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Geoffrey M. Zimmerman, CFP®

This article was first published at It is kindly reprinted here with permission.

Executives, as corporate insiders, face both planning concerns and potential landmines in their equity compensation. Your actions are highly visible, and you must perform a delicate balancing act to meet the needs, demands, and perceptions of the various constituencies interested in your company’s stock. This article, which complements my other article on, looks at these concerns along with ways to manage them that can improve your odds of achieving your financial goals.

The Corporate Insider’s Dilemma

The dilemma you face takes many forms and has many angles.

  • A significant portion of a corporate executive’s compensation often comes in the form of equity ownership in the company. Your net worth is highly tied to your company’s stock performance.
  • High concentrations in company stock align your financial rewards with those of the shareholders, but potentially expose you and your family to undue financial risks, particularly if markets and stock prices do not cooperate.
  • Due to regulatory reporting requirements, the actions of high-level corporate executives are very visible to the markets, the public, and employees.
  • Sales of company stock by corporate insiders may be perceived as a pessimistic outlook for the company.
  • Company employees, particularly those who are not financially sophisticated, may view the lack of sales by executives as a bullish sign for the company (and sales by executives as bearish).
  • Corporate executives may be prohibited from trading due to consistently closed trading windows for themselves.
  • The lack of open trading windows can lead to financial losses for executives due to the limited lifespan of stock options or because of the taxes owed when restricted stock vests. Even when corporate insiders can trade their company stock, the high level of visibility into their actions warrants additional consideration.

Under The Microscope

Corporate insiders at a publicly traded company are watched by regulators, shareholders, and employees. Depending on how senior you are in your company, you may have limited privacy in your financial affairs, as salaries, bonuses, and direct and indirect holdings of company stock for directors and high-level officers may be found in the proxy statement and other SEC filings, such as Form 4. Transactions in company stock are visible as well. Commercial services such as Vickers Stock Research and Yahoo! Finance consolidate and report on insider holdings and recent transactions.

Market Perceptions Of Insiders’ Actions

High-level corporate executives are encouraged and often required to build and maintain a meaningful stake in company stock, as many companies have ownership guidelines. The underlying assumption is that the fortunes of management, company, and shareholders will thus be aligned, and that corporate management will be more inclined to act in the interests of shareholders accordingly. If the company is perceived as successful in the marketplace, share prices rise, and shareholders increase their own wealth.

In summary, holding positions in company stock is equated with management confidence in the outlook for the company. Conversely, unexplained sales of company stock by corporate insiders may be viewed adversely by the markets, and perceived as a signal of unannounced trouble brewing within. Because of these factors, corporate insiders tend to be reluctant to sell company stock, unless other events are motivating them to act.

Following The Leader (Whether You Realize It Or Not)

Many companies issue stock options, restricted stock units, and other forms of equity compensation to employees outside the executive offices. During the technology boom of the 1990s, it was not uncommon for administrative employees to receive option grants. While senior executives may know how to effectively manage and integrate their equity compensation in their own financial plan, lower-level employees may not. They may be intimidated by such plans, or they may not take the time to gain a full understanding of equity compensation. They may also fear that option exercises and stock sales will cause management to believe they are less loyal than their peers.

For these reasons and others, employees may choose instead to mirror the actions of their corporate leaders in deciding when and how to handle their equity compensation. The irony is that corporate insiders may want and need to make moves with equity compensation for their own financial futures, but are prevented from doing so for compliance reasons (e.g. locked out of a trading window). Lower-level employees may have the opportunity to take action and more need to diversify, but may choose instead to wait until their leaders take the first step.

Locked In Place

Corporate insiders are generally prevented from taking action (including purchase transactions) related to their company stock while trading windows are closed to prevent insider trading. Trading windows for senior executives are routinely closed apart from a brief period shortly after the release of corporate earnings announcements. For high-level executives, trading windows may remain closed for extended periods because they consistently possess material nonpublic information regarding the operations of the company.

This can cause financial losses for an executive. An insider who waits too long before taking action may see in-the-money options expire unexercised because of a closed trading window. With restricted stock grants, which are usually taxed at vesting, if the stock cannot be sold and the company does not permit share withholding to cover the taxes, executives may have to hold the stock and pay the taxes in another way.

Other Unintended Consequences

If your management team is contemplating a merger, acquisition, or change in control, review your stock option plan agreements, particularly if your company has issued incentive stock options (ISOs). Corporate events such as mergers can accelerate the vesting of options, and this can cause ISOs to lose their preferential tax treatment.

A Path Through The Jungle

Financial markets tend to favor clear signals and consistency. Employees appreciate a management team whose corporate culture looks out for their interests. Using these as a guide, a management team may benefit by taking the following paths.

Engage Qualified Assistance

The area of equity compensation planning is a complex topic where attention to detail is critical. Seeking help from professionals with expertise in this arena is strongly encouraged.

Have A Financial And Trading Plan

Many companies allow their executives to use a Rule 10b5-1 trading plan for their company stock. Under common best practices, these are generally initiated during open trading windows and allow for transactions involving company stock to take place on a systematic basis, even while trading windows are closed. Generally, metrics in these plans are based on time, prices, and quantities. These plans do not have to be the same for all members of the executive team and can be tailored to the needs and financial situation of each participant.

When you are developing a trading plan, a useful consideration is to build in a grace period before the plan becomes operational. While there is no SEC rule that requires this, I have seen a number of companies and plans that impose a 60-day grace period before a new (or a revised) trading plan takes effect. The delayed implementation may offer some further assurance to regulators and the markets that the executive is acting in good faith.

A starting point for any trading plan begins with effective financial planning. This includes the traditional topics, such as funding university education and ascertaining the amount of capital needed for retirement or to provide for your family in case of death or disability. From this approach, and by answering the financial questions in my other article on, you will learn how much of your financial future depends on your company stock holdings.

Once you know the role of your company stock in relation to your (and your family’s) financial future, you can set exit points that are based on price, quantity, and/or timing. These are some of the metrics that need to be quantified, particularly for executives who want to use 10b5-1 trading plans.

For executives whose net worth has already exceeded the point of financial independence, an alternative strategy could involve a plan to maximize the value of equity comp relative to some identifiable target, such as the Black-Scholes value.


An executive of company ABC has two option grants:

Grant 1: 100,000 NQSOs granted on 10/1/2009 at $8.50/share
Grant 2: 100,000 NQSOs granted on 10/1/2011 at $19/share

Each grant has a seven-year lifespan, and the stock of ABC has the following characteristics:

Dividend = $0 (no dividend)
Volatility = 50%
Risk-Free Rate = 1.30%

Finally, the executive wishes to exercise options and immediately sell the stock once 90% of the Black-Scholes value has been attained and no sooner than three years before the grant expires. This leads to the following decision matrix.

DNE = do not exercise. Prices represent limit prices for exercise, beginning on the date at the top of each column.

Option grant

Before 10-1-2013









Grant 1







Grant 2










Note that as the options near the expiration date, the limit price declines. This is because the Black-Scholes value = the intrinsic value + the time value. As the option gets closer to expiration, the time-value portion of the equation slowly decreases toward zero.

Using this type of framework, our executive could refine the trading plan to liquidate shares either all at once or incrementally (e.g. 10,000 shares on the first trading day of each month) once the price and date thresholds have been triggered. An incremental approach could become particularly useful with a large number of shares, or for thinly traded securities, to avoid running afoul of Rule 144 volume limits.

Alert: When they are reported on Form 4, sales under a trading plan are generally indicated as “Automatic Sales” on websites such as Yahoo! Finance. This provides some clarity and reassurance to the market that the sale was prompted by a formal written plan, and thus presumably not because of any changes in the outlook for the company.

Rule 10b5-1 Trading Plans For Restricted Stock

A Rule 10b5-1 trading plan may also be useful for restricted stock or restricted stock units, particularly because the fair market value of these grants is generally taxable as ordinary income at vesting (unless the recipient has a basis in the stock). A reasonable strategy would be to sell just enough of the vesting grants to avoid increasing concentration in company stock. At a bare minimum, consider selling enough shares to cover the tax liability if your company is not automatically withholding shares for the taxes.

In special circumstances, other planning strategies come into play for restricted stock. For example, grants of stock that has a very low current fair market value but high growth potential (e.g. in a privately held company soon going public) may be appropriate candidates for a Section 83(b) election. Since this strategy makes sense for few people, we will defer discussion of that topic to a future article.

Balancing Act

As a corporate executive, you must both serve the needs of your company and its shareholders and meet the financial needs of your family, all while under the watchful eyes of Wall Street, the regulators, and your employees. Because your actions are highly visible, it is important for you to demonstrate sound leadership. Proper planning and the use of the tools and techniques described in this article can help you clear a path through the financial jungles, build your wealth, avoid some of the traps along the way, and increase the odds of a successful journey for you and those who follow you.

Geoffrey M. Zimmerman is a Certified Financial PlannerTM Practitioner and Senior Client Advisor with Mosaic Financial Partners Inc., located in San Francisco and Lafayette, California. Mr. Zimmerman uses to calculate and monitor the Black Scholes values for his clients with employee stock options.

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