For high-achieving corporate executives, compensation often extends well beyond salary into deferred income and equity-based incentives. As that complexity increases, so does the importance of managing it intentionally. And especially now, as the year winds down, tax planning for equity compensation can make the next tax return filing season less stressful and costly.
We regularly see situations where the underlying opportunities are strong, but the coordination between tax strategy, investment decisions, and long-term planning is lacking. The result is often unnecessary tax exposure, excess concentration risk, or missed planning windows.
What are the basics of executive compensation?
First, let’s do a quick review of the basics of executive compensation.
- Base salary and bonuses: These provide the foundation for cash flow and savings. How they are managed plays a key role in funding taxes, maintaining liquidity, and supporting other planning decisions.
- Deferred compensation: Both qualified plans (such as 401(k)s) and non-qualified arrangements allow for the deferral of income into future years. While this can reduce current taxable income, the long-term benefit depends heavily on distribution timing, future tax rates, and overall retirement income planning.
- Stock options (ISOs and NSOs): Stock options enable the recipient to purchase a stated number of shares at the option price (sometimes called the “strike price”). Though there are slight differences among option types, they generally become taxable when the option is exercised and actual shares are purchased. The amount that is taxed usually depends on the “spread”: the difference between the purchase price guaranteed by the option and the stock’s current market value. For example, if an executive holds options that allow the purchase of stock at $50 per share, and if, upon exercise, the market value of the stock is $100 per share, the spread would be $50. Incentive stock options (ISOs) don’t typically generate ordinary income at the time of exercise, though for some high earners, they may trigger alternative minimum tax (AMT), a possibility that should be considered and analyzed in cooperation with your tax advisor. Non-qualified stock options (NSOs) generate ordinary income based on the spread at the time the options are exercised. Later, if the stock (either from ISOs or NSOs) is sold at a higher price than its market value when purchased, that gain would be taxable at the rate for capital gains (typically lower than the rate for ordinary income when held longer than one year).
- Restricted stock units (RSUs): Restricted stock units are basically bonuses paid in company stock instead of cash. Typically issued according to a vesting schedule that may involve length of service, achievement of certain corporate goals, reaching certain benchmarks, or some combination, RSUs belong to the recipient upon vesting. At that time, they are also recognized as taxable income, according to the value of the stock at the time of vesting. So, in any year when an executive receives vested RSUs, the value of the units is added to any other compensation paid to the executive during the year to determine taxable income and the marginal bracket for that year.
How is equity compensation taxed?
Because extra taxable income (and additional tax liability) is generated in years when equity compensation is received (or stock options are exercised), it is wise for recipients to plan ahead for the extra liquidity needed to cover both the exercise of options and the taxes due on the resulting income. For publicly traded companies, this may be as simple as selling a portion of the shares received to generate sufficient funds. For privately held companies, it can be a little more complicated; depending on the specifics of the plan, recipients may have to wait for a “liquidity event”: an IPO, merger, acquisition, or something similar. In some cases, it may be possible to borrow against the value of privately held shares, but this depends on what the plan allows.
If you’ve received equity compensation during the year, such as vested RSUs or exercised stock options, now is the time to do the liquidity planning necessary to ensure that you can cover the taxes due when you file your next return. You may want to adjust your withholding to a higher level to ensure that enough has been held back to take care of the extra liability. Alternatively, you may want to consult with your financial advisor to determine how much company stock (or other assets available for liquidation) you will need to sell to handle the extra tax bill.
When is the deadline for a deferred compensation election?
Executives eligible for nonqualified deferred compensation (i.e., deferred comp not included in a qualified retirement plan like a 401(k)) must make their elections by December 31 of each year. The standard deadline for income to be earned in 2026 is December 31, 2026, but because many employers impose an earlier deadline (often December 1–15), you should check with your human resources department to make sure your elections are completed for the upcoming year.
How much of my net worth should be in my company's stock?
Another aspect of equity compensation that deserves discussion is the issue of a concentrated position, or concentration risk. Sometimes, executives will accumulate a large position in company stock, to the point that a significant percentage of their net worth is represented by a single asset. This results in a concentrated position: the owner’s financial position is vulnerable to financial, competitive, or economic developments that would negatively affect the company and the value of its stock.
Especially for those who will depend on the value of their holdings to fund a secure retirement, it is usually best to avoid accumulating a concentrated position as the result of executive compensation. Instead, it may be advisable to “unwind” the position over a period of time to permit diversifying the portfolio away from over-reliance on the value of company stock. This process typically requires careful coordination between your financial advisor and your tax expert; by calibrating the amount of shares to be sold in a given year and also by taking advantage of tax-loss harvesting and other tools, the concentrated position may be reduced with greater tax efficiency. And this can often also require careful coordination with insider information protocols, since many executives may have access to sensitive information, requiring approval from compliance to ensure their ability to sell the stock position.
How should my executive compensation be integrated with my financial and tax planning?
The most valuable planning opportunities in executive compensation are often tied to timing. Deferral elections, option exercises, and stock sales all occur within specific windows, and decisions made in isolation can have unintended consequences.
A coordinated approach brings together:
- Current and projected income
- Tax brackets and potential changes over time
- Portfolio construction and risk exposure
- Retirement and distribution planning
This allows each decision to support the broader plan, rather than working against it.
Executive compensation can be one of the most effective ways to build long-term wealth, but it requires ongoing attention. As your career progresses and your balance sheet evolves, your strategy should evolve with it. At Tailored Wealth Solutions, we work with high-achieving executives to align these moving pieces into a cohesive plan, helping ensure that each component of their compensation is being used as effectively as possible. If you would like to learn more, please let us know.
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Disclosure: This has been provided for informational purposes only and is not intended as legal, tax, or investment advice, or as a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Information obtained from third-party sources is believed to be reliable, though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results. Our firm is not affiliated with any government agency.