Many executives in both public and private corporations have the opportunity to build their wealth to some form of stock-based compensation, including but not limited to stock options. It is very common, for executives to lose focus on this important wealth building strategy and tool. It is not uncommon for executives to miss expiration dates on their stock options losing any value they may have. Others may miss the opportunity to optimize their options for a variety of other reasons.
One concept that many executives don’t recognize is the “endowment effect” in the holding of their stock-based compensation. Richard Thayer, a behavioral finance expert, coined the phrase. It is based on the notion that we over value things that we already own over things that we may purchase.
In other words, our company stock is more valuable because “I” own it. If I were going to purchase it with cash, it may seem less valuable.
Having a tracking system that measures the value of holding a stock-based compensation, versus selling it now, is critical to optimizing stock-based compensation. Using statistical methodologies, such as Black Scholes, can provide valuable information to make decisions from. For example, White Oaks tracks all options for our executive clients and monitors ongoing decision points to maximize the wealth building impact.
And of course, a well-crafted financial plan can magnify the impact they may have on an individuals or family finances.
If you would like more information, read our white paper, Three Things Executives Often Miss in Maximizing Their Stock-Based Compensation”.