Let’s Talk Executive Compensation Packages

Those perks may come with great responsibility.

When you reach the executive level at an established company, you are offered some potentially significant rewards for staying put. Here are three common perks.

Stock options. Your firm gives you an agreement by which you have the chance to buy the company’s stock at a set price for a set period. You might be fully vested in the stock after 4–5 years. These shares don’t have marketable value and usually cannot be transferred. Some executives like to execute options early to try and realize gains and lower risk, but this can lead to a very involved tax situation. In addition to regular income tax, exercising an option can trigger capital gains tax and even the alternative minimum tax (AMT).1,2

NQDC packages. Imagine setting some of your executive compensation aside to reduce your income tax burden this year, and then receiving that deferred income in retirement, when you may be in a lower tax bracket. Some non-qualified deferred compensation plans are SERPs (supplemental executive bonus plans) funded by an employer, while others are salary reduction plans whereby an executive defers some salary into a life insurance product or an account with the potential to earn interest.3

Golden parachutes. Many employees receive severance pay from a corporation, but executives may be promised much more if they are let go or downsized. Besides 6–12 months of salary, a golden parachute package can include stock options, sustained health insurance, and bonuses. Many golden parachutes now contain ethics clauses for the executive.4