Key Considerations for Executives in Long-Term Incentive Grants
When the long-term incentive (LTI) grant season rolls around, it’s essential for executives to evaluate their financial and career strategies. LTI grants are typically awarded to executives and key employees to align their interests with the company’s long-term success.
These grants can come in various forms, such as stock options, restricted stock units (RSUs), performance stock units (PSUs), or cash awards, typically vesting over several years. Because these grants are an integral part of total compensation, executives should consider them from multiple perspectives. Below are key factors to keep in mind.
1. Understanding the Plan
The first thing an executive needs to do is fully understand the LTI plan’s structure. Without a solid grasp of how it works, it’s easy to miss opportunities or overlook risks.
Vesting Schedule: The vesting schedule outlines the timeline to access the incentives. Some plans are time-based, meaning that you’ll receive the incentive after a set period, while others are performance-based, which means you’ll need to meet specific goals. There are also hybrid plans that combine both requirements. It’s important to clearly understand when the incentive will vest and how it aligns with your future goals at the company.
Performance Metrics: With performance-based LTIs, it is crucial to understand the metrics used to determine the payouts. Common performance measures include total shareholder return (TSR), revenue, and profitability. Make sure you understand what these metrics are and evaluate whether they’re realistically achievable based on the company’s current trajectory and external market conditions.
Tax Implications: The tax treatment of LTIs varies depending on the type of award, the vesting schedule, and when you choose to sell or exercise the grants. These grants can have significant tax implications when they are granted and when you realize the value. Therefore, it’s important to factor taxes into your financial planning to accurately assess the net benefit of the LTI.
2. Timing and Strategy
The timing and your broader strategic perspective also play a large role in optimizing the value of your LTI.
Closely review your company’s current performance, industry trends, and outlook. If the company is performing well and hitting its growth targets, there’s a higher likelihood the performance-related LTI grants will result in a larger payout. However, if the company is struggling or facing headwinds, it’s important to be realistic about the likelihood of meeting the performance goals.
Consider how the LTI fits into your career goals. If you plan to stay with the company long-term, the grant could be a significant part of your compensation. However, if you’re considering a career change or early retirement, assess how the vesting timeline may affect your decision-making. You might need to balance the potential gains from the LTI with the opportunity to move on to new ventures.
If your LTI is based on company stock, it’s important to consider how much exposure you want to have to your employer’s stock. Holding too much of your wealth in company stock can be risky, especially if the company’s performance takes a downturn. To bolster your diversification, ensure your LTI grants don’t comprise an outsized portion of your total investment portfolio.
3. Long-Term Financial Planning
LTIs are often designed to encourage long-term retention, but they should also support your broader financial strategy.
Diversifying Assets: For executives receiving LTIs, it’s important to incorporate these assets into your overall portfolio strategy. While holding onto your company stock may seem attractive, you’ll want to diversify your investments across different asset classes. This will help protect your wealth if your company experiences financial difficulties or a downturn in its industry.
Exit Strategy: If you are considering retirement, a career change, or a move to another company, consider how it could impact your LTI grants. Can you take them with you if you leave? When do they vest in relation to your exit plans? How much value might you leave on the table by moving on from your current employer?
4. Risk Tolerance
Understanding your own risk tolerance is crucial in deciding whether to accept stock-based LTIs or choose cash alternatives.
If you’re offered the choice between stock or cash, consider your comfort level with risk. If you have a high risk tolerance and believe strongly in the company’s future, you may prefer stock. However, if you’re risk-averse and would prefer a guaranteed payout, a cash option might be more suitable for you.
5. Possible Changes in Compensation
Finally, LTI grants are negotiable, depending on your role, performance, and company policy.
If you’re an executive with significant experience or unique skills, you might negotiate a more favorable LTI package. This could include a larger allocation of shares, stock options with more favorable terms, or a vesting schedule that aligns better with your personal goals. Don’t hesitate to engage in discussions with HR or management if you feel the need to adjust your package to better suit your needs. Consult a financial advisor and tax professional to help you navigate these discussions.
The LTI grant season is a critical time for executives to evaluate how their compensation package aligns with their financial goals, career trajectories, and risk tolerance. By thoroughly understanding the structure of the grants and considering the strategic implications, you can make the most of the opportunity to help enhance your long-term financial success.
If you’re unsure about how to navigate your LTI grants, a Savant financial advisor can help you evaluate your current financial picture and future needs.
This is intended for informational purposes only and should not be considered personalized investment advice. Please consult your investment professional regarding your unique situation.
Matthew P. Witter
Financial Advisor
CFP®, CEP, ChFC®, AIF®