When it comes to equity compensation planning, executives must manage a complex group of considerations and obligations between meeting the expectations of the company and its shareholders and meeting the financial needs of their families. And for executives, their status within the company and the high visibility of their actions, can make choices regarding their own equity compensation complicated.
The Equity Compensation Planning Dilemma for Corporate Executives
When it comes to equity compensation planning, executives must manage a complex group of considerations and obligations between meeting the expectations of the company and its shareholders and meeting the financial needs of their families.
The Corporate Insider's Dilemma
Due to their position, executives have a unique set of circumstances that can impact their financial decisions, which may include the following:
- A significant portion of overall compensation may come in the form of equity compensation, which is tied to company's stock performance.
- High concentrations in company stock can potentially expose executives to financial risks, particularly if markets are volatile.
- Regulatory reporting requirements make the actions of corporate executives visible to the markets, the public and other employees.
- Executives may be prohibited from trading at certain times due to closed trading windows, and even when trades are allowed, the visibility into their actions may be a reason for additional consideration when making trading decisions.
- Sales of company stock by corporate insiders may be perceived as a lack of confidence in the performance of the company.
Under the Microscope
Depending on how senior you are in your company, you may have transparency requirements when it comes to your financial affairs. Salaries, bonuses, and direct and indirect holdings of company stock for directors and high-level officers may be found in company proxy statements and other SEC filings. Your company stock transactions may be visible as well.
Market Perceptions
In some companies, high-level executives are encouraged and often required to build and maintain a meaningful stake in company stock. The underlying assumption is that management, company and shareholder interests will be aligned. Holding positions in company stock is often equated with management’s confidence in the outlook for the company. Conversely, sales of company stock may be perceived as a signal of concerns from within. Because of these factors, in certain situations, corporate insiders may be reluctant to sell company stock even though it may be the right decision for their personal finances.
Locked in Place
Corporate insiders are generally prevented from taking certain actions while trading windows are closed. For high-level executives, trading windows may remain closed for extended periods because they possess material nonpublic information regarding the operations of the company.
The inability to make transactions at specific periods in time can potentially cause financial losses for executives. For example, an insider who waits too long before taking action may see an option that presents a profit opportunity due to the prevailing market price expire unexercised because of a closed trading window. And in the case of restricted stock grants, which are usually taxed at vesting, if an executive has to hold onto the stock, they’ll have to be pay the taxes in another way.1
A Path Forward
A starting point for any trading plan begins with a base of effective financial planning targeted toward your specific goals, which might include funding education, saving for retirement, estate planning and planning for the unexpected. From here, you can determine how your equity compensation fits into your plan. Once you know the role your company stock will play in your financial future, you can plan on how to set exit points based such factors as price, quantity, and or timing.
Many companies allow executives to use a Rule 10b5-1 trading plan for their company stock, which allows for transactions involving company stock to take place on a systematic basis, if certain regulatory requirements are met. These plans can be tailored to the needs and financial situation of each participant. and offer an affirmative defense against insider trading liability if certain regulatory requirements are met.
Balancing Act
As a corporate executive, proper planning can help you balance the needs and interests of your company and with that of your personal financial goals. The area of equity compensation planning is a complex topic where attention to detail is critical. The good news is that help is available. Your Executive Services Relationship Manager can help you navigate the complexities of your equity compensation and offer assistance as you plot a path forward.
1 Intuit How to Report RSUs or Stock Grants on Your Tax Return. Accessed May 8, 2023
The information contained in this presentation has been prepared by mystockoptions.com, who is responsible for its content.
This material is being provided to you for educational purposes only. The content has been written by a third party not affiliated with Morgan Stanley. No information presented constitutes a recommendation by Morgan Stanley to buy, sell, or hold any security, financial product, or instrument discussed therein or to engage in any specific investment strategy.
This material does not provide individually tailored investment advice and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it.
Information contained herein has been obtained from sources considered to be reliable. Morgan Stanley Smith Barney LLC does not guarantee their accuracy or completeness.
When Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors (collectively, “Morgan Stanley”) provide “investment advice” regarding a retirement or welfare benefit plan account, an individual retirement account or a Coverdell education savings account (“Retirement Account”), Morgan Stanley is a “fiduciary” as those terms are defined under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and/or the Internal Revenue Code of 1986 (the “Code”), as applicable. When Morgan Stanley provides investment education, takes orders on an unsolicited basis or otherwise does not provide “investment advice”, Morgan Stanley will not be considered a “fiduciary” under ERISA and/or the Code. For more information regarding Morgan Stanley’s role with respect to a Retirement Account, please visit www.morganstanley.com/disclosures/dol. Tax laws are complex and subject to change. Morgan Stanley does not provide tax or legal advice. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a Retirement Account, and (b) regarding any potential tax, ERISA and related consequences of any investments or other transactions made with respect to a Retirement Account.
This material may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the material refers to website material of Morgan Stanley Wealth Management, the firm has not reviewed the linked site. Equally, except to the extent to which the material refers to website material of Morgan Stanley Wealth Management, the firm takes no responsibility for, and makes no representations or warranties whatsoever as to, the data and information contained therein. Such address or hyperlink (including addresses or hyperlinks to website material of Morgan Stanley Wealth Management) is provided solely for your convenience and information and the content of the linked site does not in any way form part of this document. Accessing such website or following such link through the material or the website of the firm shall be at your own risk and we shall have no liability arising out of, or in connection with, any such referenced website. Morgan Stanley Wealth Management is a business of Morgan St
Morgan Stanley, its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning, charitable giving, philanthropic planning and other legal matters.
Banking products and services are provided by Morgan Stanley Private Bank, National Association, Member FDIC.
Morgan Stanley and its affiliates do not provide tax advice, and you always should consult your own tax advisor regarding your personal circumstances before taking any action that may have tax consequences.
Employee stock plan solutions are offered by E*TRADE Financial Corporate Services, Inc., Solium Capital LLC, Solium Plan Managers LLC and Morgan Stanley Smith Barney LLC (“MSSB”), which are part of Morgan Stanley at Work.
Morgan Stanley at Work services and stock plan accounts are provided by wholly owned subsidiaries of Morgan Stanley.
Morgan Stanley at Work stock plan accounts were previously referred to as Shareworks, StockPlan Connect or E*TRADE stock plan accounts, as applicable.
In connection with stock plan solutions offered by Morgan Stanley at Work, securities products and services are offered by MSSB, Member SIPC.
E*TRADE from Morgan Stanley is a registered trademark of MSSB.
All entities are separate but affiliated subsidiaries of Morgan Stanley.
The laws, regulations, and rulings addressed by the products, services, and publications offered by Morgan Stanley and its affiliates are subject to various interpretations and frequent change. Morgan Stanley and its affiliates do not warrant these products, services, and publications against different interpretations or subsequent changes of laws, regulations, and rulings. Morgan Stanley and its affiliates do not provide legal, accounting, or tax advice. Always consult your own legal, accounting, and tax advisors.
Securities, investment advisory, commodity futures, options on futures and other non-deposit investment products and services are not insured by the FDIC, are not deposits or obligations of, or guaranteed by, Morgan Stanley Private Bank, National Association, and are subject to investment risk, including possible loss of the principal amount invested.
Securities products and investment advisory services offered by Morgan Stanley Smith Barney LLC, Member SIPC and a Registered Investment Adviser. Commodity futures and options on futures products and services offered by E*TRADE Futures LLC, Member NFA. Stock plan administration solutions and services offered by E*TRADE Financial Corporate Services, Inc., and are a part of Morgan Stanley at Work. Banking products and services provided by Morgan Stanley Private Bank, National Association, Member FDIC. All entities are separate but affiliated subsidiaries of Morgan Stanley. E*TRADE from Morgan Stanley and Morgan Stanley at Work are registered trademarks of Morgan Stanley.
© 2024 Morgan Stanley. All rights reserved.
CRC#6087475 (11/2023)