Dos and Don’ts for Year-End Equity Compensation Planning for Your Participants

By Chuck Steege. As the year winds down, there are a few dos and don’ts that may impact how your participants plan to exercise vested stock options before year-end. In order to make sure employees get the most value out of their equity awards, it may be helpful to provide some considerations for equity compensation planning.

  1. Make sure employees take time to review their vested stock options and check for impending expiration dates, including any in-the-money stock option grants that may expire in the first quarter.

  2. Encourage participants to consider any changes in tax rates in the coming year. If employees expect their tax rate to be higher in 2016, due to a promotion at work or another rise in taxable income, it might make sense for them to exercise stock options in 2015 that are slated to expire in the first quarter of next year. An executive who is retiring soon (and expects to benefit from a lower tax rate in 2016) may choose the opposite strategy and exercise closer to expiration next year.

  3. Clearly communicate any selling windows to participants. Make sure participants are aware of any year-end deadlines for option exercise and selling windows that close prior to the end of the year.

Offer detailed information about the considerations for exercising non-qualified stock options (NQSO) early. Even if the employee plans to hold the stock long term and is thinking about exercising now to start the capital gains period running, it may be wise to think carefully before proceeding.  Studies have shown that NQSOs generally make the most money when they are kept tax-deferred as long as possible. It’s a good idea to wait to exercise stock options closer to expiration, unless their tax situation calls for it. Any exceptions for tax purposes should be reviewed by a tax advisor.

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