Wealth is a wonderful thing, but as the adage goes: More money, more problems. Success creates a complex puzzle of unique financial challenges that executives need to be able to solve.
Among those challenges: How and when they are compensated; how to mitigate the tax hit for high-net-worth individuals; how they can maintain liquidity, when net worth may be tied up in hard-to-access assets; and how they can defend against 'lifestyle inflation' that could threaten their family's financial security.
Since there can be significant resources at stake, it's prudent to be as thoughtful as possible about what's coming in and what's going out. Important questions to consider, in conjunction with professionals like financial planners, tax specialists and estate attorneys:
How should my compensation be structured?
High-level executives are often compensated by receiving equity in the company, which could be either public or private. There are strict regulations around such compensation, both federal and specific to the firm, which should be understood and followed to avoid legal entanglements. Equity compensation often comes with a vesting schedule (a timeline over the course of which you earn full ownership rights), and is sometimes tied to company performance and the achieving of certain benchmarks.
What tax complexities might I face?
Many, which is why having planning professionals on your team is your best bet. In minimizing what is owed to Uncle Sam, remember that executive compensation is sometimes deferred, or even directed into special retirement plans. Large bonuses are typically taxed as straight wages, and the common mistake of under-withholding means you could be slapped with a big bill come tax time. If your compensation is in restricted stock, that is taxed as ordinary income whenever the shares eventually vest. For more on executive compensation tax issues, visit here.
How can I maintain liquidity?
When executives have much of their net worth tied up in assets like private company shares, or their home, or public stock that has not vested yet, that creates problems in terms of liquidity. Taking a portion of compensation in straight salary can help with having ready cash. For high-net-worth clients, private banks also may enter into lending arrangements based on the value of underlying assets like an investment portfolio or real estate properties.
How can I avoid lifestyle creep?
Human beings tend to adapt to whatever income they are making, a phenomenon called the hedonic treadmill. So even if someone gets promoted to the C-suite and is making plenty of money, they still may be spending it all or even going into debt – because of huge expenses like a bigger home, a nicer car, a vacation property, a private club, and Ivy League colleges for the kids. Avoid lifestyle creep by keeping your spending in check, and living below your means. That is one piece of evergreen financial advice that applies to every single person of every income level – but is especially pertinent to executives, since a high income is an opportunity to create generational wealth that you do not want to waste.