The Pitfalls of Performance Stock Units, and How a Financial Advisor Can Help
Performance Stock Units (PSUs) have long been a crucial part of executive compensation packages, offering an opportunity for company leaders to share in the success of their organizations. However, for executives, navigating the world of PSUs can be tricky, and mishandling them can have significant financial consequences. Here are some common mistakes executives make with their PSUs, along with ways a financial advisor – can potentially help executives keep more of their PSU proceeds.
1 – The Tax Surprise
Imagine this scenario: An executive files her taxes and is shocked to discover a substantial, unexpected tax bill due to under-withholding on PSU vesting earlier in the year. This can lead to anxiety and financial scrambling. Advanced planning with a financial advisor could have optimized withholding, used charitable donations of vested shares to offset income, and prevented forced sell-offs to cover the tax liability.
2 – Concentration Risk
Another pitfall executives face is an over-concentration of their net worth in their employer’s stock after PSUs vest. This can expose them to the volatility of company stock and concentration risk. A financial advisor can design a diversification plan to methodically reduce this risk and help improve financial wellness.
3 – Short-Term Cash Flow Needs
Some executives liquidate vested PSUs to meet immediate cash flow needs, not realizing that this may not be the most efficient way to build wealth and legacy. A financial advisor can suggest alternative sources of liquidity and create a plan that balances short-term needs with long-term wealth maximization.
4 – Immobilization in Wealth Management
Executives may find themselves overwhelmed and unable to act when dealing with considerable newfound wealth and the need to pass it along to their family. A personal financial advisor’s goal is to help them connect their financial goals, increase likelihood of financial freedom, and help provide peace of mind for their loved ones.
5 – Insider Trading Rules
Fear of insider trading rules can prevent corporate leaders from taking advantage of legitimate selling opportunities. With a pre-planned strategy designed by a qualified professional, executives can navigate these rules while helping reduce their risk and maximizing their awards
6 – Balancing Vesting Events and Diversification
Company insiders often struggle to balance PSU vesting events, mandatory holds, and diversification needs. An equity compensation consultant can provide an expert governance framework, accounting for vesting schedules, blackout dates, and tax implications, helping lead to improved financial well-being.
7 – Understanding Performance Metrics
Senior-level leaders may find performance metrics like Total Shareholder Return (TSR) and Relative Total Shareholder Return (RTSR) perplexing, which can result in missed opportunities. Having a knowledgeable authority on long-term incentives can help them ensure they quantify the value of their PSU awards effectively.
Although it does happen, executives should not treat PSUs the way a Powerball® winner might approach a lottery windfall. Instead, they should consider PSUs a powerful component of their financial wellness and tax planning strategy, when incorporated thoughtfully into their plan. Savant has financial advisors who specialize in working with public-company executives and hold the Certified Equity Professional designation. If you’d like to learn more about how we can help you navigate the world of PSUs and pursue your financial goals, please don’t hesitate to reach out to us. Your financial well-being is our priority.
Charles F. Steege
Financial Advisor / Managing Director