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January 12, 2024 at 02:24 PM
Founders of public companies and corporate executives are passionate about their jobs. Even as retirement age nears, they may not be thinking about slowing down.
We engage with highly successful clients in their 70s and 80s who are still very active with their companies, because they love what they do — it’s who they are.
But a corporate action, health event, new direction for the company or any number of circumstances can bring retirement quickly into focus, so they need to be prepared.
It’s our job to make sure our C-suite clients have plans in place for transitioning to a life in which they no longer have their executive-pay cash flow.
Beyond the typical deferred compensation and Social Security payouts, here are three considerations to keep in mind as you strive to guide them toward a rewarding and well-funded retirement:
Converting Equity Compensation
Executives’ cash compensation grows throughout their careers.
Real wealth creation generally comes from the equity component of their compensation packages — most often through restricted awards, performance awards or compensatory stock options: non-qualified and incentive stock options.
The cash component of executives’ compensation typically serves to support their lifestyles — new boats, vacation homes, golf club memberships.
After retirement, they intend to maintain that lifestyle, so throughout their career, executives may need to focus on converting their equity compensation into a diverse and income-producing portfolio to preserve that wealth and to generate a level of cash flow commensurate with the cash component of their working years.
Planning a Concentration Strategy
Five to 10 years before clients retire, you’ll want to start having conversations around how much equity they can afford to hold in their company. These are delicate — and sometimes difficult — discussions.
Many founders and executives are very confident about the future of their companies. Or they are sensitive to the market perception of reductions they make in their concentration of company stock.
Of course, stocks don’t always move in the right direction and there are ways to methodically reduce concentration so that investors feel the executives’ continued alignment with the company. The focus needs to be on managing risk.
Things will look very different for an executive at a small, fast-growing company that doesn’t have any earnings compared to an executive at a larger company in a conservative industry that doesn’t see a lot of change. Corporate culture can also play a role in a client’s approach to equity concentration.
