http://www.sfgadvisors.com/blog/2014/07/performance-options-and-financial-parity/

 

 

Grit and determination and a long career in consumer solutions have led Gwen to her current role as president of a high-end fashion retail company.* Two retail companies are now courting Gwen for the CEO position she’s been tracking toward for years. While the offers present similar salaries, one offers significant wealth potential through performance-based stock awards.

Can Gwen use these performance options to accumulate the wealth needed for retirement and a second career pursuing her humanitarian ventures?

Performance-based equity awards have continued to gain prominence as company boards seek to align compensation with executive performance. The compensation advisor The Hay Group surveyed 300 companies in the top 500, and found that 51% are incentivizing executives today using performance awards tied to the strategic goals of the firm.  While time-based stock option awards have declined, performance options are nonqualified stock options linked to performance. Usually the awards are tied to earnings per share targets or certain stock price conditions. They vest when the metric has been satisfied; thus they are referred to as “performance-earned” options. Once vested, an executive can exercise and sell them right away.

Gwen sought our help in understanding how these performance options work, and whether the performance metrics could reasonably be met in order to benefit from the award. She determined that the offer from the company utilizing performance options was superior and would accelerate her plans to eventually run a nonprofit serving humanitarian goals.

If you are evaluating offers and need help comparing parity, it is important to understand the value of the awards, the terms of the performance target, tax treatment and how the likely outcome compares with other forms of executive compensation.

For more information, please contact us.

* The name, likeness and circumstances in this example are a fictional composite of facts from executives similar to actual SFG Clients.

Mr. Steege is President of SFG Wealth Planning Services, Inc., SFG Investment Advisors, Inc. (SFG), a fee-only financial planning firm. Founded 20 years ago, SFG is dedicated to assisting senior executives and their employees with their complex stock-based compensation and planning challenges