Optimally Managing Your Holding Requirement

What is a holding requirement? Skin in the game:

Equity compensation is a well-known prerequisite for senior leadership at both large private and most public companies. One of the lesser-known policy obligations to receive ongoing equity awards for senior-most leaders is a requirement to continuously hold a specific amount of company stock while you are an employee. Analysts want to see senior leaders with “skin in the game” fulfilled by held shares, not options on company shares. This Holding Requirement gets larger the greater one’s leadership responsibility becomes in the company. A holding requirement might start at 1x base salary and may end up at 5x base or more.

What’s the natural byproduct of a holding requirement? Elevated portfolio risk.

The natural byproduct of fulfilling holding requirements is developing a single-security, excessive concentration of a leader’s wealth in the company for which they work. Concentration is the precise corporate (or investor relations) objective to demonstrate alignment between the executive’s personal financial wellbeing and the successful execution of their corporate responsibility.

Is there a management opportunity around fulfillment of the holding requirement? Yes.

If an officer wants to reduce portfolio concentration risk and must first fulfill a specified holding requirement, then using the most tax-effective method of meeting their requirement will produce the maximum dollar amount of shares available for diversification. Therefore, tax optimizing the holding requirement is a vital element of tax planning for a senior leader. This tax optimization process is part of every client engagement with our team, who must meet such a requirement.

Are holding requirement rules complex, making tax optimization difficult? Almost always!

Holding Requirement rules are often confusing. Many officers default to one or two methods of meeting the holding requirement, and very little tax management enters into the consideration of alternate strategies. In addition, different companies have different rules about what qualifies as a held share for meeting the holding requirement. For example: Do only after-tax held shares count? What about held shares in my deferred comp plan or my regular or Roth 401K? How about a spouse’s 401k if the officer lives in a Community Property state? In many companies, non-vested Restricted Stock Units (RSU’s) count toward the holding requirement, but what about Performance Share Units (PSU’s)? Or how about shares in a personal brokerage account or an IRA rollover from previous employment? Would shares held in a defective Spousal Lifetime Access Trust (SLAT) qualify? How about shares held in a single-member LLC inside a self-settled asset protection trust in South Dakota or Nevada? While these details are important, they never seem to rise to the level of urgency.

Can one learn to play a better holding requirement game? Absolutely! (From a great teacher/coach!)

Company compliance and Investor Relations team want the requirement fulfilled, period. They must not provide individual tax or financial planning advice to a particular officer. This is one of the reasons many companies provide a stipend for obtaining specific planning advice because these issues are complex, and optimization is a worthy objective. Success requires a relationship with a firm that knows all the moving parts within the individual officer’s company and personal financial life. SUGGESTION: Obtain a second opinion from a firm like ours that works with senior leaders in many different corporate environments. Our advisors are great coaches, or perhaps better phrased, great personal advocates!

Why does a highly-educated leader need a great personal advocate? Polite, proactive perspective!

Considerations like optimization of Holding Requirements are essential but seldom are they urgent. We provide proactive insight into the most important yet non-urgent elements of our clients’ lives on both a quantitative and qualitative level throughout the many disruptive internal and external changes in their corporate and personal lives, markets, economy, and politics of tax changes. Our clients routinely prioritize the pursuit of responsibilities that are simultaneously urgent and important. Seldom is there time, interest, or energy for a senior leader to focus on the merely essential yet non-urgent elements of their personal lives! Proactively covering that base is where TBG’s advocacy delivers a lifetime of value for client families! It’s what we do every day. Please give us a call or click this link to raise your hand.

Stoddard Barnhill
sbarnhill@thebahnsengroup.com

Phillip Barnhill
pbarnhill@thebahnsengroup.com

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The Bahnsen Group is registered with HighTower Securities, LLC, member FINRA and SIPC, and with HighTower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through HighTower Securities, LLC; advisory services are offered through HighTower Advisors, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.

All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. The team and HighTower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.

Third-party links and references are provided solely to share social, cultural and educational information. Any reference in this post to any person, or organization, or activities, products, or services related to such person or organization, or any linkages from this post to the web site of another party, do not constitute or imply the endorsement, recommendation, or favoring of The Bahnsen Group or Hightower Advisors, LLC, or any of its affiliates, employees or contractors acting on their behalf. Hightower Advisors, LLC, do not guarantee the accuracy or safety of any linked site.

Hightower Advisors do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax advice or tax information. Tax laws vary based on the client’s individual circumstances and can change at any time without notice. Clients are urged to consult their tax or legal advisor for related questions.

This document was created for informational purposes only; the opinions expressed are solely those of the team and do not represent those of HighTower Advisors, LLC, or any of its affiliates.

About the Authors

Phil Barnhill, CLU

Private Wealth Advisor
Director of Risk Management

Stoddard Barnhill, CFP®

Private Wealth Advisor

For nearly 25 years Phil has worked exclusively with senior leaders of public and large private companies. Over the past six years Stoddard has been carefully mentored in this niche market, leading to a highly-specialized practice knowledge within the team. This focus on corporate executives and their family dynamics comes with significant insights into executive compensation, stock concentration, equity monetization, and the full life-cycle of a career in the C-Suite.

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