News & Insight
September 2009

Leaving or Changing Your Job? Think Twice About Your Compensation

Chuck Steege, CFP, SFG Wealth Planning Services, Inc

In the current challenging job market many senior executives, are finding themselves unemployed longer then expected despite their experience and credentials, making the right decisions about their executive compensation more important than ever.

If you are a senior executive, keep in mind that the very skills and values you practiced successfully on the job are just as valuable during a period of unemployment. While hardworking, devoted and conscientious, many may forget key actions and deadlines in the emotional heat of the moment as they head out the door.

While you may be entitled to an attractive array of assets and benefits from your company, those advantages can be snatched away if these four immediate and near-term actions are overlooked:

  1. Building a budget
  2. Managing stock options and restricted stock
  3. Developing a deferred compensation strategy
  4. Maintaining insurance

1. Building a budget

You might receive enough severance to last six months with careful spending. This provides a window of time to put out feelers for a new job, while arranging other aspects of your post-employment life.

Cash flow is king. Without bread and butter on the table nothing much matters. All asset sources must be examined. Perhaps there is money accumulated elsewhere that can be brought into play. It is helpful to think of your money pool as a venture capitalist would: Your resources have a burn rate of six to 12 months toward supporting your search for the next job.

One outcome is likely: In the current environment, your money may have to last longer than you might think.

Are you an executive over 55? You may be eligible to negotiate your separation as a retirement from the company. There are two immediate benefits of retirement status over being laid off:

  • You don't have to be as concerned about near-term cash flow. You are closer to receiving retirement income from a pension or other source.
  • The stock options you have been granted may continue to vest. This will help you to continue building your wealth.

2. Managing stock options and restricted stock

Once the broader issues of budgeting are addressed, you can start to consider actions to take regarding your plans for stock options as well as restricted stock.

A stock option is, by definition, an option to purchase stock that has been granted to executives like you. This stock is nontransferable and subject to forfeiture under certain conditions - such as termination of employment. There are two types:

  • Incentive stock options (ISOs) When you exercise your ISOs, rather than paying ordinary income tax the options are instead taxed at the capital gains rate, currently 15%, if shares are held for a year and a day.
  • Non-qualified stock options (NQOs) Here you pay ordinary income tax on the difference between the grant price and the price at which you exercise the option. Once exercised, any amount above the exercise price would be immediately included as ordinary income if your shares are sold within 12 months.

Once you leave your job, you have 90 calendar days to exercise your options and receive your vested stock - or forfeit your options. (Any non-vested options in your account will be forfeited upon your date of separation from employment.)

Paying for your stock as well as receiving the proceeds from selling shares may require a series of steps:

  • You may choose to divest some of your stock to pay for the exercise of additional shares, net of taxes.
  • Or, you may wish to combine cash from stock sales and other available to cash to pay for your shares.

Without careful attention to the complexity of managing stock-based compensation grants, including restricted stock, you can inadvertently leave a lot of money on the table - or unintentionally propel yourself into a higher tax bracket.

3. Developing a deferred compensation strategy

Next, take a close look at your deferred compensation and retirement plan situation:

  • Do you know which assets are qualified and which are non-qualified for tax purposes?
  • How much did your employer contribute to your retirement plan?
  • Is your 401(k) or pension plan portable - or does it remain with the company?

Depending on the answers, you may have a lot of discretion in how you receive your deferred compensation at separation. You might choose to take your money in a lump sum and pay ordinary income tax (plus any penalties for premature withdrawal if you have a qualified retirement plan) - or receive your distributions over a period of time and spread out your tax payments.

If you cannot recollect your non-qualified elections from when you joined the firm, just ask your human resources department for details.

4. Maintaining insurance

There are a host of insurance considerations to grapple with at separation:

  • You can continue your health insurance for 18 months under The Consolidated Omnibus Budget Reconciliation Act (COBRA), which gives workers and their families the right to continue group health benefits for limited periods of time.
  • You will want to explore and replace coverage for both your long-term and short-term disability insurance.
  • If you elect the portability of your employer's plan, you must also consider the possibility that insurance coverage could skyrocket in price. The company's insurance company will likely assume your risk is very high - otherwise you would not have chosen to continue coverage.
  • New spousal coverage must also be considered; at many firms, spousal coverage vanishes at separation.

What if you are leaving a company to take a higher paying job? Even during a recession, some people are finding attractive opportunities. It is very tempting to consider a new offer based on an attractive hike in pre-tax income. Think twice - and do the math.

  • Would you be missing out on a near-term bonus?
  • How will a job change influence your wealth - not just your income? (It's not how much you make that is important, but how much you get to keep.)
  • Will you be leaving any stock on the table? How far away from being fully vested in your company's stock plan are you?

Whether you are leaving a company voluntarily or involuntarily, don't be short-sighted. Before ending any long-term professional relationship, it is important to get your house in order. Collect the information you need to organize your plan of action. If you need help, your accountant or financial advisor can lend assistance.

Most importantly, act quickly to gain the maximum advantage from your executive compensation. After all, you earned it.

Executive Financial Coach and Financial Advisor, Chuck Steege, CFP®, is President of SFG Wealth Planning Services, Inc./SFG Investment Advisors, Inc. (SFG), a fee-only financial planning firm and SEC Registered Investment Advisor. Founded 15 years ago, SFG is dedicated to assisting senior executives and their employees with their complex stock-based compensation and planning challenges. Contact: Tel. 215-345-5601,

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