Seniority doesn’t mean certainty. Even the most accomplished leaders face unique challenges when it comes to equity compensation and long-term wealth. With equity now a growing share of executive pay, the stakes are high – if it isn’t managed well, the results can be costly.
Bob Fritz, Head of Executive Advisory at J.P. Morgan Private Bank, has spent years helping C-suite executives make the most of their awards. His advice: don’t assume your executives have it all figured out. “They’re spending the vast majority of their time running the business; it consumes most of their days. Then on the weekends, they want to spend time with their family and friends,” he explains. “They don’t always spend the time to analyze their own compensation and benefit plans as much as they should.”
Three phases of the executive ‘journey’
Executives’ needs evolve with their careers. Understanding which phase, they are in helps shape the right support.
- Phase 1 – Emerging executives: New to the C-suite, learning how equity and deferred compensation fit into their broader financial plan.
- Phase 2 – Established leaders: Building wealth, balancing equity with other assets and planning for the future.
- Phase 3 – Transitioning executives: Approaching retirement or a new chapter, focused on preserving and diversifying accumulated wealth.
Tailoring support – and asking the right questions – at each phase ensures leaders make informed choices.
Stock options: timing is critical
Stock options can create extraordinary value – but only with careful timing. Executives can make mistakes at both ends of the spectrum if they don’t have the right support systems and advisory teams working alongside them. For example, if a stock option grant is available for 10 years and an executive waits until the eighth, ninth or tenth year to take action, this may expose them to risk.
“There’s a lot of bad things that can happen to a stock option in those later years that has nothing to do with the company,” says Bob. “It could be market-driven reactions, or industry-driven reactions, or something else that drives that stock price down.”
On the flipside some act too soon, exercising early in an option period. If the option invests over two or three years and they see the value rise, executives may get anxious about it and want to exercise.
“What they’ve effectively done is given up the free upside leverage with an option plan, and what you want to do is strike that right balance,” says Bob.
Understanding the award mix
Most executives hold a blend of equity types:
Public companies often use a blend of restricted stock units (RSUs) and performance stock units (PSUs) to incentivize their C-suite. With a PSU there is a performance trigger in addition to a time vesting element where they have to meet certain revenue growth targets, or profitability or growth.
Incentive stock options (ISOs) are often used by pre-IPO companies. It’s important for both administrators and executives to gain an understanding of their complexities, particularly around tax treatment.
Executives should always consult with their tax advisor around the exercise strategy as sometimes pre-paying some taxes that you’ll get the benefit of down the road, depending on the plan type.
Individual wealth – a team effort
Supporting executives isn’t just about administration. Equity is a major retention and reward tool, and pairing plan rollout with access to skilled financial advisors can maximize its impact.
Companies invest heavily in designing executive plans, but without proper support those plans may not deliver their full value to the company or the executive team. Extending the right advisory resources helps leaders unlock wealth, while strengthening retention and engagement.
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This publication contains general information only and J.P. Morgan Workplace Solutions is not, through this article, issuing any advice, be it legal, financial, tax-related, business-related, professional or other. J.P. Morgan Workplace Solutions’ Insights is not a substitute for professional advice and should not be used as such. J.P. Morgan Workplace Solutions does not assume any liability for reliance on the information provided herein.
