Executive Compensation: The Most Common Types
If you are fortunate enough to be an executive with equity compensation, you may have many opportunities available. The programs, however, quickly begin to look like alphabet soup. The most common programs are grants of Non-Qualified Stock Options (NQSOs) and Restricted Stock Units (RSUs). Other forms include Incentive Stock Options (ISOs), Restricted Stock Shares (RSSs), Stock Appreciation Rights (SARs) and Performance Stock Units (PSUs).
Non Qualified Deferred Compensation
A nonqualified deferred compensation (NQDC) plan is an arrangement, between employer and employee, to defer receiving currently earned income to a future year. These plans don’t have the tax-favored benefits of qualified plans.
Stock Options
Each offering comes with its own set of advantages and disadvantages. This is not only relative to risk and return, but also tax implications, vesting requirements, deadlines, withholdings and the impact on your aggregate investment portfolio.
For planning purposes, it’s prudent to complete a concentration analysis that compares the value of all company stock and options to the value of your other investments. Additionally, you should know the approximate stock price needed to achieve your goals of retirement, college funding, or other specific cash flow needs. Importantly, the after-tax proceeds should be calculated, since most often the amount of tax liability is higher than expected.
Non Qualified Deferred Compensation
Nonqualified plans are advantageous because they generally don’t need to comply with complex ERISA rules. Unlike qualified plans, nonqualified plans can be offered by an employer to selected employees only, such as executives and other highly compensated key employees.
Unfortunately, one issue is that assets are protected from the employer’s change of control, but subject to the rights of creditors, i.e., employer’s bankruptcy and insolvency creditors.
Golden Parachutes
Golden parachutes provide key employees who are terminated from a takeover or change in control. They can be either continued compensation for a specified period, following departure, or a lump-sum payment. Golden parachutes are severance agreements that protect key employees from a corporate takeover or change in control.
Executive Bonus Plans
An executive bonus plan involves an addition to regular salary or compensation. It is provided so that employees can share in profits from a successful year. Bonuses are often used for executives as incentive-based compensation, aligned with profits or other goals during the year.
Fringe Benefits
Fringe benefits are noncash compensation benefits provided by employers to their employees. They may include a variety of forms, including employee discounts, company cafeteria or meal plans, free parking, and free gym/club memberships. Although executives normally participate in a company’s broad-based fringe benefit programs, such as group medical plans, many executives also receive fringe benefits available only to the executive group.
