If Bill Gates never sold any of his shares in Microsoft, they would now be worth $609 billion. That’s more than Jeff Bezos and Elon Musk combined, according to a recent article from Bloomberg News. Although this makes for interesting reading, it’s unlikely that Mr. Gates cares. The article ignores a very key point – what he accomplished by selling his stock.
Even if you are not Bill Gates, decisions about your stock compensation can be complex, are always personal, and often involve striking a balance between conflicting objectives. Yet, too often, these critical decisions are given short shrift.
Have A Plan:
I recently contacted a healthcare executive in the later stages of a successful career. Despite having a hefty salary and bonus, the executive’s lifestyle and the costs of supporting a family allowed for only modest wealth accumulation. He did not yet have a firmly secured retirement.
Then, clinical results were released, causing his company stock value to pop. Overnight, the executive’s stock options became sufficient to more than fully secure his retirement. The question then became what to do about it, and when?
Decision points like this can arise quickly or creep up over time. Ideally, an executive will consider “what-ifs” and form a well-thought-out plan ahead of time. Knowing in advance what your decisions will accomplish can lead to timely and decisive action when the time comes.
Steps to Take:
- Determine a target that will firmly secure your retirement. Don’t guess what this target should be. Instead, consider getting professional advice. This should include “stress tests” that look at multiple scenarios and how your assets might perform in good and bad market conditions. Then, consider pursuing your target aggressively.
“True individual freedom cannot exist without economic security and independence.”
– Franklin D Roosevelt
- Manage your risk. According to FINRA guidelines, investors should limit their own company’s stock exposure to between 10 and 20 percent of investable assets. However, this is an arbitrary guideline, and different individuals accept different levels of risk. For instance, an executive who has already secured their retirement with other assets may choose to increase risk and concentration in company stock because they can absorb potential losses. It is essential to understand that most professional money managers are very sensitive to overconcentration in any single company, and most will not exceed the FINRA guidelines in their portfolios. Many even limit holdings in any single company to less than 10 percent of their portfolio (see risk management video segment one and segment two).
- Understand your stock compensation plan document and pay close attention to the details. There are different types of stock compensation and various provisions in each plan document. Therefore, it can be vital to understand how the plan works to avoid making costly mistakes (see video segment on common mistakes).
- Consider establishing a 10b5-1 plan. A 10b5-1 plan can help accomplish several objectives, but is not appropriate for all circumstances. A significant feature of these plans is establishing provisions to execute trades even during blackout periods. The linked document provides an overview of key considerations. However, not all companies allow 10b5-1 plans.
In the example above, the executive quickly moved to exercise a sufficient number of options to secure his retirement. At the time, there was no way to know what direction his company stock price would go.
A wicked brew of emotions, including fear and greed, often impact investor decisions. In this instance, the executive employed a balanced and dispassionate approach, focused on accomplishing a worthy goal.
I suspect Bill Gates sold shares of Microsoft with an eye toward his own worthy goals and not on remaining the wealthiest man in the world. Connecting your stock compensation to worthy goals can crystalize what really matters and help you make good decisions regardless of how your company stock performs.
Planning Capital Management Corp is a Registered Investment Advisor with the SEC, and we are held to a fiduciary standard with all of our clients. We offer full financial planning in conjunction with investment advice and portfolio management. Should you have any questions or concerns about current market conditions, or just general financial planning questions, schedule a call with us!