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Many compensation packages for executives come in the form of equity, generally company stock or a derivative of company stock. Executive equity compensation tends to be a strong incentive because it is based on how performance relates to the value of the award, the company’s stock price. When the value of a company increases, the value of the equity increases. Thus, providing an incentive for executives to be successful and improve the company’s performance – raising its market value. There are many forms of executive equity compensation, including restricted stock units, stock appreciation rights, employee stock purchase plans, deferred compensation, pre-IPO, and concentrated stock positions. We can help optimize your executive equity compensation depending on your needs. Get in touch with our team of CFP® advisors to get started today!
Restricted stock units (RSUs) are a kind of executive equity compensation that is stock-based. RSUs are restricted during what is defined as the vesting period. The vesting period may last several years. During which RSUs cannot be sold. RSUs give employees interest in the company stock. However, there is no real tangible value in RSUs until vesting is complete. Once vested, RSUs are assigned fair market value and are considered income. Once the employee receives the remaining shares after income taxes are paid, they can decide what to do with them.
In the past, stock options have been a more popular choice among companies, but with various scandals and tax issues within companies in the mid-2000s, companies have been considering other kinds of stock rewards for their executives. RSUs previously tended to be reserved for key executive positions and began to make their way into compensation packages for all employees. RSUs give executives and other employees an incentive to stay with a company for an extended period, thus helping with employee retention and performance.
Stock appreciation rights are a kind of executive equity compensation linked to the company’s stock price within a given period. Stock appreciation rights give employees the right to the cash equivalent of a stock’s gains in price in a predetermined time interval. Employers will almost always pay this kind of bonus in cash. Yet, some companies will choose to pay these bonuses in shares. In many cases, executives can exercise stock appreciation rights once they are vested.
Deferred compensation is a part of an executive’s compensation or wages that are set aside to be paid out to them later. In many cases, taxes are deferred until it is paid out. A deferred compensation plan is beneficial when one can reduce present and future taxes by deferring income. The withheld amount of income is paid out to the executive at the specified date, usually at retirement. Deferred compensation plans are incentives offered by employers typically to hold on to or retain key employees and executives. Deferred compensation can be qualified or non-qualified. Deferred compensation benefits depend upon the individual’s tax situation. A deferred compensation plan is most beneficial when you can reduce present and future tax rates by deferring your income.
Pre-IPO placements occur when IPO underwriters make stocks available to selected investors at a discount ahead of time. These usually happen immediately before the IPO. Stock options can be provided to executives who can resell their shares, subject to specific restrictions.
Concentrated stock positions occur when investors own a share of a stock or another kind of security, which represents a large percentage of their overall portfolio. The investor’s wealth becomes concentrated in a single position.