by Sheri Iannetta Cupo, CFP and Founding Principal Sage Advisory Group, LLC

In the classic quiz show, Jeopardy, contestants show their smarts by asking rather than answering the right questions. Executives who want to make the most of their employee stock options can do well by taking a similar approach. Your company stock options can be a source of significant enrichment, but effectively managing them can be daunting. To clarify your next best steps, start with these four questions, preferably in partnership with your financial advisor:

1. What type(s) of equity compensation grants do you currently hold: options or shares?

Have you been granted options (nonqualified or incentive) or shares (restricted stock or restricted stock units, i.e., RSUs)? Options are more complicated because you will need to know when and how to exercise them. But they are also more flexible. As we covered in our earlier posting about RSUs, options provide more choices over when you want to incur the taxable income.
2. What role does your equity compensation play in achieving your financial life goals?
Rather than letting your executive compensation drive your financial circumstances, flip that planning on its head. First define your life’s goals – such as educating your children, achieving a desired lifestyle or retiring within a particular timeframe. Then let those goals drive your stock option or restricted stock decisions.
3. What is your framework for making timely and profitable decisions?
Have a disciplined approach that coordinates your executive-compensation planning with your overall portfolio management. Having a plan that’s tailored to suit your personal circumstances helps you stay focused on your true goals (as identified in your answer to Question #2), so you can make rational rather than emotional decisions about how to get there financially.
4. What resources do you turn to for assistance?
Even Alex Trebek can’t run the show all by himself; he relies on his seasoned team to help. Similarly, there are a lot of moving parts to your equity compensation package, so we recommend you seek solid advice along the way. We recommend this quick-reference from to help you get started: “5 Things You Should Know About Your Employee Stock Options.” These are:

1) Your Forfeit Value – the potential value you forfeit if you leave your employer.
2) The upside & downside leverage in portfolio value with a 20% change in stock price.
3) The stock price at which your financial goal is attained.
4) Your concentration percentage in company stock, restricted shares and stock options.
5) Your Insight Ratios – the percentage of time value remaining in each stock option.

At SAGE, we offer our clients a Personal Equity Compensation Profile that answers the “5 Things” listed above, providing a foundation for making timely and prudent decisions about their employee stock options and company stock holdings.

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