Leaving Your Job? 4 Executive Compensation Considerations
Thinking about leaving your job? You’re not alone. 2021 is turning into the “Big Resignation,” with millions either quitting or thinking about leaving for greener pastures.
If you are a professional falling into this camp, what does that mean for your Executive Compensation? Here are key considerations if you’re thinking about making a leap.
1. Equity-Based Compensation Plans
Usually, you’re fine with whatever is already vested, but it’s imperative to check your agreements. Restricted stock should be yours to keep once it vests, but not always. It’s also possible to lose unexercised vested options at termination. In that case, consider exercising whatever you can prior to notice. This assumes, of course, they are in the money (i.e., worth something), and there is a market for your shares. If you are an insider, take caution.
Determine if your company offers cashless exercise. Otherwise, you will need enough liquidity for the exercise and potential taxes. And if the stock can’t be easily sold once you exercise, you need to weigh the pros and cons.
Find out how long you have to exercise your options if you terminate. It’s usually 90 days but can vary. Remember, options that expire are lost, and you end up with nothing.
Also, it’s important to distinguish the reason why you’re leaving. If your considering retirement, some plans allow for unvested shares to vest at retirement.
While this is more common for startup companies, you should also check to see if there are any clawback clauses in your contract or plan agreements. If there are, you may be forced to pay back salary or gains already realized from option exercises or stock vesting.
Lastly, realize some plans vest all unvested options and restricted stock upon death or disability. This can lower the need for costly insurance. If the company you are considering doesn’t have this provision, you need to evaluate your insurance needs and the possible added cost.
2. Deferred Compensation
Now is a good time to review your agreement. Some companies have a set distribution schedule based on what you elected at the time the funds were contributed. Others may allow you to elect a payout schedule within a limited timeframe after termination. It’s possible you may be forced to take a payout or forfeit contributions if you leave, so be sure you know the details.
Be aware that Section 409A Deferred Compensation plans generally cannot be rolled to IRAs, and any payout you receive can be subject to tax. This can result in a big tax bill or drive you into a higher bracket, so plan accordingly.
You should also weigh the credit risk associated with leaving your money there versus taking the payout, as those funds are tied to the company’s general assets and subject to creditors.
If you have highly appreciated company stock in your 401(k), consider the net unrealized appreciation tax strategy (“NUA”). This allows you to take an in-kind distribution of that stock and pay ordinary tax on the cost basis and capital gains on the appreciation at a potentially lower rate. There are pros and cons to this, so it’s best to run the numbers.
4. Maintain Records
Lastly, keep copies of all your statements and agreements and any contact information to take necessary actions (like option exercises). It’s possible you may be shown the door immediately upon giving notice, and unable to access the system. You should be able to obtain everything eventually, but things move slower in today’s COVID environment, and time is critical.
At BDF, we are dedicated to helping you make sound decisions to enjoy a full life. Please don’t hesitate to reach out with questions.
Gary is a Wealth Manager at BDF and member of the Firm’s Investment Committee. He specializes in executive and stock-based compensation plans, including stock options, restricted stock and deferred compensation. He combines his tax knowledge, executive compensation experience and capital markets expertise to help clients reduce their tax burdens and achieve each of their unique goals.