Executive Compensation Planning
Executive compensation planning is the work of coordinating equity, deferred pay and business ownership so that the decisions governing each one are made in the right order. For households whose compensation arrives as restricted stock, options, deferred salary or the eventual sale of a company, the difficulty is rarely the arithmetic of any single year. It is that each instrument carries its own deadline, set by a plan document or by statute rather than by the person holding it, and several of those deadlines close before the year they affect has begun. This page sets out what each one requires and when it stops being available.
What you will learn
- What executive compensation planning covers, and what separates it from ordinary tax planning
- How a restricted stock unit strategy differs from restricted stock, and why one election is unavailable
- What a stock option exercise strategy has to account for across incentive and non-qualified options
- How non-qualified deferred compensation elections work, and when they lock
- What business succession planning has to hold together, and one case that changed the arithmetic
What Executive Compensation Planning Is
Executive compensation planning is the coordination of equity awards, option exercises, deferred compensation elections and business succession into a single sequence, so that each decision is made with knowledge of the others. It differs from general tax planning in one respect that matters: most of its decisions carry a statutory or contractual deadline, and once that date passes the choice is no longer available at any price.
Ordinary tax planning is an annual exercise that can be revisited. Equity and deferred compensation cannot. An election missed by a week is missed permanently, and the instruments interact: an option exercised in the year a deferral begins paying out, or a company sold in the year a large block vests, produces a result neither decision anticipated alone.
Restricted Stock Unit Strategy
A restricted stock unit is a promise to deliver shares later, and that distinction carries the most commonly misunderstood consequence in equity compensation. Because nothing is transferred at grant, an RSU is not property for the purposes of Section 83, so no Section 83(b) election can be made on an RSU grant.1 The income is recognized when the shares are delivered, at their fair market value on that date.1
Restricted stock is different. Where actual shares are transferred subject to vesting, a Section 83(b) election is available and must be filed no later than 30 days after the transfer.2 That window is short, it starts on a date the recipient did not choose, and it does not reopen.
- Confirm whether the grant is a unit or an actual share transfer
- For a share transfer, diarize the 30-day window from the transfer date
- Record the delivery dates on which RSU income is recognized, by year
- Note what share of net worth sits in one employer as each tranche settles
Assuming an 83(b) election is available because the award is described as “restricted stock” in conversation. If it is a restricted stock unit, the election does not exist, and time spent planning around it is time not spent on the delivery schedule that will actually drive the income.
Stock Option Exercise Strategy
Options divide into two categories that behave differently, and holding both makes the sequence harder rather than simply larger. A non-qualified stock option without a readily ascertainable fair market value at grant is taxed when it is exercised or otherwise disposed of.3
An incentive stock option is more constrained. For the favorable treatment to apply, the shares must not be sold within two years of the grant nor within one year after the share is transferred.4 Only the first $100,000 of aggregate fair market value becoming exercisable in a calendar year can be treated as an incentive stock option.5 And for alternative minimum tax purposes, the deferral Section 421 normally provides does not apply on exercise,6 which is why an exercise held for the qualifying period can still create a consequence in the exercise year rather than the year of sale.
- Separate grants by type before modeling; the rules do not blend
- Track both incentive-option holding periods from their own start dates
- Identify grants exceeding the $100,000 first-exercisable threshold in a year
- Test whether an exercise creates an alternative minimum tax consequence that year
Treating the qualifying holding period as the only date that matters. The holding period governs the character of the eventual gain; the alternative minimum tax consequence is measured at exercise. They are two different years, and planning for one does not address the other.
Non-Qualified Deferred Compensation
A non-qualified deferred compensation arrangement lets an executive defer pay beyond the limits of a qualified plan, and its defining feature is when the decision has to be made. Under Section 409A, an election to defer compensation for services performed in a taxable year must generally be made no later than the close of the preceding taxable year.7
That is a decision made a year early, without knowing what the year will contain. Two narrow accommodations exist: a newly eligible participant may elect within 30 days, and where compensation is based on services over a period of at least twelve months, the election may be made up to six months before that period ends.7 Deferred amounts are also a contractual promise from the employer rather than a funded account, which is a different exposure from market risk.
- Note next year’s deferral election deadline, which falls in this year
- Map the distribution schedule against the years equity is due to settle
- Confirm whether the arrangement is unfunded, and what that means if the employer fails
- Check whether any portion is performance-based, which changes the window
Electing a deferral and a distribution schedule in isolation, then discovering the payout years coincide with the years a large equity block vests or a business sells. The deferral did what it was asked to do; nothing checked what else those years already held.
Business Succession Planning
For an owner, the compensation question and the ownership question are the same question, because the largest single event in the plan is the transfer of the business. Business succession planning has to hold together who takes over, how the interest is valued, how a purchase is funded, and what the arrangement does to the estate.
What Connelly changed
In Connelly v. United States, decided in June 2024, two brothers had agreed that if one died the company would redeem his shares, funded by life insurance the company held. The Supreme Court held that the obligation to redeem those shares did not offset the insurance proceeds, so the proceeds counted in the company’s value for estate tax.8 The agreement did what it was written to do, and also produced a valuation the owners had not planned for.
- Identify whether the buy-sell is an entity redemption or a cross-purchase
- Confirm how any purchase obligation is funded, and where that funding sits
- Establish how the interest is to be valued, and by whom
- Review it with counsel in light of Connelly if drafted before June 2024
Treating a buy-sell agreement as finished because it exists and is signed. It was drafted against the law and the balance sheet of that day, and both change.
Executive Compensation Planning FAQ
What are the disadvantages of a deferred compensation plan?
The three most commonly cited disadvantages are that the money is an unsecured promise from the employer rather than a funded account, that the election is made before the year the income is earned, and that the distribution schedule is difficult to change once set. Section 409A restricts changes to payment timing, which is what makes the original election consequential.7
What is the difference between a 401(k) and deferred compensation?
A 401(k) is a qualified plan: contributions sit in a trust for the participant’s benefit, protected from the employer’s creditors, with contribution limits set by statute. Non-qualified deferred compensation has no such trust and no such protection, is generally an unsecured claim against the employer, and is governed by Section 409A.
What happens to deferred compensation if I quit?
It depends on the plan document, which sets both the vesting terms and the payment event. Separation from service is a common trigger, but the timing is fixed by the plan and by Section 409A rather than chosen at departure, and unvested amounts are commonly forfeited.
Are executive deferred compensation plans a good idea?
That depends on the household’s circumstances and cannot be answered in general terms. The considerations usually weighed are the value of moving income into a year with a different expected tax position, against the loss of access to the money, the inflexibility of the schedule, and the credit exposure to the employer.
How do I create a succession plan for my business?
A succession plan generally addresses four things together: who assumes control, how the ownership interest is valued, how any purchase of it is funded, and how the transfer interacts with the owner’s estate. Because the document carries legal, tax and valuation consequences, it is normally built with an attorney and a tax professional alongside the financial plan.
Schedule with Security Financial Management
If you want help putting these decisions into one sequence rather than handling them one at a time, Security Financial Management works with households across Central Florida whose compensation arrives as equity, deferred pay or the sale of a business. A lead advisor coordinates the plan alongside specialists across investment, retirement, estate and insurance, so the elections are considered together. If you would like to review your own plan, our team is available.
Continue with the September Executive Compensation pillar
- Insight: Executive Compensation Planning and the Closing Window
- Conversation: Executive Compensation Planning When Your Employer Is Also Your Largest Holding
- Market Commentary: September 2026 Market Commentary
Sources
- IRS Office of Chief Counsel Memorandum AM 2020-004 — an RSU is not property under §83 at grant, so no §83(b) election may be made; income is includible when the shares are delivered. irs.gov
- 26 CFR §1.83-2(b) — “the election … shall be filed not later than 30 days after the date the property was transferred.” ecfr.gov
- 26 CFR §1.83-7(a) — “sections 83(a) and 83(b) shall apply at the time the option is exercised or otherwise disposed of.” ecfr.gov
- 26 U.S.C. §422(a)(1) — two years from grant, one year from transfer of the share. law.cornell.edu
- 26 U.S.C. §422(d) — aggregate fair market value first exercisable in a calendar year above $100,000 is not treated as an incentive stock option. law.cornell.edu
- 26 U.S.C. §56(b)(3) — “Section 421 shall not apply to the transfer of stock acquired pursuant to the exercise of an incentive stock option.” law.cornell.edu
- 26 U.S.C. §409A(a)(4)(B) — election “not later than the close of the preceding taxable year”; 30 days for newly eligible; six months for performance-based. law.cornell.edu
- Connelly v. United States, No. 23-146 (U.S. June 6, 2024). supremecourt.gov
About the Author
Dave Allen, CFP® · Managing Partner, Security Financial Management. CRD #1210763. Verify credentials at BrokerCheck by FINRA or SEC IAPD.
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Disclosures
The information presented is for educational purposes only and does not constitute legal, tax, or investment advice. Security Financial Management, Inc. is a registered investment advisor under Kestra Advisory Services, LLC. The election deadlines, holding periods and limits referenced are set by the Internal Revenue Code and Treasury Regulations and are subject to legislative and regulatory change. Equity compensation, deferred compensation and business succession decisions should be coordinated with qualified tax professionals and, where appropriate, legal counsel familiar with your specific situation. Nothing here is a recommendation to exercise, hold, sell or defer any award. Past performance is not indicative of future results. Securities offered through Kestra Investment Services, LLC, member FINRA/SIPC (Kestra IS). Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS). Security Financial Management, Bluespring Wealth Partners, LLC, Kestra IS and Kestra AS are affiliated through common ownership by Kestra Holdings. Verify advisor credentials at BrokerCheck by FINRA or SEC Investment Adviser Public Disclosure.