Planning Considerations for Executives in Transition

By 213 Strategic Partners on November 11, 2019

Lessons Learned from Clients Who Are Repeaters – Mitch Wienick, Kelleher
Executive Transition Tax Related Decisions – Tom McGlone, CPA, Marcum LLP
Planning Considerations for Executives in Transition – Greg Sarian, Sarian Strategic Partners

Lessons Learned from Clients Who Are Repeaters

Mitch Wienick, Kelleher

Somewhere between 3-5% of our clients will cycle back to us within 12-18 months after starting a new position. While this is a very low repeat rate, it’s humiliating and frustrating to those few clients who experience it. When someone is in a career transition mode, he or she is often emotionally and/or financially vulnerable, and this state of vulnerability can color judgments, especially about future career opportunities. As a result, as career consultants, we play a pivotal role in challenging a client’s thinking about job offers and opportunities. Noted below are some of the key “dos” and “don’ts” we’ve helped clients work through over the years:

Do recognize that cultural and personality fit are as important as business fit, and sometimes more so.

Upwards of 80% of executive derailments involve so called “soft issues” relative to fit rather than the “hard” business issues. So, the probabilities are 4 to 1 that a derailment will be rooted in a soft issue. Regrettably, most executives don’t pay enough attention to this when considering a new position. We have become strong believers in an executive’s ability to “read” the individual and team styles, the organizational culture, and board dynamics of target companies. We systematically coach and train clients on the need to do so, and how to do it. Frankly, more than a few executives (ego driven “captains of industry”) ignore this key aspect or do it poorly without some overt third party insight and coaching.

Don’t accept a position if you don’t know who your boss will be.

Executive recruiters and companies will more than occasionally go into the marketplace to recruit a subordinate when a supervisor’s position is also open. This often happens during restructurings or when companies are in financial stress and the Board has “cleaned house”. If a subordinate joins the company first, he or she may discover that the subsequently recruited supervisor may see the business and cultural issues very differently. In most instances, senior executives look for and emphasize particular skills, experience, and approaches in their subordinates. They know what “works for them” to help offset their own limitations and reinforce their key strengths. In these circumstances, if one of our clients accepts a position before having clarity around expectations, style, and values from a direct supervisor, he or she assumes a substantially above normal risk in a new job situation.

Don’t be rushed into accepting a position.

Sometimes employers and executive recruiters create a powerful urgency through “end game” tactics. For example “Our board meeting is next week”; or “we need this done by March 1”; or “the annual ____ process is about to start (you fill in the blank)”; or, especially in this economy, “we have an eager alternative candidate waiting in the wings”. Clients are fine if they’ve completed their due diligence at this point, but at risk if they haven’t. A client’s requirement for an organized and deliberate process to come to an appropriate yes or no decision should be based on as much knowledge as possible within a reasonable period of time regarding the business, cultural, and people factors and is as important as the company’s need to fill the position. Be wary if a company or search firm doesn’t respect your need to do this thoughtfully and carefully, and more so if they try to shortcut or thwart this effort.

Do check and double check the issues important to you.

It’s very important to ask the key business and cultural questions of everyone in the interview process. In addition to asking your potential new boss these key questions, do the same with peers, subordinates, and other involved stakeholders. It’s essential to get a reasonably consistent set of answers. If you don’t, engage in deeper digging to try and explain key differences. Remember that different managerial levels may see business and cultural situations differently and you will have to sort these anomalies out to your own satisfaction, and that of your consultant.

Don’t work for someone you do not trust, respect, lack confidence in, or dislike.

While this sounds like Business School 101, it happens too often to dismiss lightly. No matter how hard we try to hide emotions and attitudes relative to others, over time our attitudes will reveal how we feel and it affects our behavior. Negative attitudes and behaviors are “mirrored” by others quite rapidly. And, of course, in any conflict between a superior and a subordinate, the superior prevails. So, like the doctor’s oath to “do no harm”, a client’s oath should be “avoid questionable situations”.

Don’t be lured by money when the other factors aren’t right.

Financial considerations can and should play an important role in the decision process, but they should not be the only factor or even the primary one. The nature of the business challenge, the culture, and people factors should flash “green” before the financial factor in seriously considered. If the business, cultural, and people factors aren’t right, cash compensation and equity grants won’t correct these deficiencies.

Do get it in writing, and make sure it includes all the key elements.

An offer letter, term sheet, or employment agreement is an important business document. It memorializes agreements and understandings between the two key parties, the company and the prospective employee, as a run-up to starting in the new position. All of the meaningful issues should be covered. Our consultants are especially astute at ensuring that these agreements are comprehensive and complete. One critical issue is severance. It’s reasonable and smart to document severance provisions, including career transition support. An executive owes it to himself and his or her family to negotiate for needed income and benefits protection in advance of the relationship not working out. And our clients have much more leverage in doing so when entering a position than when leaving it.

Do trust your judgment and common sense.

Executives need a process to harmonize the emotional and intellectual aspects of the search for a new position, and use some basic common sense and judgment, just as they would when making an important “on the job” business decision involving people issues. If the proper research and due diligence process has been successfully completed, the “head” and the “heart” should converge on a “go” decision. If not, it should be “no go”.

Summary

It’s not surprising that we spend a lot of time seriously discussing and assessing new opportunities with clients before they commit to one of them. While we value and respect our clients, and really love working with them, we would rather not see them again because an employment choice they made wasn’t thoughtfully and completely vetted or made for the wrong reasons.

Executive Transition Tax Related Decisions

Tom McGlone, CPA, Marcum LLP

Executive transition can result in a multitude of tax-related decisions with both your new and former employers. The most common issue that arises with your new employer is the completion of IRS Form W-4, which dictates the amount of federal income tax withholding to be deducted from your paycheck. The form itself is relatively straightforward, but there are supporting schedules to be completed for personal exemptions, itemized deductions, and two-earners/multiple jobs. A good tip to remember is that the more exemptions you claim, the lower the federal tax to be withheld. So, if you want the maximum federal tax to be withheld, claim zero exemptions. There is also a box (#6) in which you can add an additional amount to be withheld from your paycheck, to cover your tax liability for other sources of income (such as investment income) that is not subject to withholding.

Retirement plans provide opportunities for tax planning for the executive in transition. If you plan to rollover your retirement plan assets to your new employer’s plan or to an individual retirement account (IRA), you need to make sure that you make a direct (trustee to trustee) transfer of the assets. If the retirement plan distribution comes directly to you, the company is required to withhold 20% in taxes, even if you plan to roll it over within the allowable 60-day window. Your new employer may offer a designated Roth account as part of its retirement plan, which allows for additional tax planning. The Roth account is taxed differently than a regular retirement plan. In contrast to regular IRAs, contributions to Roth IRAs are made with post-tax dollars; the tax benefit is instead realized upon withdrawal, as distributions including investment growth are tax-free.

Executives receiving an equity stake in their new company or liquidating an equity stake in the former employer will need to fully understand the tax consequences of the equity arrangements, as the tax consequences of ownership do not always with cash flows. You need to understand the timing of the income, the tax character (wages, ordinary income, wages or capital gain) of the income and timing of cash flows. If the ownership is in an S Corporation, partnership or LLC, you need to comprehend the allocation of income and expenses, potential capital gains, timing of receipt of the Schedule K-1, which may result in the need to extend the time needed to file your individual income tax returns, tax distributions, and the need to file non-resident state tax returns.

Planning Considerations for a Transitioning Executive

Greg Sarian, Sarian Strategic Partners

Job changes are becoming more common and frequent throughout a person’s career. Today, the fast-paced executive or entrepreneur can expect to work for, build or transact multiple companies before retirement. While this can be very beneficial to long term wealth-creation, there are also challenges associated with each career transition.

Regardless of which stage of transition you may find yourself in, it is important to take some time to evaluate key personal financial matters. The following considerations can help you be strategic and maintain your financial security while focusing on your new venture without having to compromise your short-term needs or long-term financial goals.

Financial Areas to Strengthen as You Begin to Seriously Consider a New Opportunity

Pay down any consumer debt

A period of job change may include diminished short-term cash flow. It is important to reduce credit card debt, home-equity loan balances, auto loans, or other types of debt that may be subject to rising rates. Eliminating these expenses may make your monthly outflows more manageable during your transition.

Build up your cash reserves to establish an emergency fund

If you are unsure of the timing of your next few paychecks, it is vital to create a cash reserve that can help you maintain your short-term liquidity needs during a job or career transition. At a minimum, we recommend keeping six to nine months’ worth of liquidity on the sidelines.

Review your current monthly budget

Revisit your monthly expenses prior to entering a period where you will be without regular cash flow. Are there any discretionary expenses that can be reduced or modified? This may also be an ideal opportunity to prioritize your recurring expenses going forward.

Important Considerations During the Time of Transition

Assess the options for your retirement plan

You have several choices for your next course of action for the retirement plan sponsored by your former employer but not all are optimal:

Do nothing; leave your money in the current plan, if allowed.
Cash out your former plan and use the funds to pay off immediate financial needs. This is the least-attractive option. If you are under 59 and 1/2, these funds may be subject to a 10% penalty, as well as ordinary income taxes upon distribution.
Roll your assets over into a plan offered by your new employer.
Roll this money over to your own individual retirement account or IRA. This course of action has desirable tax benefits and offers a stretch out provision for non-spousal beneficiaries. The investment choices in an IRA are nearly unlimited so there is greater flexibility on how to invest within an IRA. A Stretch IRA offers far greater tax benefits to your heirs including a much longer period of tax deferral. Typically, this is the most optimal choice.

Review and update your wealth transfer strategy

Pennsylvania, New Jersey, New York and Delaware all have state-specific inheritance and gift tax rules. A current or anticipated change in residency due to a job transition could alter previously established wealth transfer strategies. It is important to review:

Wills
Power of Attorney
Living Will
Guardianships

As You Begin Your New Opportunity

Assemble an advisory team

You should surround yourself with professionals who have skill sets that complement yours. Your advisor team should include, certified public accountant (CPA), contract or tax attorney, Certified Financial Planner™ (CFP®) practitioner and insurance advisor. This team can serve as a sounding board for your current compensation package. This will help you understand and compare equity compensation versus cash compensation, which can be useful in evaluating the different outcomes of a potential equity event.

Understand your new equity stake

If your new company is offering you, as a founder or senior executive, an equity stake, this presents an additional level of complexity. It is important that you understand the goal of the company. Is it private or public? Is it targeting an acquisition, IPO, or growth and expansion? Is the equity an outright grant or is there a vesting schedule? If the company is already public, equity may be granted in the form of stock options or restricted stock units (RSUs). Options and RSUs are very different in terms of the ownership equity component they represent. You may also have access to an employee stock purchase plan that allows for favorable accumulation of shares over time. This information can help you develop the right strategy to monetize your equity in the future, as well as focus on specific tax nuances to help you derive an optimal outcome. It is key to understand the different types of stock options, as Incentive Stock Options and Non-Qualified Stock Options each have different tax nuances that need to be understood before an exercising strategy can be developed.

Review your new benefits plan and insurance options

Another sometimes overlooked but key consideration is your new benefit plan and insurance plan options. It is important to carefully assess the life insurance, health insurance, disability insurance and retirement benefits relative to your prior company. Your next opportunity may not offer the same level of coverage, especially if it is an earlier stage company with more of an equity ownership component. You may need to augment some of the insurance programs with personal policies to make sure your levels of coverage are where you need them to be. Health insurance should be considered when evaluating new employment opportunities. Review your potential new employer’s healthcare benefits in terms of co- pays, prescription coverages and in-network physicians and facilities to make a fair determination. You should also carefully consider the amounts and types of life insurance and disability income insurance that are appropriate for you. You may change jobs several times and be exposed to several benefit plans with varying coverages. Also, as your asset base increases and your liabilities decrease, your need for these coverages may decrease. Additionally, group policies offered through an employer can be costly and can lack the specific type of coverage you feel is needed for your situation. Solidifying your own plans for life and disability income insurance may be more sensible than capitalizing on the group policies available through your employer. When you have your own personal life insurance and disability insurance programs, your premiums are fixed for the duration of the policies. If your employer offers a Health Savings Account (HSA), consider taking advantage of the triple tax benefits of this account and allowing it to compound to pay for health care expenses in retirement.