By Chuck Steege. The phone rings on Gerald’s desk. He’s the stock plan administrator for Wynlap*. Denise, the wife of a recently deceased executive, is calling to determine how her late husband’s performance share units (PSUs) will be handled.
Forty-eight-year-old Chris was senior vice president of security at Wynlap, a real estate search company, when he died in a tragic car accident, leaving behind Denise and their two children.
While Chris was working, Denise took time off to care for their children. She also maintained her CPA license and worked on annual tax returns for family members and friends. Some months after Chris’ death, she is now considering joining an accounting firm which has been pursuing her for some time.
Gerald, who has been the stock plan administrator for four years, hasn’t encountered the death of an executive or the question of performance shares and beneficiaries. Denise tells him that she and Chris never talked about it either: what would happen to his performance shares or restricted stock units if he died suddenly. In fact, as a financial professional, she had taken a few steps to protect their family’s financial security such as life insurance, but hadn’t considered things like performance shares.
At any age, the spouse and executive can use information about their executive compensation in general, and performance shares in particular, as part of their overall planning conversation. Knowing how performance shares work will ensure an executive’s family has adequate cash flow and financial resources in the months and years after an untimely death.
Gerald reviewed the exact rules for vesting in his company’s plan document and was able to advise Denise accordingly. At the time of Chris’s death, he had 3,000 PSUs granted. He received the PSUs on April 1, 2014, and they were expected to fully vest on April 1, 2017, as long as all the performance metrics were met. Potentially, vesting could reach up to 200 percent if the performance exceeds the target. Christopher died in April 2016.
The company’s board of directors reviewed the performance metrics for the fiscal year and determined that his and the company’s performance reached 125% of the target. Therefore, Denise should receive 2,475 PSUs (3,000 x 1.25 x 0.66).
Some companies have stock incentive plans that permit 100 percent accelerated vesting if the award holder dies, so the surviving spouse can receive the full amount. In that case, Denise would receive 3,750 PSUs (3,000 x 1.25).
Based on Gerald’s experience with Denise, he compiled a list of questions to share with other executives that should be addressed through financial planning meetings with a financial advisor in advance of tragedy:
- In the event of death, does the plan provide pro rata vesting (based on the portion of the time period completed) or accelerated vesting?
- Does the plan specify a payout at the end of the performance period based on actual performance, or a payout upon death based on an assumed performance level?
- Does the surviving spouse need official paperwork from the board of directors to verify that the performance targets were met?
- How will this new income be taxed? Will the employer withhold some of the taxes?
*Wynlap is the fictitious name for a company similar to the companies whose executives are advised by SFG Wealth Planning Services. The name, likeness and circumstances in this example are a fictional composite of facts from executives similar to actual SFG Clients.
As specialists in executive compensation, tax and financial planning, SFG Wealth Planning Services, Inc. can assist you in optimizing your performance awards and other assets.
Mr. Steege is President of SFG Wealth Planning Services, Inc., SFG Investment Advisors, Inc. (SFG), a fee-only financial planning firm. Founded in 1993, SFG is dedicated to assisting senior executives and their employees with their complex stock-based compensation and planning challenges.