Advising Clients With Large Equity Compensation Holdings

Janeesa Hollingshead, Executive Editor, Wealth Solutions Report

Blue Chip Managing Partner Explains Needs Of Equity Compensation Holders, Behavioral Biases, Technical Analysis, 10b5-1 Plans And Strategies To Reduce Concentration

Conventional wisdom reminds us to not “put all your eggs in one basket,” because if you drop that basket, all your eggs break. It is, perhaps, the first lesson we receive in life about portfolio diversification and risk management. 

Don’t put all your eggs in one basket

Regardless of this life lesson, many wealth management clients have concentrated dependence on one employer. While that employer might act wisely in providing equity compensation to incentivize high-performing executives and key employees, a side effect is that the employee becomes concentrated in one source for both their salary and a significant portion of their portfolio.

Dan Seder, Managing Partner, Blue Chip Partners

To understand how an advisor should guide clients who hold significant equity compensation, we spoke with Dan Seder, Managing Partner at Farmington Hills, Michigan-based Blue Chip Partners, which serves over 750 client relationships with more than $1.1 billion in assets under management. 

Seder specializes in serving the unique needs of corporate executive clients, such as compensation packages, equity grants and trading plans for executives reducing their concentration in company stock.

We spoke with Seder about behavioral biases of employees with significant company equity holdings, the role of technical analysis and 10b5-1 plans, and steps to manage concentration in company shares.

WSR: Investing is difficult without the added complexity of being employed by your largest portfolio holding. It would seem impossible to stay objective. What behavioral biases arise for corporate executives who hold concentrated positions in company stock and options? How can corporate executives address these biases?

Seder: The three behavioral biases that subconsciously affect how you perceive and manage company stock holdings include status quo bias, recency bias and anchoring. 

Status quo bias occurs when we prefer to keep things as they are by doing nothing or sticking with a previous decision, even when we have access to new facts. 

For example, if you received a cash bonus of $500,000 in lieu of Restricted Stock Units (RSUs), would you immediately use the cash to purchase company stock? Probably not. However, few insiders immediately sell vested RSUs and, instead, embrace the status quo and let those holdings accumulate over time.

Status quo bias

Next, recency bias: “I can’t sell now. The stock is making a move!” 

Many executives avoid selling company stock when it is rallying under the belief the rally will persist. Recency bias occurs when investors feel like the most recent turn of events will continue into the future. 

Finally, anchoring: “Analysts are calling for $50 per share. If the stock hits that price, I’ll sell for sure!”

Anchoring is a cognitive bias in which an individual depends too heavily on an initial piece of information when making decisions. Anchoring can occur based on information from a variety of sources. In addition to analyst price targets, anchoring can also stem from recent high-water marks, option strike prices and even round price levels.

Awareness is key. We don’t act on behavioral biases because we want to. However, simply being aware of these biases can lessen their impact on your decision-making. 

WSR: What is a 10b5-1 plan, and how can corporate executives use these plans to diversify their concentration in company stock and options?

Seder: The SEC’s Rule 10b5-1 helps executives establish preapproved trading plans for the systematic execution of company stock trades. This type of plan is designed to provide an affirmative defense against allegations of insider trading.

Automated discipline

A 10b5-1 plan can identify when to sell specific stock grants at predetermined prices. Once in place, 10b5-1 trading plans automatically trigger stock sales without additional action on your part and irrespective of future blackout periods or corporate preclearance. Without this structure, you may find it difficult to maintain the discipline necessary to sell shares periodically to maintain a prudent level of asset diversification.

WSR: Why is technical analysis particularly beneficial to corporate executives? How does it help executives address uncertain markets in their corporate stock and option ownership?

Seder: Most executives know their company inside and out. We recommend they complement that knowledge with a technical analyst’s expertise in the financial markets. Technical analysts focus on relevant market indicators and past market prices in the belief that stock price movements are driven by the supply and demand of that stock. They interpret past trading patterns to discern this balance to predict future price movements.

Technical analysis can be an excellent complement to the more traditional form of fundamental analysis. Technical analysis can defend an objective and disciplined sell strategy for company stock that helps manage risks and allows you to minimize the chance of regrettable decisions based on emotions or analyst opinions.  

WSR: Is there a rule of thumb for an appropriate amount of company stock that executives should hold?

Seder: Concentration in any one stock presents a significant risk for your portfolio. It’s even more risky when that same company employs you. There is no ideal threshold of concentration. Your goal should be continually managing the concentration down.  

Immediately sell vested RSUs and Performance Shares. RSUs and Performance Shares are taxed as ordinary income once they vest. Employees usually surrender shares to pay that tax, and “net shares” are then deposited into the executive’s brokerage account. Immediately selling the net vested shares at no additional tax is a prudent game plan for reducing your concentration, particularly since future equity awards are likely to be granted down the road. 

Exercise options when intrinsic value exceeds 180% of the strike price. Although both restricted stock and stock options vest over time, only stock options give you discretion. Stock options are often exercised in reaction to an immediate financial need. It’s also easy to procrastinate until the stock option grant is about to mature, which causes a “use-it-or-lose-it” scenario, or worse – an underwater option.  

Proactive planning makes it possible to identify the minimum threshold at which an option grant has realized a fair value for you, that is, the most “juice in the squeeze.” Generally, we recommend exercising stock options and selling the resulting shares once the intrinsic value of your option grant exceeds 180% of the strike price. 

Janeesa Hollingshead, Executive Editor at Wealth Solutions Report, can be reached at

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