Stock Options Management: Maximizing Executive Compensation

By Sue Cheung | 張淑芬, CFP®, CTFA, AAMS®, CRPC®, MBA | Apr 08, 2024 |

Stock options give employees the right to buy company stock at a predetermined price — the strike price — within a certain timeframe. It allows employees to share in the company’s success and potentially profit from its growth. But without the right strategy, you will not maximize your return.  

Types of stock options

Companies may offer incentive stock options (ISOs) and non-qualified stock options (NSOs). ISOs are typically reserved for key employees and have certain tax advantages, while NSOs are more commonly offered to all employees.  

When stock options are granted, they often come with a vesting period. Employees must remain with the company for some time before exercising their options and buying the stock. Vesting schedules can vary, but the most common is a four-year period with a one-year cliff. This means that employees become vested in 25% of their options after one year of employment, and then the remaining options vest monthly over the next three years.  

Managing stock options after termination can be a complex process. Depending on the terms of the options and the reason for termination, employees may have limited time to exercise their options before they expire. It’s important to understand the company’s policies and consult a financial advisor to make informed decisions. 

Benefits of effective stock option management

One key advantage is getting ahead of tax implications; implementing smart strategies may reduce the taxes you owe.  However, ensure you understand the tax implications of gifting NSOs and any subsequent disqualifying dispositions. Proper planning and guidance can help you navigate these complexities and maximize your options. 

The cashless exercise and hold approach allows you to exercise your stock options without using your own funds. You sell enough of the acquired shares to cover the exercise price and any associated taxes while holding onto the remaining shares for potential future gains.  

At Brighton Jones, we understand the importance of effective stock options management. Our team of experts is dedicated to helping you navigate the complexities of stock options and develop strategies that align with your financial goals.  

Stock options management case studies

Tax mitigation & overall planning

A client who works at a senior level in IT for a health insurance company had NQSOs and ISOs as a big component of his compensation. He had a cadence of just exercising his options upon vesting, which, at the time, had built up $400k+ in AMT income. To help offset this and smooth his tax situation, we advised him to stop exercising and put an option collar strategy in place to protect him from a large loss. This allowed him to sell his shares at a price that would offset AMT liability. We continued to alternate year to year and had him exercise and add to AMT, then sell to offset the next year.  

Navigating company benefits and RSUs

A client was an executive for a large tech company and received most of her compensation in the form of RSUs. Her total compensation was in the several millions with only $160k base & the remainder in RSUs—an undoubted concentration risk. Her advisor put a 10b51 plan into place with limit orders scaled up. As the stock price increased, the client participated in the upside but took the risk off the table. We put a plan in place so that during the open enrollment period, she and the advisor would look ahead for goals she had & then determine a dollar amount needed to sell for her RSUs in order to accomplish those goals. Through this strategy, she purchased a second home and upgraded to a nicer primary residence. It also helped her attain her vocational freedom goal so she could pivot to doing the things she loves. 

At Brighton Jones, we pride ourselves on stock option planning and management expertise. We understand that stock options can be a valuable tool for employees, allowing them to participate in their company’s growth. Our experienced professionals are dedicated to helping you navigate the complexities of stock option management and maximize your financial benefits. 

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