In addition to salary and traditional employee benefits such as health care and qualified retirement plans, an executive’s total compensation package typically includes other incentives commonly referred to as “executive benefits.” These benefits may supplement the more traditional coverages or may provide additional coverages that are not included in the employee benefit plan available to the rank-and-file employees.
Short-term incentives, usually paid in the form of an annual cash bonus, are quite common. This module, however, is going to focus on mid- to long-term incentives (typically 3-10 years), which are tied to achievement of specified business goals-most often financial goals. Many such incentives, such as incentive stock options and nonqualified stock options, are tied to the employer’s stock price and they are often wrapped in a nonqualified deferred compensation package. In some cases these plans are structured to benefit the employee and in others they are structured as golden handcuffs to benefit the employer.
Generally, high net worth individuals derive a significant portion of their wealth from these employer-provided equity incentives. It is therefore important for financial advisers working with these clients to be comfortable with the nature and characteristics of nonqualified deferred compensation plans as well as the various forms of equity-based compensation.