As an insider, lighten up! Even shareholders don’t expect your holding period to run forever. You just need to be sure your plan for selling company stock meets with current SEC standards and aligns with shareholder interests. Planned trading programs, also known as rule 10b5-1 trading plans, can be put in place to facilitate systematic sales. Greater scrutiny of 10b5-1 plans has intensified after some corporate insiders were accused of abusing these plans to reap unfair profits from inside knowledge of their companies. Some of the abuses consisted of trading too soon after the plan was filed, filing and trading under multiple 10b5-1 plans at the same time, and making frequent changes to plans on file.

A Smart Strategy

Adopting a written plan for selling company securities can be an affirmative defense against trading on material nonpublic information. These guidelines consist of three pillars for insiders to follow to safely and successfully divest their company stock under Rule 10b5-1:

1. Put a written plan in place while you are not in possession of material nonpublic information.
2. Develop a pre-planned trading program that outlines how and when you plan to sell within statutory size constraints. Prepare this plan in consultation with your corporate counsel well in advance, as much as 6 months prior to the first trade. Specify periodic dates on which pre-specified share amounts will be sold. You may specify limit or market price, number of shares and the type of shares to be sold.
3. File the plan with your designated brokerage firm for automatic trade execution as outlined. You will certify not to enter into another agreement to sell your company shares at a different firm or with another broker while the plan is in place.

These plans, approved by corporate counsel and on file with your designated brokerage firm, provide a positive appearance to shareholders, protect you from charges of “well-timed” transactions, and provide you with more time to file Form 4. Under this type of plan, corporate insiders may take up to five business days following the sale to file Form 4 with the SEC, versus two business days for a regular sale.

These plans are known as 10b5-1 plans for the SEC regulation by that name enacted in 2000. Not all companies permit 10b5-1 plans, so be sure to check with your corporate counsel on company policy.

Mr. Steege is President of SFG Wealth Planning Services, Inc. (SFG), a fee-only financial planning firm. Founded 19 years ago, SFG is dedicated to assisting senior executives and their employees with their complex stock-based compensation and planning challenges.

Performance Awards are being issued in record numbers, with about 50% of S&P 500 companies awarding performance-linked equity compensation. The surge in performance shares, performance share units, and performance stock options follows Dodd-Frank’s Say on Pay provision and is popular with corporate governance watchdogs. Executives are coming up to speed with the distinctions between their Performance Awards and other equity compensation awards.

In a nutshell, here are four keys to understanding Performance Awards:

1. Company metrics are more controllable than total shareholder return (TSR). When it comes to benchmarks, internal financial metrics that drive value provide greater motivation and fairer measurement than total shareholder return, which is subject to stock market conditions.
2. Don’t count your chickens before they hatch (or your performance shares before targets are met). Executives are rightfully uneasy with compensation awards that are less than guaranteed and sometimes beyond their control. With that said, the upside of performance awards, which may include additional shares based on higher performance targets, can be highly rewarding.
3. The responsibility to file SEC Forms 3, 4 and 5 rests with the Executive and not the Company. The filing requirement, and the potential for penalties from not doing so, rests with the executive and not the Company. The requirement calls for filing when targets are met and performance awards are paid-out “grant or award”. Send us an email and we can walk you through how this works.
4. Despite a few uncertainties, performance awards usually work out reasonably well for most executives. As an example, over a 3-year period for S&P 500 companies, a company may need to rank in the 50^th to 75^th percentile or better for each consecutive year in order for performance award recipients to receive 100% or more of their awards. Higher relative performance may earn amounts in excess of 100%. Each award has a designated dollar value, with payment in shares, cash, units, stocks options or any combination. We can help simplify how your awards work.

As always, you should consider the disposition of your performance awards in the fullness of your entire financial situation. How much company stock is too much? What should your time horizon be for holding the shares? And is it possible to limit your risk exposure? We welcome your questions and comments about your company equity awards and concentration considerations. Give us a call.

Mr. Steege is President of SFG Wealth Planning Services, Inc. (SFG), a fee-only financial planning firm. Founded 15 years ago, SFG is dedicated to assisting senior executives and their employees with their complex stock-based compensation and planning challenges.

If you have ever waited until close to expiration date to exercise your non-qualified stock options (NQSO), you may have been stunned by how much was swallowed up in taxes. While a cashless exercise is the most popular way to go, senior executives have to consider the sizable tax savings considerations to exercising non-qualified stock options early. Exercising immediately after vesting depends on several variables, including whether or not you want to:

• hold the stock long term;
• minimize the tax you pay;
• commit the cash for the stock and taxes without receiving the proceeds until much later.

Now that the Medicare tax increases the maximum Federal income tax rate to 41.95% vs. 23.8% for capital gains tax, the timing on your NQSO exercise can make a big impact on your after-tax rewards.

Let’s make these assumptions about your stock option award:

Two examples demonstrate the benefits of each strategy; assuming you plan to hold the stock long term:

Exercise on vesting date – you pay $100,000 (money you have to commit) plus taxes to exercise your options and acquire the shares to hold long term;

Exercise at or near expiration – you defer exercise until 2020 (near expiration) when you exercise and sell the shares.

What a difference! By triggering the long-term capital gains rate early and letting the stock run, the tax savings in this example total $19,720. These examples are straightforward, although your particular circumstances may not be. Wealth accumulated in stock options can be quite significant, and should be tied in with your overall investment planning and other goals, with tax savings being a factor.

At SFG Wealth Planning Services, Inc., we can weigh all of these factors to help you determine which options exercise strategy is right for you. We draw from our training in accounting, executive compensation and investments. We would be happy to discuss the particulars of your stock option exercise if you give us a call.

Mr. Steege is President of SFG Wealth Planning Services, Inc. (SFG), a fee-only financial planning firm. Founded 15 years ago, SFG is dedicated to assisting senior executives and their employees with their complex stock-based compensation and planning challenges.

As the stock markets have waned, more companies have been compensating executives with restricted stock rather than stock options in recent years. Executives who acquire a concentration in company stock often ask:

• Are there ways to save taxes on particular awards?
• Will the stock vest if I retire early?
• What kind of tax savings can I afford with my restricted stock?

As restricted stock has gained in popularity, it’s important to know there are two types of restricted stock: Restricted Stock Awards (RSAs) and Restricted Stock Units (RSUs). When it comes to RSAs and RSUs, there are planning techniques that allow you to moderate your tax liability.

The two are different in fundamental ways:

1. Restricted Stock Awards (RSAs) are granted and issued on the same date. The executive has the right to vote and receive dividends right away. The executive may take what is referred to as an 83(b) election within 30 days, accelerating the recognition of income, such that all future appreciation can be taxed at the lower long-term capital gains rate, assuming the stock is held for one year or longer. It is important to act quickly as the election must be made within 30 days. Without having made the 83(b) election, the award is subject to ordinary income tax at vest.

2. Restricted Stock Units (RSUs) represent a pledge by the employer of a set number of shares of stock upon the completion of the vesting schedule. The units are granted but carry no voting rights on the stock during the vesting period, because no stock has actually been issued. Dividend equivalents may be earned prior to vest. When shares are released, the executive gains voting rights and receives dividends. The value of the stock is reported as ordinary income in the year in which the stock is released. If you continue to hold the stock for greater than a year upon vesting, all additional appreciation is taxable as long-term capital gains.

Restricted Stock vs. Stock Options: which is “better”?

Most executives do not have a choice in the type of restricted stock they receive. In the more likely scenario where a choice or blend of restricted stock and stock options may be offered, there are three issues to consider:

1. When do you need the money?

If not for a while, stock options may be more attractive. If the funds are needed sooner, perhaps in the next few years, restricted stock is the better choice.

2. How volatile is the company’s stock price?

Restricted stock may be a means of reducing volatility of your money associated with stock vs. stock options having far more potential fluctuation. Stock options may expire worthless if the stock dips near the expiration date. Restricted stock will be worth the value of the underlying stock upon vest.

3. How optimistic are you about your company?

If you are optimistic that the stock will go higher, stock options would offer a potential upside relative to restricted stock. If you believe the stock is fully valued and may not go higher, restricted stock may be the better choice.

Consider these questions to help maximize the value of your stock rewards:

• What is the most tax-advantaged way to maximize the value of particular awards?

• How much company stock is too much?

• How do you integrate these rewards into a plan to address your family’s financial needs?

As executives transition toward a significant financial event, such as retirement, it’s important to know how best to divest a concentrated position, ratchet down your risk, sequence the tax liability and gain peace of mind by diversifying away from company stock and repositioning for the future.

Should you have any questions, contact us for a complimentary consultation.

Mr. Steege is President of SFG Wealth Planning Services, Inc. (SFG), a fee-only financial planning firm. Founded 15 years ago, SFG is dedicated to assisting senior executives and their employees with their complex stock-based compensation and planning challenges.