Maximizing wealth through executive transitions: three case studies.


We've demonstrated the importance of bringing single-stock risk under control, analyzed methods of doing so, and shown how to maximize the likelihood of reaching your financial goals within the core-and-excess capital framework. Now, let's look at some examples of putting these insights into action.

* John Talent, a 50-year-old executive, has been offered a new job with an attractive compensation package composed largely of stock options. How can he best compare the package to his current compensation?

* Jane Leader, a 55-year-old senior executive, has amassed millions of dollars in company stock and options and has decided to retire. Is it time to take some of the money off the table?

* Blake Silver, a 65-year-old CEO, is on the verge of retiring with significant wealth, including a great deal of company stock. How should he handle the transition, and is it time to initiate estate planning?

Case Study I: Building Core Capital

John Talent has spent the last 10 years working at Wonder Drugs Inc., a blue-chip pharmaceutical company based in Baltimore, but he's got an exciting opportunity to transfer to the company's three-year-old biotech spin-off, Bio-X, near San Francisco. The big attraction is stock options in the new company.

At Wonder Drugs, John is well compensated, with perks that include an annual cash bonus of 50% of his salary and a long-term incentive plan that gives him annual grants of restricted stock worth two times his salary. John has a taxable portfolio of $2.2 million and a 401 (k) plan with $300,000, both of which are invested in a portfolio of 40% stocks and 60% bonds. He also has 27,000 shares of company vested stock and 40,000 shares of unvested stock.

Wonder Drugs management understands that the cost of living in the San Francisco area is higher and that John is taking a risk by leaving a secure job at the parent company. So they are offering to increase John's salary, exchange his unvested Wonder Drugs shares for Bio-X shares, and provide him with an incentive package that is a little lighter on restricted stock--but includes $600,000 in annual stock option grants in Bio-X.

John has worked out that his annual living expenses will increase from $200,000 to around $300,000 in San Francisco. He hopes that he can retire at the end of 10 years, when he will be 60. At that point, he and his wife would like to move back to rural Maryland, where they expect they will need $200,000 annually (in today's dollars) to support their lifestyle in retirement. John has created a spreadsheet with the two competing offers {Display 16, following page), but it is still hard for him to judge. There is a big risk in leaving a prestigious company to join one that has been in existence for only three years, but the prospect of building his wealth quickly and retiring at 60 is very appealing.

Working with John's accountant, we used our Wealth Forecasting System to model all the variables simultaneously, showing John how much wealth he can expect to have after 10 years in the two scenarios. The initial outcome was not what John expected:

Display 16 John Talent: Comparing Competing Pay Packages Wonder Drugs Bio-X Cash Salary $300.000 $400,000 Cash Bonus $150,000 $200,000 Deferred Bonus -- $250,000 Cash Deferral -- 50% Restricted Stock $600,000 $400.000 Options -- $600,000 Expenses $200,000 $300,000 Analysis assumes thai compensation amounts are increased with inflation; cash and bonus in the Bio-X offer include a onetime deferred bonus of $250,000 and a 50% annual salary and bonus deferral: deferred compensation is to be paid out and taxed at year 10; existing restricted stock is to be replaced with an equal value of spin-off restricted stock; restricted stock and options rest over three years and expire at year 7; the ratio of stock options to restricted stock is three to one: remaining unvested restricted stock and options vest at year 10; year 10 restricted stock and options are paid in cash; Wonder Drugs is a low- volatility stock, and Bio-X a high-volatility stock; annual expenses and state income/capital gains tax rate in John's current position are $200,000 and 9.08%; in the proposed job his expenses would be $300,000 for 10 years and state taxes would be 10.55%; annual retirement expenses are $200,000 in both scenarios. Source: A Ilia nee Bernstein If John takes the package with Bio-X and follows a...

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