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Important Highlights from Compensation Conversations with EBS: Part 4

Stock compensation, particularly Restricted Stock Units (RSUs), plays a pivotal role in the total rewards package for senior executives. Over the last 15 years, the form of equity awards has evolved significantly, with a shift towards performance-based compensation and the introduction of accounting changes. This evolution necessitates a nuanced understanding of how RSUs can be optimized within an executive’s compensation package.

Hosted again by Christopher W. Rich and Chris Rich, Managing Directors of EBS-Boston, the fourth and final part of the Compensation Conversations with EBS series explored the potential advantages of the deferral and diversification of RSUs and PSUs, the mechanics, issues that need to be considered and the implementation and administration steps.

Find additional highlights below, and then be sure to watch the recording!

Equity Compensation and the pivot to RSUs

Due to a change in tax law, RSUs and PSUs have replaced options as the predominant form of equity compensation. This pivot means that executives have lost control over the timing of their income taxation – RSU and PSU grants typically vest over time and become taxable on their vesting date, whereas options can be exercised as needed.

When combined with a state-of-the-art deferred compensation plan, RSUs afford executives:

• Control over the timing of federal and state income taxation
• Potential reduction / elimination of state income taxes
• Enjoyment of future appreciation on 100% of RSUs vested rather than 50 – 60% after withholding of shares to cover income taxes upon vesting
• Opportunity to defer RSUs granted in prior years that are still unvested
• Financial planning flexibility – access to value as needed

Amplifying the Advantages of RSUs: Diversification

As a key feature allowing executives to broaden their portfolio beyond company stocks, it should be understood that:

• Deferral and Diversification of RSUs are separate features of a “state of the art” nonqualified deferred compensation plan.
• A plan can be designed to allow only deferral; however, it is of greatest value to participants to permit both deferral and diversification. This allows participants to match their investment strategies in the deferred compensation plan and in their other investment accounts.

Advantages of Diversification:

• Mitigation of concentration of net worth:
  • Many executives diversify without the benefit of a NQDC plan: A portion of the net shares received is sold and reinvested in a diversified portfolio.
• Coordination of the LTIP with a NQDC plan allows diversification of 100% of RSUs vested and deferred rather than 50 – 60% after tax withholding.
• Subject to:
  • Meeting stock ownership and other Company holding requirements
  • Certain holding requirements related to accounting practices and with SEC insider trading rules regarding black-out period

*Diversification does not guarantee a profit or protect against a loss.

Closing Thoughts

Attendees left the webinar equipped with actionable strategies for navigating the complexities of executive compensation, including:

• Mastery over RSU taxation and strategic deferral
• The benefits of diversification within deferred compensation plans
• A blueprint for successful implementation and integration of these strategies into their total rewards approach

As a finale in our Compensation Conversations with EBS series, this webinar built upon many of the concepts outlined in our earlier discussions and put them into action. For those who could not attend or wish to revisit the wealth of information shared, we invite you to access the recording of our webinar.

After diving into the intricacies of RSU deferral and diversification, take the next step towards amplifying your executive total rewards by reaching out to EBS.