Wealth management for executives

Compensation earned by successful business executives who’ve worked for years may well be significant, varied, and complex. Likely encompassing more than just salary and bonuses, executive compensation packages commonly include stock options, equity grants, performance incentives, benefits, and more.

Not only are these rewards intended to retain executive management, but they can also be used to incentivize middle management and high performers to stay with their current employer. Your Huntington Private Bank team’s expertise with all types of executive compensation allows us to assist in evaluating the best strategies to achieve your goals and objectives. To give more perspective on this topic, I sat down with Wealth Planner Rosemarie Amore, who shared insights into some types of executive compensation and the benefits of each. As a wealth planner, Rose works with Huntington’s wealth management teams nationwide to advise high-net-worth clients on techniques for wealth transfer, wealth preservation, and tax planning. She is a Certified Financial Planner^® and holds a Master of Taxation from the University of Akron.

Executive compensation examples

“Salaries, vacation, travel and automobile stipends are some ways executives get compensated, but there are others that can motivate leaders to remain with the company as well as to incentivize improved performance,” Amore says. “Benefits that pay out over time may benefit the executive and company.”

RSUs and PSUs

Restricted Stock Units (RSUs) and Performance Stock Units (PSUs) are forms of equity compensation issued by a company to employees. Both represent a company’s commitment to give shares of stock or an equivalent in cash to an employee at a future date upon vesting. It’s important to note that no shares of stock or cash equivalents are issued at the time of the grant. The company promises that stock or a cash equivalent will be awarded in the future as long as the conditions set on the grant date (vesting conditions) are met by the employee. RSUs vest based on a period of time and the initial amount granted compared to the amount that vest does not change based on company performance. PSUs differ from RSUs in that they are linked to company performance goals, and the actual number of shares will vary based on performance as measured against the defined goals of the plan.

RSUs and PSUs are typically subject to a “graded” or “cliff vesting” schedule.

• In a graded vesting schedule, the shares of stock vest in portions over time. For example, 20% of an employee’s RSUs/PSUs will vest every year for five years.
• Cliff vesting requires a period of time to pass before all shares of stock vest at the same moment. For example, 100% of an employee’s RSUs/PSUs will vest after a three-year period.

Once the units vest, they’re included in W2 wages and are taxed as compensation. Taxes can be paid using a portion of the equity in the RSUs/PSUs or with cash outside of the plan. “The price at vesting establishes the employee’s cost basis in the units,” Amore says. “When the units are sold, any capital gains or losses will be realized and taxed as short- or long‐term gains, depending upon the length of time the shares have been held.”

Stock options

Stock options are forms of compensation issued by a company to their employees, usually found in start‐ups or publicly traded companies. An option is the right to buy company stock within a certain window of time for a pre-determined price typically established based on the current “fair market value.” There is no obligation to purchase the shares but by owning these stock options, the executive is given the opportunity to buy company shares at a possibly lower price than what the current company valuation shows. Stock Options are made available through grants by the employer which establish the number of shares that will be offered, what the “strike price or exercise price” will be, and a vesting schedule for the underlying options.

There are two forms of Stock Options: Incentive Stock Options (ISOs) and Non‐Qualified Stock Options (NSOs), neither of which come with dividend or voter rights.

• ISO, also called statutory or qualified stock options, are generally offered to key employees and upper management as an additional incentive to their base salary. ISOs can qualify for preferential treatment from the IRS, allowing gains to be taxed at long‐term capital gain rates.
• NSOs are granted to employees at all levels including board members and consultants. NSOs do not receive preferential treatment from the IRS, and gains on NSOs are considered ordinary income for tax purposes.

Deferred compensation

Deferred Compensation is an arrangement where a portion of an employee’s income is set aside to be paid out at a later date. In most cases, taxes on this income will be deferred until the income is paid out. Typically, the compensation is paid out at retirement; however, the payout can also occur due to a change in ownership of the company, disability, or death. Examples of deferred compensation include pensions, retirement plans, and employee stock option plans, which fall under two categories, qualified and non‐qualified.

• Qualified deferred compensation plans are pension plans governed by the Employee Retirement Income Security Act (ERISA), including 401(k)s, and 403(b)s. Contributions to these plans are limited by law. The compensation that is deferred in these plans is for the sole benefit of the recipient, meaning that the company’s creditors are unable to access the funds if the company fails to pay its debts.
• Non‐qualified deferred compensation plans, may also be known as excess benefit plans, bonus plans, wraparound 401(k) plans, and supplemental executive retirement plans (SERPs). Contributions to these plans are not limited by law and can be a great way for a firm to attract and retain valuable employees without the burden of paying that employee’s full compensation upfront . These plans can help reduce an employee’s income tax burden during their highest earning years and give them another way to save for retirement.

“Deferred Compensation Plans are best suited for high‐income earners seeking alternative retirement savings strategies. The income tax reduction is applied immediately in the year(s) in which they elect to defer,” Amore says. “The desired portion is then placed in an account that can be invested and receive tax‐deferred growth.”

Upon retirement the employee will start receiving their deferred income in whatever payment interval they elected at the time of their deferral.

Getting the advice you may need

Your team at Huntington Private Bank is prepared to partner with your legal and tax advisors to determine the best way to manage any executive compensation you are awarded and to outline a plan that can help alleviate your concerns. To learn more, please contact your Huntington Private Bank team to see how we can help, or find a Huntington Private Bank Office near you.