If you missed our last entry, Retirement Planning , we cover the most common concerns and risks we hear from clients every day regarding their retirement. This next 13 Wealth Management Issue: Executive Compensation, definitely has a targeted audience but it can be a bit misleading. There are some specific details that might impact you if you are one of the “top four” employees in your company. However, many of these issues impact highly compensated employees making more than $120,000 per year, not just the most senior executives of a firm. In this installment, we will also review a three-pronged discussion from more of a big picture perspective. When evaluating these issues, it is no surprise that primary considerations include strategies to maximize worth and minimize taxation both currently and from an estate planning or transfer perspective. Let’s get started.

Executive Compensation

Number 5 out of 13 in our Wealth Management Issues Series

The first issue to address is the broadly overused term “executive” as it regards to complex compensation issues. Unless you are retired, you are likely receiving some form of compensation if you are employed. The higher you climb in your company or your practice, the more complex your compensation plan will be. Why? Because we know that firms use tools like benefit plans, deferred compensation, insurance contracts, and equity as a way of incentivizing you to remain at their firm. Gone are the days when only “executives” earn incentive stock plans and equity. This is a common compensation tool for tech start-ups and other practice groups that may be cash-strapped in early days of the business. Many employees earn bonuses. Often, we don’t consider that our salary, benefits like retirement, short-term incentives like annual or performance bonuses, and longer-term equity compensation are all taxed different levels. Your salary is taxed at the normal income tax rates. Taxes on benefits are all determined by the qualified plans or non-qualified plans in which you participate. Tax law changes last year mean that many perks are now taxes. Bonuses are often taxed at different rates from ordinary income. Long-term incentives often paid via equity compensation will be different based on when and how you exercise your shares.

So, even if you are not an “executive” in your firm, but you have multiple retirement plans and equity compensation, you likely need to speak with a professional for guidance and advice. Let’s look at some other common issues pertaining to compensation.

Commonly, we see executives and other highly compensated employees concerned with the impact of taxation on their various stock options plans, deferred compensation, qualified & non-qualified plans. Why? Because this ultimately impacts their net worth and how their goals will be pursued. There are a number of compensation options including: Cash, Deferred Compensation, Life Insurance, Qualified Plans, Non-qualified Plans, Incentive Stock Options (ISO), and Non-qualified Stock Options (NQSO). The decisions you have to make about the types of equity compensation you have when you exercise your options and strategies to ensure that you have the best possible tax treatment can ultimately cost you thousands of dollars in taxes if you do not act with precise timing. The space doesn’t allow for a detailed breakdown of ALL of these options; thus, our thought is to provide the most typical client interactions.

Often, we engage in a three-pronged discussion of compensation:

• Compensatory Review – compare with current ISO, NQSO, and restricted stock, employee stock purchase plans and stock appreciation rights plans. Goals include maximizing tax efficiency & control.
• Insurance – non-qualified/supplemental, long-term care, health, and life/disability insurance. In all cases, we are evaluating the adequacy, appropriateness, and cost-effectiveness.
• Qualified & Non-qualified plans – evaluate the alternatives and develop a strategy for distribution.

When combining the three of these aspects of compensation, the long-term strategy generally becomes developing lifetime income AND efficient wealth transfer plans.

It’s important that clients understand a number of factors, including whether stock options are qualified or non-qualified; restrictions associated with the timing of exercising or selling options, tax implications, and decisions on how the exercise is funded. Our goal is to make sure that you retain as much of your hard-earned compensation as possible. A common mistake is that executives and highly compensated employees don’t pause to discuss their compensation with their financial advisor. If your overarching goal is tax minimization, efficient wealth accumulation, lifetime income needs, and transferring your wealth to your family or causes of your choice, then we are here to talk about all aspects of your financial life, including providing guidance about aspects of your compensation.

Our commitment to you is to deliver a plan that provides you with the greatest chance to realize your family’s or practice’s goals while being highly considerate of your current situation, your outlook on the future, your feelings, and your family dynamics. 

Your financial advisors should be aware of all of these moving parts as they are gears and cogs in your greatest recurring asset: your compensation. Ultimately, it’s important your advisors are working collaboratively explaining the nuance of your compensation, the subsequent investment strategy, taxation, and how these items impact your financial planning objectives.

When considering these issues, it’s important to ask yourself, how do any of these affect you, your family, and your goals? The following installments will cover each of these Wealth Management Issues in greater detail. Our hope is this series of chapters will provide not only an educational forum but also promote thought, leading to action…in a holistic manner, of course. Learn about our other 13 Wealth Management Issues here.

Watch our Whiskey & Wealth Wednesday video of this article:

If you would like to learn more about this subject please contact us and we’ll be happy to help.

By Anthony C. Williams, CWS, ChFC, MRFC, CLU | Investment Advisor Representative | President & Founding Partner of Mosaic Financial Associates & Orthopaedist Advisory Group | Securities and advisory services offered through Cetera Advisors LLC, Member FINRA/SIPC, a broker/dealer and a Registered Investment Advisor.  Cetera is under separate ownership from any other named entity.