If you’re a high-income professional in or around Boston, executive compensation can be both a wealth-building opportunity and a puzzling tax consequence. Whether you’re receiving stock options, restricted stock units (RSUs), or annual bonuses, knowing what to do—and when—can significantly impact your long-term financial success.

At the same time, executive compensation often comes with additional complexities. Your decisions can have tax implications, affect your investment mix, or even backfire if your company’s stock fails to perform.

You’re not alone if you’re unsure how to handle it all. Many professionals contact our team of financial advisors in Boston for help turning compensation into a solid, tax-smart plan for building additional wealth.

In today’s blog, we’ll examine five common concerns and some practical ways to address them with the help of an experienced team of executive compensation advisors.

Read our latest Quick Guide: Wealth Management in Boston, MA: Protecting Your Wealth

First, let’s do a quick comparison of the more common types of equity compensation plans you may be presented with:

• Restricted Stock Units (RSUs) are low-risk, delivering shares at vesting
• Incentive Stock Options (ISOs) favor tax planning (capital gains)
• Non-Qualified Stock Options (NSOs) are simpler but costlier
• RSUs/ISOs suit executives; NSOs often fit broader roles

Understanding these can help optimize your financial planning, taxes, and investment strategy with the assistance of a Boston financial advisor. 

Question 1. How Will My Equity Compensation Be Taxed?

The concern: RSUs, ISOs, NSOs… each type of equity compensation has different tax consequences. It’s easy to feel overwhelmed when projecting future tax liability or planning a stock sale.

Start by identifying what type of equity you’re receiving:

• RSUs (Restricted Stock Units):
  A promise of stock (or cash equivalent) granted after vesting (e.g., 1,000 RSUs vesting 25% yearly over four years). There is no cost to receive shares at vesting; they are taxed as ordinary income (e.g., $25,000 if 250 shares vest at $100 each). It offers guaranteed value, is less risky than other options, and is taxed at vesting with no tax flexibility.
• ISOs (Incentive Stock Options):
  Options to buy the stock at a set price (e.g., 1,000 shares at $50), exercisable if the stock rises (e.g., $80, paying $50,000 for $80,000 of market value). No tax at grant/exercise (AMT may apply); long-term capital gains if held one-year post-exercise, two years post-grant. Employee-only, tax-efficient, but limited to $100,000 yearly value and requires timing for optimizing value.
• NSOs (Non-Qualified Stock Options):
  Options to buy stock at a fixed price (e.g., 1,000 shares at $50, exercised at $70 for $70,000 worth). Taxed as ordinary income on exercise (e.g., $20,000 gain) and capital gains on sale. Flexible, available to non-employees, but less tax-advantaged than ISOs due to double taxation.

You’ll also want to consider timing your sale to benefit from long-term capital gains taxed at lower rates than short-term gains. This is where an executive compensation advisor comes in. They can walk you through scenarios and help you map out a tax-efficient sales strategy.

Question 2. When Should I Exercise My Stock Options?

Exercising your options too early can result in a hefty tax bill while exercising them too late might mean leaving money on the table. What’s the right call?

There’s no one-size-fits-all answer, but innovative ways exist to approach the decision. Deciding when to exercise stock options (ISOs or NSOs) depends on stock price, taxes, timelines, and goals. 

• While you can’t choose when to receive RSUs, you can decide when to sell the shares after vesting. The key question is timing the sale: sell immediately to cover taxes (RSUs are taxed as ordinary income at vesting, e.g., $10,000 if 100 shares vest at $100) or hold for potential growth, risking a potential drop in value. Consider tax brackets, diversification needs, and market conditions. Financial advisors can optimize your strategy.
• For ISOs, exercise when the stock exceeds the strike price (e.g., buy at $50 when it’s $80), but hold shares a year after exercise and two years after grant for capital gains tax benefits—watch out for AMT risk. 
• For NSOs, exercise when the spread (market price minus strike price) maximizes profit, but consider ordinary income tax on the gain. Timing matters: wait for growth, but don’t delay past expiration (typically 10 years). Diversify by selling gradually and consult financial advisors to align your investment strategy with market trends and personal finances.

A qualified financial advisor in Boston can run multiple scenarios and help you weigh your cash needs, tax impact, and risk exposure to determine the best timing.

Question 3. Am I Too Concentrated in My Company’s Stock?

It’s common for executives to build wealth that is heavily tied to their companies’ performance. But this can backfire if the stock drops or underperforms—think Enron or Lehman Brothers.

Start by determining the percentage of your overall net worth in company stock; anything over 10% is considered concentrated. That doesn’t mean you should panic-sell, but it does mean it’s time to develop a strategy.

This might include:

• Setting a scheduled diversification plan (e.g., selling a set number of shares annually).
  
• Use protective strategies like collars or options to hedge your potential downside risk.
  
• Reinvesting proceeds in a diversified portfolio aligned with your long-term goals.

Experienced Boston financial planners, like Sherr Financial Associates (SFA), can help you remove emotion from the decision and build a more balanced, long-term investment plan.

Question 4. How Do Bonuses and Deferred Comp Fit Into My Financial Plan?

Large annual bonuses or deferred compensation plans can throw off your tax planning, affect cash flow, or even create retirement planning challenges if not properly managed.

First, understand the structure of your deferred comp:

• Is it subject to a vesting schedule?
  
• Are you locked into a payout timeline?
  
• Is there flexibility to defer to retirement when you may be in a lower tax bracket?

You’ll want to balance your deferral decisions with other income sources, retirement plan contributions, and tax projections. For some executives, spreading income over several years might make sense to reduce the total tax hit so you don’t experience a year-end surprise.

Question 5. What Happens If I Leave or Retire?

What happens to unvested equity? What about deferred compensation or severance packages? Too often, executives make big financial decisions before fully understanding the consequences of leaving a firm.

Before you resign and accept a new role at another company, get clear answers to these questions:

• Do your RSUs or options continue to vest after departure?
  
• Are there deadlines to exercise vested options?
  
• Is your deferred compensation forfeited or preserved?
  
• What happens if your company is acquired?

Timing your departure could save or cost you thousands of dollars. An executive compensation advisor can review your benefits package, model the financial impact of leaving, and help you make informed decisions—especially if you’re considering early retirement.

Need Help With Your Executive Compensation Strategy?

If you’re looking for guidance tailored to your specific role and benefits, consider working with the Sherr Financial Associates (SFA)’s team of Boston financial planners. Whether you’re planning for retirement, considering a job change, or just want to minimize taxes, the right plan can make all the difference. Connect with us today.