How to navigate the complexities of executive compensation structures

This may be one of the reasons why your compensation package is likely more complex than a standard salary and benefits arrangement. Understanding the different pieces of your compensation package and taking a strategic approach to optimizing them can help set you up for long-term financial success.  

Your compensation: Understanding the full picture 

Your executive compensation package may include many elements, such as:  

• Base salary: Your basic salary, not including any bonuses, incentives or other benefits. 
• Bonuses: Extra monetary compensation. Bonuses may or may not be linked to your – or the company’s - strong performance and success. 
• Equity compensation: Non-cash “pay” that gives you a stake in the company. This might be stock options, restricted stock (stock options that require you to stay with the company for a vesting period), or performance shares, which you receive only if you meet certain performance measures or metrics. 
• Retirement benefits: Your company pension plan or contributions to employer-sponsored plans such as a Registered Retirement Savings Plan (RRSP). 
• Health and insurance benefits: An employee health plan, which may include coverage for drug, dental, vision, mental health and paramedical care. It may also include short- and long-term disability insurance, critical illness insurance, accidental death and dismemberment insurance, life insurance and health spending accounts. 
• Deferred compensation: A percentage of your compensation set aside to be paid at a later date – usually retirement, when you’re in a lower tax bracket. 
• Additional perks and benefits: Any extra compensation or recognition. This could include almost anything, from flexible work arrangements and travel allowances to the use of a company vehicle, club memberships, executive medicals or exclusive leadership retreats.  
   

Let's explore how to maximize each component so that the whole of your compensation is more than the sum of its parts. 

Understanding your bonus 

Be aware of your bonus and how it’s awarded to you. Sometimes bonuses are not included in income for group benefit coverage such as life insurance or disability coverage. It may or may not be included in the income for pension or other retirement plans when determining retirement income calculations or matching contributions.  Be mindful of this as you choose the personal amount of coverage you may require. You could inadvertently find yourself underinsured related to your actual income and expenses/lifestyle.

Bonuses vary with your performance in your role, the company’s performance, or both. Performance-based bonuses are a huge incentive to work hard, perform at a higher level, and bring home those extra dollars. It can also mean large fluctuations in your annual income. Ensuring that you are budgeting well and setting aside some money in the great years to offset the challenging years is critical. Budgeting and spending based on the best years can lead to future stress and cashflow issues and force some uncomfortable decisions.

Equity compensation: Your stake in success 

Equity compensation can be one of the most valuable - and complex - parts of your compensation package. Common forms include: 

• Stock options. Generally, stock options allow you to purchase the shares of your company at a pre-determined price in the future to hold them for future appreciation, to grow your ownership position, or to sell them and profit from the difference in the value from the grant price vs the fair market value. The taxation of stock options is complex as it depends on whether the issuer is a Canadian Controlled Private Corporation (CCPC) or not. Also, the tax rules have changed in recent years; it also matters when the options were issued.  
• Restricted stock units (RSUs). These are stock shares you receive once you meet certain performance milestones or have stayed with the company for a certain amount of time. RSUs are considered income once you receive them, and a part of the shares is often withheld to pay income tax. 
• Employee share ownership plans (SOPs). This allows you to buy shares of stock in the company. There may even be a matching or partially matching formula from the company. It can act as a great incentive for high performance, as the company’s success – and rising stock price – translates into financial rewards for you. Vesting of these shares can happen right away, after a certain amount of time, or over the years. When you leave the company or retire, the company will buy the vested shares back from you, providing you with a lump sum or periodic payments. For publicly traded companies, you can often transfer your vested stock to a personal brokerage account intact without triggering a taxable event. 

Maximizing retirement benefits 

When it comes to making the most of your retirement benefits, it’s important to think beyond the basics. Consider: 

• Your contributions. Be aware of your company’s contribution matching. Make sure you’re contributing enough to get the full match. Also, investigate your contribution room for your RRSP, and consider using payroll deductions to enhance your savings in a disciplined fashion. If your savings come right off your pay, you’ll not be tempted to spend and try and save at the deadline. 
• Different employer-sponsored savings vehicles. There’s more than RRSPs. Other plans include Tax-free savings accounts (TFSAs) or Registered Education Savings Plans (RESPs). and Deferred Profit Sharing Plans (DPSPs). Here’s a quick breakdown: 
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  • RRSP contributions are tax-deductible. Investments and capital gains grow within the account tax-free. You pay tax when you withdraw the money – ideally at retirement when you’re in a lower income bracket. 
  • TFSA contributions are not tax-deductible. Investments and capital gains grow within the account tax-free. Withdrawals are tax-free, and you can withdraw the money anytime, for any reason – not just retirement. 
  • Group RESPs are starting to become more prevalent. These plans allow you to start saving for your children’s education directly from pay. This creates a discipline of saving for the future and enjoying convenience and group pricing. 
  • DPSPs are a plan type where employers can contribute to a registered plan on your behalf. Generally, they are tied to the profits of the company and remain in the plan until you retire or terminate. The growth in the meantime is tax-free until you start withdrawing.
     
• The type of pension plan you’re contributing to.
   
  • Defined-benefit plans, also known as traditional pension plans. With these, the company takes responsibility for the investments of the pension plan and provides you with a specified payment amount in retirement, which is guaranteed. You may not need to contribute to the plan, depending on its design. 
  • Defined-contribution plans have become more prevalent in recent years. In these plans, you’re responsible for making contributions and choosing the investments; your employer will provide a match based on a preset formula. There is no guaranteed payment amount. Instead, the payout depends on the performance of the investments and the total amount contributed over the years. 
  • Supplemental Executive Retirement Plans (SERP) are additional retirement plans often targeted at high-earning executives, where traditional pension plan limits can not accommodate the desired replacement ratio between employment income and retirement income. The designs vary widely, but the key to know is whether the contributions and investments are actual or notional and what happens at termination, retirement or death. 
     

Making your healthcare and benefits work for you 

Making strategic health benefit choices can enhance your compensation: 

• Look into high-deductible health plans with health savings account (HSA) options. Contributions to HSAs are tax deductible, and distributions from the account are tax-free, as long as you use the money for qualifying medical expenses. This means contributing to an HSA may lower your taxable income. 
• Consider executive health screening programs. These are designed for high earners like you, who may not have time for regular check-ups. These programs can identify issues long before you have symptoms and are substantially more comprehensive than regular check-ups. If your employer pays for this option, that amount is a taxable benefit. 
• Review supplemental health insurance options, which can help pay for cost gaps and treatments not covered by your regular health insurance. Supplemental insurance may reimburse you with a flat fixed amount for a healthcare service, health condition or health event, and include things like critical illness and travel insurance. 
   

Know the details of your deferred compensation plan 

Deferring part of your compensation until retirement can be a great way to lower your taxes today, but make sure to ask questions and understand the details surrounding your deferred compensation. Are there limits on contributions? Can you take the money out before retirement? What happens if the company goes bankrupt or is sold? Is some protection in place, or is the money you deferred lost? If the plan is a SERP, and the investments and contributions are notional, what protection is in place while employed or after retirement? These are all good questions to ask. 

Make the most of your compensation 

Once you understand all the elements of your executive compensation, it’s time to create an action plan to maximize and optimize it. Consider: 

• Insurance and risk management. Protect your compensation with the appropriate coverage. This might include disability or critical illness insurance, life insurance, errors and omissions insurance, or key person insurance. Group coverages and limits may not be enough. 
• Budgeting. Fluctuations in annual income can be quite extreme depending on the ratio of base salary to variable and deferred income. Explore smoothing techniques to ensure your lifestyle can be maintained through the lows. 
• Smart tax planning. As your compensation grows, tax efficiency becomes crucial. Talk to a tax professional about the right timing to exercise stock options or other compensation, tax-loss harvesting and opportunities to use capital losses to offset capital gains, vesting opportunities, and charitable giving strategies. 
• Diversifying your portfolio. Don't put all your eggs in one basket! If you have a lot of company stock, balance it with other investments. Remember, your income, bonuses, retirement plans, and company stock holdings all add up to a sizable concentration risk in one company's success and job security. 
• Estate planning to protect and transfer your wealth effectively. This might include trust structures; exploring philanthropic options or gifting strategies; and planning for business succession.
   

You’ll also want to make sure you review your complete compensation package at least once a year, re-balance and manage risk in your portfolio as needed, and make updates to your entire action plan as your compensation changes. 

Not sure where to start? We can help you build your financial future. 

To optimize your compensation, we recommend working with a team of experts, including: 

• A financial advisor experienced in executive compensation and equity compensation 
• A tax professional or accountant 
• An estate planning attorney 
   

If you don’t have existing relationships with other professionals, we have a network of contacts and can help you find the right partners. 

The bottom line 

Your executive compensation package is more than just a salary. It's a web of financial opportunities that, when managed strategically, can enhance your long-term financial success. The key is understanding how all these pieces work together and making informed decisions that align with your financial goals.

We'd love to work together to create a comprehensive financial plan that maximizes every aspect of your executive compensation package. Our team specializes in helping executives make the most of their unique compensation structures while building long-term wealth.