By Christian Patterson, CFP®, Wealth Advisor
As leaders in your organizations, your compensation and benefits packages may have additional complexities requiring specialized planning and care. We know navigating the intricate landscape of compensation strategies and benefits can be overwhelming.
To help you make informed decisions, this blog post aims to provide a comprehensive overview of different types of executive compensation and the planning required for these specific strategies. Let's delve into the key components of executive compensation and benefits, ensuring you have the tools to optimize your financial rewards.
Base Pay
Base pay refers to the fixed salary you receive regularly, reflecting your expertise, experience, and responsibilities. It serves as a solid foundation, providing stability and financial security. As the foundation of your compensation, this is generally the easiest to plan around and will be the portion of your income you can count on to be there regardless of company performance.
Short-Term Incentive Plans
Short-term incentives are performance-based bonuses tied to specific objectives, typically measured annually or quarterly. These incentives align executive goals with the company's strategic targets, fostering a culture of accountability and driving individual and team performance. This type of incentive plan is generally received as a cash bonus. Though, some companies may also pay this benefit in the form of equity awards.
Long-Term Incentive Plans
Long-term incentive plans are designed to reward sustained performance and focus on aligning executive interests with long-term shareholder value. Here are some common types of long-term incentives:
Non-qualified Stock Options
Non-qualified stock options (NSOs) grant executives the right to purchase company stock at a predetermined price over a specified period. This compensation vehicle offers potential financial gain based on the stock's appreciation.
With NSOs, you pay ordinary income taxes when you exercise the options and capital gains on any appreciation when you sell the shares.
Incentive Stock Options
Incentive stock options (ISOs) are similar to NSOs but carry tax advantages. They allow executives to purchase company stock at a favorable price without incurring immediate tax liability.
With ISOs, you pay taxes only at the time of selling your shares. The type of tax paid depends on how long you have held the shares, when the shares were granted, and when the shares were exercised. While exercising ISOs is not a taxable event, it could have alternative minimum tax (AMT) implications.
Restricted Stock Units
Restricted stock units (RSUs) provide executives with company stock that vests over time or upon the achievement of specific performance milestones. Executives gain ownership rights after the vesting period, aligning their interests with long-term company success.
With RSUs, the value of the award is included as ordinary taxable income at vesting. Future growth of the shares is subject to capital gains taxes with the purchase date being the date of vesting and the cost basis being the share price at vesting.
Performance Stock Units
Performance stock units (PSUs) are granted based on predetermined performance metrics. As executives meet or exceed these goals, they are awarded additional company stock, creating a powerful incentive for sustained high performance.
PSUs are similar to RSUs with pre-determined multipliers based off of performance metrics incentivizing corporate leaders to achieve company goals.
Benefits
In addition to compensation, executive benefits play a vital role in the full compensation package that executives receive. Here are some essential benefits to consider:
Life Insurance
Life insurance provides financial security for executives' families in the event of their untimely passing. It can help cover expenses, such as mortgage payments, college tuition, and other financial obligations.
Umbrella Insurance
Personal Liability Umbrella Policies (PLUP), also known as Umbrella Insurance, supplement existing liability coverage and offer additional protection against unforeseen risks. It provides an extra layer of security for executives' personal assets in the event of a lawsuit or other significant liability event.
Since executives are high earners and generally accrue many assets over their working careers, many companies will provide this type of policy to executives at either no-cost or a subsidized rate to incentivize asset protection.
Pension Plans
Pension plans provide retirement income, ensuring executives have a stable financial future. Companies may offer defined benefit plans or contribute to executives' 401(k) plans through profit sharing plans. This type of benefit has become increasingly rarer as employers shift to using defined contribution plans, but there are still employers that offer pension plans to new hires or have grandfathered employees that are still eligible for pension plans.
Non-Qualified Deferred Compensation
Non-qualified deferred compensation (NQDC) plans allow executives to defer a portion of their income to a later date, often upon retirement or a specified event. These plans offer tax advantages and enable executives to customize their compensation structure.
We have written another article specifically detailing NQDC plans that can be found here if you are looking for more information on the benefits of utilizing deferred compensation plans.
401(k) Restoration Plan
A 401(k) restoration plan is a valuable benefit that assists executives in maximizing retirement savings. It restores a portion of 401(k) contributions that may be limited due to tax code restrictions due to being high earners.
Company Vehicle or Vehicle Stipend
Providing a company vehicle or a vehicle stipend enhances an executive's mobility and represents a tangible perk. It can help streamline travel and offer convenience while reinforcing the executive's status within the organization.
As corporate executives, understanding the intricacies of executive compensation and benefits is crucial for optimizing your financial plan and maximizing your overall compensation. By adequately planning around the various components discussed - base pay, short-term incentives, long-term incentives, and benefits – you can ensure you are maximizing the benefits received from your compensation package to better achieve your goals for the future.
Remember, just as each person’s financial situation is unique, so are their company’s compensation plans. It is crucial to seek personalized advice from qualified financial professionals who can tailor a strategy to your specific goals and circumstances.
To learn more about optimizing your compensation and benefits, feel free to connect with me or reach out to our team of experts at Exencial Wealth Advisors. Let us help you Spend Life Wisely.
Wishing you continued success and prosperity in your executive journey.
Disclaimer: The information provided in this article is for educational purposes only and should not be considered as financial or legal advice. Please consult with your financial and tax advisors to determine plans for your individual circumstances.
Exencial Wealth Advisors is an SEC-registered investment adviser. Any references to the terms “registered investment adviser” or “registered,” do not imply that Exencial or any person associated with Exencial has achieved a certain level of skill or training.