Jan 28, 2021

Best of 2020: Restricted Stock and More

2020 Hot Topics: Restricted Stock and More

A new year means new content!  While we get started on 2021’s concepts, take a look at our top three downloads from 2020.  It’s always helpful for us to see what our readers enjoy the most, so that we can continue to create high quality materials to share with you all throughout the year.  2020’s hot topics included restricted stock, NQDC plans, and split dollar life insurance.  Please as always, let us know if there’s anything you’re hoping to see from EBS in 2021.  We look forward to creating and working with you this year.

  • Protecting the Downside Risk of Nonqualified Deferred Compensation Plans
  • Learn the Financial Impact of Deferring Annual RSU Grants
  • Split-Dollar Life Insurance White Paper

This White Paper discusses the risks associated with participating in a Nonqualified Deferred Compensation Plan.  It was written in 2018 by Bill MacDonald, Managing Director for EBS-West and remains one of our most downloaded content items every year.

Most companies that sponsor NQDC’s take measures to ensure funds are set aside to fund future benefits.  Many firms establish rabbi trusts to hold these funds, which provides a measure of certainty that the funds won’t be used for purposes other than benefit payments.

But participant balances in NQDC’s are subject to creditor risk, and bankruptcy could result in a loss of the account.  This White Paper discusses the Deferred Comp Protection Trust, a relatively new structure that protects against this risk.

If you’re interested in learning more on this topic, you may be interested in listening to a recorded webinar that features Brian Yolles, CEO of Stock Shield, the firm that created the Deferred Compensation Protection Trust. 

Nonqualified Deferred Compensation

When stock options gave way to the use of Restricted Stock Units (RSUs), recipients lost the ability to control the timing of taxation.  Taxation of RSUs is triggered when vesting occurs, which is often on a prorated basis over the course of three or four years.

To regain control over the timing of taxation, some NQDC’s allow for the deferral of RSUs, in addition to cash compensation such as salary and bonuses, raising a number of questions for executives. Do I defer or not? What about vesting? Can I diversify into other investments? How will my decision impact tax liabilities?

This case study provides a methodology for answering these questions, and introduces the Restricted Stock Modeler created by EBS.  Find out the pros and cons of deferring or not deferring your RSUs and how your action impacts your financial situation at retirement.

For a deeper dive into deferring Restricted Stock Units, take a look at EBS’ case study on creating a Restricted Stock Wealth Management Program (RS WMP).  By using an NQDC’s short-term deferral account and the redeferral option, you can transform your annual RSU grants into a vigorous wealth-building strategy.

Restricted Stock Deferral

Recently, Nonprofit organizations have been bombarded by proposals to implement Split Dollar programs for their highly compensated executives.  Why is this?  Two major factors stand out:  the 2017 Tax Cuts and Jobs Act imposed a new 21% excise tax on compensation paid by a Nonprofit organization in excess of $1 million; and the relative disadvantage of retirement programs for Nonprofit executives structured under Section 457(f).

This White Paper provides a comparison of Section 457(f) and Split Dollar plans, helping highlight the pros and cons of each.  There is a handy matrix that presents a side-by-side summary of the two structures across a number of key features.  The paper is helpful for Nonprofits that are trying to level the recruiting playing field with for profit entities in search of executive talent.

If you’re interested in learning more on this topic, take a look at A Practical Guide To Accounting For Loan Regime Split Dollar Arrangements.  Written by EBS Managing Director Chris Rich (a former E&Y Tax Partner), it provides an overview of the accounting for split dollar arrangements. 

split dollar life insurance executive compensation

That’s all for 2020.  Be sure to follow our Twitter and LinkedIn to stay up to date with the latest content from EBS in 2021.

Sep 11, 2019

Executive Stock Wealth in the Age of Distraction: Time to Reexamine Your Equity Compensation Plan

Few would disagree that we live in the age of distraction, interruption, and the unexpected.  Ask any CFO.

No longer spreadsheet crunchers, today’s CFO doubles as strategic thinker and partner to the CEO, coping with broader responsibilities and divided attention spans.

On top of the US-China trade war and Federal Reserve monetary policy, CFOs worry about a looming recession. Fortunately, “80 percent of CFOs expect any downturn to be mild—an indication that companies are prepared to face the challenges ahead,” says Sanford Cockrell III, national managing partner of the U.S. Chief Financial Officer Program, Deloitte LLP.

Even so, with three generations in the workplace, CFOs also find themselves deeply involved in human resource utilization and challenged to find, retain, and reward the right talent.

Amid crammed schedules and spreading responsibility, how much can the average CFO know about the complexity of executive benefits, let alone the inner workings of an equity compensation plan?

So we ask, can you maximize equity compensation plans to attract coveted talent, grow retirement assets, reduce high taxes, and incentivize long-term performance?

Find the answers in our new four-part series, Executive Stock Wealth in the Age of Distraction.

In our series, EBS will share valuable and actionable facts and analyses on the shift from stock options and restricted stock to restricted stock units (RSUs) and performance stock units (PSUs).

Learn about these wealth-building tools and their pros and cons in an equity compensation plan. Understand how they fit into your long-term incentive plan (LTIP).

Once informed, you can decide if a RSU/PSU deferral and diversification program serves the goals of your C-suite, then you’ll be ready to step into the mechanics of program implementation and maintenance.

We intend to challenge conventional thinking.

And at the end of our series, we believe you’ll think differently, too.

Inflection Point

Back in late 2004, the Financial Accounting Standards Board  put out a statement that required companies to book an accounting expense for stock options issued, leveling the equity playing field.

Once preferred, stock options became entangled with scandals, so companies began to turn to other types of stock awards as recruitment leverage.

RSUs, usually reserved for top management, were granted to all levels of employees, and stock option grants by Fortune 1000 firms declined by 40 percent between 2003 and 2005, while RSUs increased by nearly 41 percent over the same period, cites Investopedia.

Widespread Trend

Stock continues as the largest component in equity compensation plans, increasing 10.2 percent in value from 2017, which accounts for 51.2 percent of total median pay, according to Equilar. However, plan design of executive compensation in the last decade shifted from stock options to a primary emphasis on RSUs and PSUs.

In fact, the percentage of Equilar 500 CEOs receiving performance-based awards has steadily risen, passing both time-based stock and options grants as the most prevalent long-term incentive vehicle. In 2018, 87.8 percent of Equilar 500 CEOs received performance-based awards.*

RSUs Double in Usage

In another look at the RSU/PSU trend, a comprehensive 2017 study of 325 companies by The Ayco Company reports 72 percent of respondents use RSUs in their long-term incentive compensation programs compared to only 37 percent a decade ago. The use of restricted stock fell to 13 percent in 2017, down from 41 percent in 2007, according to Ayco.

To gain a clear sense of how these forms of equity compensation breakdown comparatively, we highlight the software industry in the chart below to underscore the growth of RSUs/PSUs in 2018:

*The Equilar 500 index comprises the largest US-based companies, by revenue trading, on one of the major U.S. stock exchanges.

As stock options gave way to the popularity of RSUs and PSUs, a new set of questions arose for executive participants in deferred compensation plans:

  • Do I defer or not?
  • What about vesting?
  • Can I diversify into other investments?
  • How will my decision impact tax liabilities?

In our series, CFOs and plan sponsors will learn the answers to these questions. Better still, we’ll share our methodology for deferring and diversifying RSUs/PSUs as an LTIP feature while, at the same time, maintaining your P&L stability.

Look for part two of our blog series in a few weeks when we deep dive into the full wealth-building potential of restricted and performance stock units. Meanwhile, please contact us if you need immediate support.

From the Managing Directors of EBS