients create strategic, proactive and customized equity plans that fit their wealth-building needs.
Contact us today to learn more.