Top 5 Financial Planning Challenges Facing Corporate Executives

Corporate executives are some of the most successful, intelligent, and goal-oriented people in today’s business world. When looking at their personal finances, however, deciphering options and making decisions about financial issues can still cause headaches.

Below are five financial planning obstacles that many corporate executives face and some ideas on how to conquer them:

1. A Complicated Financial Picture

It’s hard enough to understand the nuances of insurance contracts, tax planning strategies, and the interplay of portfolio design variables, let alone the wealth management complexity corporate executives face. Corporate executives often receive payment and incentives in the form of executive compensation tools like restricted stock units, non-qualified stock options, incentive stock options, performance shares, and non-qualified deferred compensation plans. Each of these tools has different tax treatment, leverage components, time and vesting requirements, and risk factors. Given that these executive compensations pieces are “non-qualified,” there is often great variation from company to company in terms of their design and features. Adding to the complexity, these compensation components are often tied to the company’s stock price, where each company is turning in its own unique pattern of often unpredictable returns.

Equity-based compensation and deferred compensation plans can be real wealth-builders, but they can also be extremely complicated to deal with and tricky to manage. Many otherwise competent tax, legal, and financial professionals do not understand the fine print associated with company specific plans, or strategies to optimize their value.

2. Concentration

Personal finance gurus often tout the importance of diversification, but how do you adhere to this rule when so much of your wealth is tied up in your company and large portions of your future compensation will come in the form of company stock?

Many executives have built wealth through concentration in their company stock, but few are able to preserve wealth over time while in such concentrated positions. Worse yet, for too many, their stock never “hit,” leaving their financial goals underfunded.

If the company performs poorly or there is an overall bear market, it will depress the stock price and you could be laid off at the same time. Without a solid wealth management plan, your personal income statement and balance sheet could be blown up all at once. Unfortunately, history has many examples of this happening to corporate executives. Back in 1999 when Enron filed for bankruptcy, more than $1 billion in employee retirement savings simply evaporated. During the financial crisis in 2008, many Lehman Brothers employees experienced the same thing.*

The compensation structure for most executives is specifically designed to tie your fortunes to that of your company’s stock. Many executives are actually required to hold large portions of company stock! As a corporate executive, you likely have even more of your net worth tied to the stock of your company than other employees, resulting in greater uncertainty and risk in your financial plan. You need a strategic plan for how to handle this portion of your wealth. High-priority goals with shorter timelines should be funded with high-probability holdings and insulated from the risks of concentration. Protection and strategic selling strategies should be evaluated for the concentrated positions. Diversifying doesn’t necessarily mean diluting returns, but when done correctly, it results in decreasing the risk of one negative company event derailing your financial future!

3. Leverage

When it comes to investing, leverage can help you turn small amounts of equity into substantial profit. As enticing as that sounds, leverage multiplies risk. The leverage inherent in stock options can rapidly increase value on the upswing but also just as quickly destroy it on the downstroke!

While many prudent and successful investors stay comfortably away from leverage, corporate executives are often not allowed to take this stance, as their compensation in stock options are highly leveraged, non-diversified single-company stock positions. To add to the complexity, the degree of leverage inherent in each individual option grant varies with differences in grant price.

If the company does well, markets rise, and the economy remains solid within the grant time frame, this leverage can be a real wealth-builder. On the flip side, warnings from financial experts to avoid leverage are founded as well, since one corporate scandal, geopolitical event, or run-of-the-mill market hiccup can quickly vaporize the value of leveraged options.

4. Time Constraints

Time and money are two key variables in financial planning. When buying high-quality, high-probability investments, we have confidence that given enough time, the investment will work out well. But having to make investment decisions based on a short timeline creates a lot of uncertainty.

There are several ways time constraints impact a corporate executive’s wealth management decisions:

  • Time Poverty: Dedication to job, family, and community often leave little time or energy to focus on the details necessary to optimize your financial future.

  • Vesting And Expiration Periods: Stock options and restricted stock typically have to be held for a period of time before they can be exercised, and then must be sold on a relatively short timeline. If the market’s or company stocks’ swings don’t favorably overlap, these equity rewards could be worthless.

  • Blackout Periods: Tightening the allowable exercise period even further, if you are subject to “blackouts,” you are seriously handcuffed in your investment decision-making.

  • Predetermined Deferrals And Payout Periods: If you elect to defer income into non-qualified deferred compensation plans, you must choose how much of your pay will be set aside a year in advance and also choose the future date when it will become accessible—oftentimes years or decades in the future! These plans can offer financial planning advantages, but the compromise is a serious lack of control, flexibility, and liquidity, compared to other types of savings and investments.

  • Career Timeline Issues: Mandatory retirement. Leadership changes resulting in a “shuffling of the deck.” Lucrative offers at other firms. Executives’ tenure at companies are not always long, and their exit dates may change unexpectedly. As mentioned above, many pieces of your financial puzzle are already time-locked, and a change in employment could significantly disrupt your financial plans.

5. External Pressures And Expectations

When it comes to investing, everyone wrestles with the voices inside their head, even Nobel Prize-Winning Economists. Falling victim to fear and greed cycles is part of human nature, but as discussed above, the swings are magnified by complexity, concentrated positions, leverage, and significant time constraints.

However, in addition to these typical internal decision-making pressures, corporate executives have additional external pressures clouding their investment and financial planning decision-making. They may be mandated to own and hold a certain portion of company stock, and their transactions are often visible to others, both inside and outside the company. Sales, which may be prudent for diversification or goal-funding purposes, may be frowned upon and viewed as a lack of company loyalty.

Corporate business professionals are expected to be well-dressed, live in certain areas, and drive a high-end vehicle. Their kids are expected to go to the right schools. They show up on the donor “hit list” of charitable organizations and are targeted for specific “ask amounts.” Each of these norms come with a price tag which pressures spending and cash flow decisions that may conflict with their financial planning goals.

A detailed financial plan, painting a vision of the future, including financial projections to calculate amounts needed to fund future goals, and addressing threats to your situation, is a valuable tool in financial decision-making. Creating a plan will give you confidence in your decisions and help you avoid emotional, pressured decision-making.

No Coach, No Game Plan

Like top athletes, high-performing executives have well-educated, experienced coaches they can trust to help with the technical complexities and traps in their financial situation. You face unique financial planning challenges, but you don’t need to be overwhelmed and intimidated by them. I have worked with hundreds of clients, have trained hundreds of financial advisors, and have the experience and expertise to walk you through each aspect of your financial life and help you thoroughly prepare for your future.

Whether you need to get started on your financial game plan or have questions about strategies that may work for you, call us at (952) 926-1659 or email me directly at scott@cahillfa.com to set up a no-obligation conversation.


*https://www.fidelity.com/viewpoints/stock-plan-mistakes