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Equity Compensation Comes With Complex Choices

Equity Compensation Comes With Complex Choices

Financial Planning

Successful corporate executives face issues that other people don’t. It’s not uncommon for them to have 80-90% of their overall wealth tied 
up in company stock, but it’s also not uncommon for them to resist diversification advice.

Most corporate executives share an optimistic view of their company’s future and consider corporate stock to be a sound investment. They’re also concerned that they’ll be perceived as disloyal if they even hedge, much less liquidate, their positions. And even if they do decide to diversify, they may face stock holding requirements that prevent them from selling shares except when blackout periods are not in effect.

At Lenox Advisors, we work with numerous executives whose personal wealth is inextricably linked to the fortunes of their companies. In addition to overly consolidated employer stock option positions, they face such challenges as:

When (Or If) To Exercise Stock Options

In lieu of outright shares, many companies make generous grants of employer stock options to their valued executives. Often, these executives have difficulty in determining how long they should hold their options before exercising them. Understanding how options might be priced if they were actually available to the investing public might be a good place to start a decision-making process, but the formula for option valuation is complex. It pays to consult with professionals who are well versed in this area and experienced at helping executives integrate options into their overall financial plan.

When You're Allowed To Sell Your Shares 

Executives may also face restrictions on the timing of their stock sales due to insider-trading rules. To address SEC concerns, many companies use limited trading windows, which are the only times that company insiders are allowed to sell. However, the stock may not be trading at a favorable price during those windows or the executive’s decisions to sell could produce negative media attention that puts downward pressure on the stock price.

Enter the SEC Rule 10b5-1 trading plan, which essentially allows executives to create a deferred sales agreement for their stock. The contract stipulates a formula for when trades will take place – for example, at a certain time or a certain price – and the sale can go through even through the trading window is closed.

Since the trading plan is made in advance and in some cases publicly disclosed in the financial statements, there is less concern that the executive is transacting based on material non-public knowledge of the company. As such, this tool provides what’s known as “Affirmative Defense” against insider trading charges. As a result, market reaction may be more positive. In addition, this strategy provides executives with much more flexibility in diversifying out of their consolidated stock position in a systematic way.

Equity compensation can be extremely complex and a lot may be riding on every decision you make. To understand the risks, as well as the potential rewards of employer stock ownership, we urge you to seek professional advice.


Lenox Advisors, Inc. (Lenox) is a wholly owned subsidiary of NFP Corp. (NFP), a financial services holding company, New York, NY. Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. 90 Park Ave, 17th Floor, New York, NY 10016, 212.536.6000. Fee based planning services are offered through Lenox Wealth Advisors, LLC (LWA), a registeredinvestment adviser. Services will be referred by qualified representatives of MML Investors Services, LLC (MMLIS). LWA is a subsidiary of NFP and affiliated under common control with Lenox. Lenox, LWA and NFP are not subsidiaries or affiliates of MMLIS, or its affiliated companies. FP203 CRN202204-263210

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