When it comes to equity compensation planning, executives must manage a complex group of considerations and obligations between meeting the expectations of the company and its shareholders and meeting the financial needs of their families. And for executives, their status within the company and the high visibility of their actions can make choices regarding their own equity compensation complicated.
The Equity Compensation Planning Dilemma for Corporate Executives
Executives must balance their obligations to their company while balancing the financial needs of their families.
The Corporate Insider's Dilemma
Due to their position, executives have a unique set of circumstances that can impact their financial decisions, which may include the following:
- A significant portion of overall compensation may come in the form of equity compensation, which is tied to company's stock performance.
- High concentrations in company stock can potentially expose executives to financial risks, particularly if markets are volatile.
- Regulatory reporting requirements make the actions of corporate executives visible to the markets, the public and other employees.
- Executives may be prohibited from trading at certain times due to closed trading windows, and even when trades are allowed, the visibility into their actions may be a reason for additional consideration when making trading decisions.
- Sales of company stock by corporate insiders may be perceived as a lack of confidence in the performance of the company.
Under the Microscope
Depending on how senior you are in your company, you may have transparency requirements when it comes to your financial affairs. Salaries, bonuses, and direct and indirect holdings of company stock for directors and high-level officers may be found in company proxy statements and other SEC filings. Your company stock transactions may be visible as well.
Market Perceptions
In some companies, high-level executives are encouraged and often required to build and maintain a meaningful stake in company stock. The underlying assumption is that management, company and shareholder interests will be aligned. Holding positions in company stock is often equated with management’s confidence in the outlook for the company. Conversely, sales of company stock may be perceived as a signal of concerns from within. Because of these factors, in certain situations, corporate insiders may be reluctant to sell company stock even though it may be the right decision for their personal finances.
Locked In Place
Corporate insiders are generally prevented from taking certain actions while trading windows are closed. For high-level executives, trading windows may remain closed for extended periods because they possess material nonpublic information regarding the operations of the company.
The inability to make transactions at specific periods in time can potentially cause financial losses for executives. For example, an insider who waits too long before taking action may see an option that presents a profit opportunity due to the prevailing market price expire unexercised because of a closed trading window. And in the case of restricted stock grants, which are usually taxed at vesting, if an executive has to hold onto the stock, they’ll have to be pay the taxes in another way.1
A Path Forward
A starting point for any trading plan begins with a base of effective financial planning targeted toward your specific goals, which might include funding education, saving for retirement, estate planning and planning for the unexpected. From here, you can determine how your equity compensation fits into your plan. Once you know the role your company stock will play in your financial future, you can plan on how to set exit points based on such factors as price, quantity and/or timing.
Many companies allow executives to use a Rule 10b5-1 trading plan for their company stock, which allows for transactions involving company stock to take place on a systematic basis, if certain regulatory requirements are met. These plans can be tailored to the needs and financial situation of each participant and offer an affirmative defense against insider trading liability if certain regulatory requirements are met.
Balancing Act
As a corporate executive, proper planning can help you balance the needs and interests of your company with that of your personal financial goals. The area of equity compensation planning is a complex topic where attention to detail is critical. The good news is that help is available. Your Relationship Manager can help you navigate the complexities of your equity compensation and offer assistance as you plot a path forward.
Footnotes:
1 Intuit How to Report RSUs or Stock Grants on Your Tax Return. Accessed April 23, 2025
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Individuals executing a 10b5-1 trading plan should keep the following important considerations in mind: (1) 10b5-1 trading plans should be reviewed and approved by the legal and compliance department of the individual’s company. (2) Most companies will permit 10b5-1 trading plans to be entered into only during open window periods. (3) Recent rule changes will require a mandatory cooling-off period between the execution of a 10b5-1 trading plan (or a modification) and the first sale pursuant to the plan (or the first sale following such modification). (4) 10b5-1 trading plans do not alter the nature of restricted and/or control stock or regulatory requirements that may otherwise be applicable (e.g., Section 16, Section 13). (5) 10b5-1 trading plans that are terminated early may weaken or cause the individual to lose the benefit of the affirmative defense. (6) 10b5-1 trading plans may require a cessation of trading activities at times when lockups may be required at the company (e.g., secondary offerings). (7) Recent rule changes will require companies to publicly disclose material terms of Section 16 director and officer 10b5-1 trading plans, and the early termination of such plans.
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