Maximizing Your Executive Compensation
Executive compensation plans have evolved in recent years as employers seek to attract top talent and appease company stakeholders. Today, employers typically compensate executives with a mix of salary, annual incentives, long-term incentives, equity, and other benefits. Despite growing complexity, maximizing your executive compensation is still possible. And in many cases, executive benefits can be very valuable.
Unfortunately, few executives have the time or financial planning expertise to take full advantage of their benefits. However, there are rules of thumb executives can follow to maximize your compensation without detracting from your day-to-day responsibilities.
To maximize your executive compensation, consider these four tips:
Tip #1: Don’t Overexpose Yourself to Company Risk
In recent years, executive compensation has shifted towards performance-based pay rather than guaranteed income. According to the Economic Policy Institute, vested stock awards and exercised stock options accounted for 78.6% of average realized CEO compensation in 2019.
As your compensation becomes increasingly linked to company performance, it’s important to keep an eye on concentration risk. You may believe going all in on company stock shows your loyalty. However, if your goal is maximizing your executive compensation, make sure your financial resources are properly diversified. If your income decreases due to declining stock performance, you don’t want your retirement savings to take the same hit.
A common rule of thumb is to invest no more than 10% of your retirement savings in your employer’s stock. This percentage may be even lower if the majority of your compensation is tied to company performance. To balance your risks, consider investing your savings in asset classes and industries that complement your employer. For example, if you work for a high-growth technology company, you may benefit from investing in high quality bonds and defensive stocks.
Tip #2: Actively Monitor and Manage Stock Awards
If your compensation includes restricted stock units (RSUs), it’s important you understand your vesting schedule and any holding requirements. For example, you may be on a five-year vesting schedule where 20% of your RSUs vest each year. The market value of your shares at the time of vesting is considered taxable income in that year.
At the same time, you may be required to hold a certain portion of all shares earned after vesting—for example, 40 percent. If this requirement prevents you from selling stock to meet your tax liability, you’ll have to come up with the cash another way.
To ensure you’re maximizing your executive compensation from RSUs, review your plan annually. Be sure to take note of where you are in your vesting schedule relative to any holding requirements. In addition, keep an eye on the current stock price so you can estimate your future tax consequences. If you need to come up with a different source of cash to pay your tax bill, it's helpful to know as soon as possible.
Tip #3: Optimize Deferred Compensation Benefits
Maximizing your executive compensation includes minimizing the associated tax consequences. As such, many companies offer non-qualified deferred compensation (NQDC) plans. These plans allow executives and other high earners to delay paying taxes on a portion of their income.
If your employer offers an NQDC plan and you’re currently maxing out your other retirement savings plans, deferring a portion of your income might make sense in the long run. By doing so, you’re assuming your tax bracket will be lower in the future.
There are a number of factors you should consider before opting in to an NQDC plan. For one, you should be reasonably confident your employer is financially secure, so they can honor their future obligation. You’ll also need to decide how much of your compensation you can afford to defer and when to take distributions.
A good first step is to map out your future financial needs and anticipated income in retirement. Consider all sources and the tax consequences of each to determine if deferring part of your income makes sense. If so, be sure to weigh all of the potential benefits and drawbacks, as NQDCs are not risk-free.
Step #4: Seek Expert Advice on Maximizing Your Executive Compensation
At the end of the day, you don’t have to make these decisions on your own. As a busy executive, your time is already stretched. There’s an opportunity cost to overseeing and managing your compensation plan on your own.
A fiduciary financial advisor with expertise in evaluating executive compensation benefits can help you get the most from your compensation plan. In addition, we can help you connect the various pieces of your financial life, from near-term obligations and taxes to long-term goals. If you’d like to speak with an advisor about maximizing your executive compensation, please contact us. We’d be happy to help.
