For people who have equity compensation or hold shares of company stock, risk comes in various forms. In the section Financial Planning at myStockOptions.com, a pair of new articles addresses two different areas of risk management for executives and/or employees.
Public Perceptions, Closed Trading Windows, And SEC Rules: Guidance For Corporate Executives Caught In The Headlights
In The Equity Compensation Planning Dilemma For Corporate Executives, CFP Geoffrey Zimmerman examines the tricky issues that can arise for corporate insiders whose stock transactions are highly visible—and who "must perform a delicate balancing act to meet the needs, demands, and perceptions of the various constituencies interested in [their] company's stock." To summarize the major issues:
- A big portion of a corporate executive's compensation often comes in the form of equity ownership in the company, so his or her financial future is highly tied to the company's stock performance. While large holdings of company shares align an executive's financial rewards with those of the shareholders, they also raise undue financial risks, particularly if stock prices fall dramatically.
- On the other hand, stock moves to mitigate this financial risk may be complicated by regulatory reporting requirements, which make the actions of high-level corporate executives are very visible to the markets, the public, and employees. Quite often, sales of company stock by corporate insiders are perceived as a pessimistic outlook for the company. Conversely, employees may misinterpret a lack of sales by executives as a bullish sign for the company.
- Meanwhile, the hands of corporate executives may be further tied by consistently closed trading windows, e.g. around the annoucement of corporate news or quarterly earnings. This lack of trading windows can lead to financial losses due to the limited lifespan of stock options, or because of the taxes owed when restricted stock vests. Even when corporate insiders can trade their company stock, the high level of visibility into their actions warrants additional consideration.
In the article, Mr. Zimmerman offers expert guidance for executives and managers caught in the headlights of these competing forces. This includes developing a carefully structured financial plan, including the use of a Rule 10b5-1 trading plan, which allows for pre-determined transactions involving company stock to take place systematically, even while trading windows are closed. Read the article for details and other risk-managing ideas.
Maximizing Value While Minimizing Financial Risk—And Financial Regrets
For many employees and executives, the value of their equity compensation represents their largest investment. With so much at stake, making smart financial decisions is vital. To this end, strategies for minimizing financial risks are the subject of a new article by attorney and financial advisor William Baldwin: A Least-Regret Analysis For Equity Compensation: Maximizing Value While Minimizing Risk.
Introducing his subject, he poses a question that is, undoubtedly, asked by many holders of stock compensation: "What if there were a way to not only minimize the risk involved, but also to maximize the value of the opportunity?" He goes on:
It can be useful to apply "regret analysis" to your financial-planning situations...Consider your choices and then consider the possible outcomes, applying a probability and a value to each. Next, ask yourself about how much you will regret all of the bad outcomes. As an example, if all of your wealth were concentrated in one stock and that stock's value plummeted, you would regret not selling when you had a chance. On the other hand, if the price were to double, you would regret having sold it all. Building a "least regret" scenario seems the only logical way to proceed.
Among many other points, the author's "least regret" approach presents, perhaps surprisingly, a way to use stock-price volatility to your advantage. For details, read the article, which appears in the section Financial Planning: High Net Worth on myStockOptions.com.
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