Tax should be the last question in an equity-comp decision

An executive holding roughly $7 million in employer stock and options, about 70% of his investable wealth, leans toward holding rather than triggering another taxable event after a run of tax bills that arrived bigger than expected. A Financial Planning opinion column published Sept. 24 puts that case at the center of a seven-point framework for equity-comp decisions, arguing that the holding instinct is where the advisory work should begin rather than end.

The seven are tax, the size of the position, overall diversification, liquidity needs, personal goals, expectations for the stock, and the restrictions the company or the equity plan imposes. Which of them leads is the substance of the decision, and the column's account of the usual winner is that a tax hit is immediate, measurable, and painful while the cost of staying concentrated is none of those things, because it depends on where the stock goes next; the client can compute the first number and only guess at the second, so the second tends not to get a hearing.

Option holders carry a sharper version of the same problem, because a decline in the stock can produce a much larger percentage decline in the value of the options, so the concentrated position and the leveraged position are one exposure with two names; an employee who declines to sell in order to avoid a capital gains bill is leaving that compounding leverage in place.

The column is candid that the seven create trade-offs rather than a clean answer: trimming a position can produce the tax bill the client was avoiding, while the same sale can supply the liquidity the household needed anyway. It also allows for the case of a client who stays genuinely confident in the company and still concludes that protecting wealth already created matters more than capturing every additional dollar of upside. That is a legitimate place to land, reachable only after the downside has been modeled, which is the practical argument for doing the scenario work even when the answer turns out to be hold.

The seven don't sit on the same level. Three are facts about the balance sheet: how large the position is, how little else the household owns, and how much cash it needs. Two are beliefs about the future, the client's goals and the client's expectation for the stock, and only one of those yields to evidence the advisor can produce. One is a cost, and one, the restrictions written into the plan or imposed by the employer, is an external rule that planning cannot move.

That ordering points toward a sequence running against the tax-first habit the column describes. A client who begins by asking whether to exercise has handed the decision to the input he can measure, and the column's own framing treats tax as a design question: how to manage the consequences of a decision reached on other grounds. Restrictions come first, because they set what is available and when; liquidity comes second, because it is binary, and the executive in the column has significant short- and medium-term needs—a need, not a preference. Position size and diversification come third, and tax arrives last, as the bill the client plans around.

The illustration is where the framework does its work: roughly $7 million in employer stock and options against about 70% of investable wealth implies a household with something on the order of $10 million invested, a ratio the column states and a total it does not. Scenario analysis across different stock prices showed that a meaningful decline could erase a substantial portion of the wealth the position had already created, with the option leg falling further in percentage terms. The column's conclusion is not to sell everything; it is that the analysis produces four parameters: how much risk to reduce, when to act, how much liquidity to create, and how to handle the tax consequences.

Four parameters are harder to deliver than an answer, and three of them take inputs the client cannot produce alone: the plan document, the household's cash schedule, and the roughly 30% of investable wealth sitting outside company stock. An advisor who answers exercise-sell-or-hold without those four numbers has answered the tax question and called it the whole of the decision.

As this publication has argued about succession planning, the recurring deficit in this industry is documentation rather than intention, and equity comp is a case where an undocumented process looks identical to no process at all. A firm that runs the seven considerations when the client asks gets a conversation; a firm that runs them on a schedule, refreshed when the plan rules change or when a cash need appears, gets a standing policy, which is the only thing that survives a strong year in the stock, when selling feels like leaving money on the table.

The soft spot in the column is the case itself, which it describes as hypothetical—less a mark against the advice than a description of what advisors currently have to work with: frameworks rather than outcomes. The column does not specify how many price paths are enough, what the scenario output should contain, or where the line falls between reducing risk and abandoning the position. Each desk answers those for itself, and the answers differ by client, which is presumably the point.

The seven considerations are the right inputs; the sequence is the part that gets skipped. Write the four parameters into the file before the client has to choose again, and when the next strong year in the stock arrives, the tax bill stops being the argument for holding and shows up as a line item both sides already agreed to.