2018: A huge year for your Long-Term Incentive Plans at The Coca-Cola Company - Will this be your biggest LTI payout year ever? - Brightworth
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2018: A huge year for your
Long-Term Incentive Plans at
The Coca-Cola Company
Will this be your biggest LTI payout year ever?2018: A huge year for your Long-Term
Incentive Plans at The Coca-Cola Company
Note: This article represents the views and opinions of Brightworth and has not been reviewed or
endorsed by The Coca-Cola Company or any of its employees. © 2018 Brightworth. All Rights Reserved.
Will this be your biggest LTI payout year ever? Do you Here are some key questions your personal financial
have a strategy to maximize your wealth and minimize strategy should address with respect to your LTI
your taxes for the: awards:
• 2014 PSUs paid out @ 150% • What stock price should I exercise my stock options at
in order to reach my retirement goals?
• 2008 stock option grant that must have been exercised
by 2/20/18 • How many of my 2009 stock options should I pull
forward and exercise in tax year 2018?
• Enormous gains in the 2009 stock option grant
expiring on 2/18/19 – should you exercise in 2018? • Should I keep my 2014 PSUs after they are released, or
should I sell some or all of them?
• 2017 Bonus paying in March (short-term incentive plan)
• Is the federal income tax withholding on the PSU
• 2015 Performance Cash Award paying in September payout and stock option exercises enough for my
personal tax situation? Do I need to hold onto some
Why do I need a plan now? extra cash to pay my tax bill next April?
For more than 30 years, Brightworth has helped hundreds
of executives and associates at TCCC achieve their financial • Is it better to pay down my mortgage with any of
goals, especially being able to retire on their time frame these LTI payouts, or should I save the money for my
with a high degree of financial confidence. We’ve seen retirement or my children’s college? Or, a combination
many of our Coke clients work hard, save wisely, and retire of all three?
by the age of 55 with a comfortable lifestyle ahead of them. • What is the percentage of my total investment portfolio
Conversely, we’ve witnessed other Coke clients regularly in TCCC common stock?
spend every last dime of their paycheck and bonus, but
with a prudent exercise strategy, their stock options were • What types of investment accounts should I be saving
able to “bail them out”. With decades of experience serving my LTI proceeds into this year?
corporate executives and associates, we know the stress of
seeing stock options under water (no value), or PSUs not • Have I maximized all of the before-tax savings vehicles
paying out. If it weren’t for having a prudent strategy to available to me this year?
capture value from their long-term incentive (LTI) awards
• What unique tax strategies should I take advantage of
year after year, some clients would not have had a shot at
this year, that I have not looked at before?
meeting their retirement goals.
• With recent tax law changes, does this change my stock
option exercise strategy?
Continue reading for some general guidance on your LTI awards as we’ve shared in our previous paper, Preparing for Your Retirement
from The Coca-Cola Company. (Click here to download a free copy of that paper). Also, if severance is potentially another income item
for you in 2018, you’ll need to read our advice here, Receiving a Severance Package from The Coca-Cola Company.
| 2Stock Options advantage of short-term market movements while reaching
your financial goals - another reason why it is wise to run
The gain in your stock options may be the largest asset on
some calculations to know what stock price you need.
your balance sheet. This also means a large part of your
overall net worth is tied to TCCC common stock (in addition Since stock option proceeds are subject to ordinary income
to your salary and bonus which covers your day-to-day tax upon exercise, part of your exercise strategy should
living expenses). We are often asked, “How much of my net include income tax planning. For example, perhaps you
worth should I hold in a concentrated stock position?” Part
of the answer depends on whether or not you have a share In order to make wise decisions with your stock
ownership requirement. In general, while holding many options, it is equally important to know the minimum
shares of TCCC common stock can create great wealth, as
price the stock must mainitain in order for you to
with any concentrated asset if the value goes in the wrong
direction, this can result in unplanned lifestyle changes remain financially secure.
such as having to work longer, spending less in retirement, can exercise a portion of your options this year while
not having enough to pay for your child’s out-of-state staying just under the top marginal tax rate. (For some
college expenses, etc. We typically recommend a client this means you are already deferring a lot of income into
have enough diversified assets entering retirement to cover your Deferred Compensation Plan.) If you have any chance
their core living expenses and taxes. Above this core level, of staying out of the top tax bracket when you exercise
concentration in a single stock position does not pose as options, this also saves taxes on other parts of your financial
much risk to your financial strategy. picture such as tax on your brokerage account - dividends,
interest and capital gains. Also, don’t forget that if you
While holding many shares of TCCC common stock can
are in a federal tax bracket above 22%, you’ll want to hold
create great wealth, as with any concentrated asset, it back some cash from your option proceeds to pay for the
can also pose a potential risk. additional tax due (i.e., being in the 37% federal bracket
vs. the 22% federal tax withholding on your stock option
With stock options, exercising first and then planning exercises). Furthermore, if your compensation exceeds $1
second is not the right order. Exercising options just million, under current tax laws the federal withholding on
because the stock price has recently rallied, or others in stock options will be at the 37% tax rate.
your department are “pulling the trigger” may not be
the optimal plan. Since predicting future stock prices is Performance Share Units (PSUs)
impossible, you should run calculations or work with Performance Share Units are a form of restricted stock.
a professional to know at what stock price you need to After the end of the three-year performance period, the
exercise your options, in order to accomplish your financial number of shares you will receive is determined, and a one
goals. For the most part, using stock option proceeds to year holding (vesting) period follows (in most cases). At
pay for college, save for retirement, pay off debt before the end of year four the shares are released to you, and they
retirement, or provide cash flow during the early years of are deposited into your Merrill Lynch Individual Investor
retirement typically makes sense. In order to make wise account. Upon release the fair market value of the shares is
decisions with your stock options, it is equally important taxed as ordinary income and is reported on your paystub.
to know what price the stock must stay above in order for Some shares are held back to cover the tax liability, but as
you to remain financially secure, such as continuing to with stock options, the 22% federal tax withholding may not
have enough for retirement. This bottom line price can be enough for your particular situation. So, you may need or
provide peace of mind when deciding when and how much want to sell some of your released shares and set this cash
you should exercise, while not getting mentally “stuck” on aside for next April’s tax return.
whether you could have gotten one more dollar in stock
price if you had just waited. Having a pre-determined Remember, your holding period for capital gains tax
strategy for your stock options provides confidence and purposes starts the day the shares are released to you,
peace of mind. and your cost basis is the fair market value on the day of
the release. If you sell the shares right away, essentially
For those executives on the restricted trading list, setting no additional capital gain taxes would be due. If you sell
up a Rule 10b5-1 Stock Trading Plan during an open trading the stock within 12 months of release, any post-release
window is often a good move. It can allow you to take
3 |date gain will be taxed as a short-term capital gain at your New LTI Programs beginning 2018:
top marginal tax bracket (as high as 40.8% for federal tax Starting this year the LTI awards have been revamped, and
including the 3.8% Medicare surtax). And don’t forget about some associates will start earning Restricted Share Units
state income taxes! (RSUs) and/or Growth Share Units (GSUs). Stock options
Holding the stock for more than 12 months (i.e., the will continue to be awarded for Grade levels 14+. The value
following March), will allow any post-release date gain to be of RSUs will depend upon the stock price of TCCC common
taxed at long-term capital gain rates – a top federal rate of stock at the end of a three year period, whereas the GSUs
23.8%. For example, assume 1,000 shares are released to you will depend upon Company performance over a three year
in February, 2018 and the stock is trading at $45/share that period (similar to how PSUs have worked).
day. This $45,000 will be included as compensation on your
paystub. Assume further that you wait until March, 2019 and Some 2018 Financial Planning Tips:
sell the shares at $50/share. The $5 per share gain is taxed as
a long-term capital gain.
401(k) Plan
The 401(k) contribution limit increased by $500 in 2018, so
Performance Cash Awards be sure you are saving the maximum into your 401(k) plan
($24,500 for those age 50+, and $18,500 for those under age
The first year these Performance Cash Awards were granted
50).
was 2015 to Grade levels 12 through 14, in lieu of stock
options and PSUs. Performance Cash Awards have the At the beginning of 2018, stocks were trading at all-time
same three year performance period as PSUs, however, highs. Rebalance your 401(k) if your stock exposure is
performance cash pays out six months earlier than PSUs now more than you are comfortable with. Remember, if
assuming Coca-Cola achieves its performance targets. your stocks go down 50%, it takes a 100% return to get back
to where you are today. As with your 401(k) investments,
Results have been certified and the 2015 Performance Cash
this asset allocation should be coordinated with your
Award will be paying out in September, 2018 above target.
overall investment game plan and rebalanced periodically.
We provide our clients with specific investment
It is important that you have a plan for the Performance recommendations based upon their unique financial
Cash Award payout. Saving most, if not all, of this situation.
award payment is a prudent decision as LTI awards are
The Health Savings Account is a good tool to take
not guaranteed to have value every year.
advantage of the “triple tax play”. If you can build up
For many associates at TCCC, they could have both PSUs and this account and avoid using it for current medical
Performance Cash, from two different plan years, paying expenses, this is a good tax-efficient strategy to help
out in 2018! The main difference is the Performance Cash pay for higher medical expenses during retirement.
payment will feel more like your bonus – it pays in cash and
taxes will be withheld.
Health Savings Account
However, just like other LTI awards, the Performance Cash The Health Savings Account (HSA) is a good tool to
Award is not eligible for deferral into the 401(k) or deferred take advantage of the “triple tax play” as an HSA is the
compensation plan. only investment vehicle where it’s pre-tax going in, tax-
deferred while the money is in the account, and tax-free if
It’s so important that you have a plan for this payout, as it withdrawals are used for qualified medical expenses. If you
can be very tempting to see this big cash balance in your can build up this account and avoid using it for current
checking account and have visions of the new pool being medical expenses, this is a good tax-efficient strategy to help
installed in your backyard. A better idea is to save most, pay for higher medical expenses during retirement. There is
if not all, of this award payment as LTI awards are not also a list of investment options to choose from in your HSA
guaranteed to have value every year. plan which might make sense if you’re trying to accumulate
a large balance for retirement. We provide our clients with
specific investment recommendations for their HSA.
| 4Don’t forget about the Company’s contribution to your HSA Other Helpful Hints
each year – this is “free” money!
• Does your spouse or partner have a job? Are they
The maximum contribution (including Coca-Cola’s maximizing their pre-tax savings plans? Or if they are
contribution) for singles is $3,450 and for families it’s self-employed or consult, do they have a retirement
$6,900. And if you are age 55 or over, you can deposit an plan for their business?
additional $1,000. Furthermore, if your spouse is over age
• Saving for college? Look at your state’s 529 plan rules,
55, you can open a spousal HSA for them and deposit $1,000.
as many states (including Georgia) offer a state tax
benefit for contributions made to your home state’s
During open enrollment, look ahead to the next two
plan. These plans can now also be used to pay for
years of LTI award payments, and consider increasing private K-12 starting this year.
your deferrals to minimize taxes in upcoming years
• Talk with your CPA about buying tax credits offered in
of big stock option/PSU/Performance Cash Award
your state. This can be a way to save 5% or more on your
payouts. state income taxes.
Deferred Compensation Plan • Make larger gifts to charity in big income years.
If you meet the eligibility requirements to participate in Consider a donor advised fund and gift appreciated
this nonqualified plan, you have the option to defer up stock into your own “mini private foundation”. This
to 80% of your annual base salary and 95% of your annual saves income taxes and capital gains tax. Be sure to take
incentive award each year. This can be a powerful way to advantage of TCCC’s generous 2:1 charitable gift match
save for future goals and significantly reduce your current up to $10,000. Gifts out of your donor advised fund to
tax bill, especially in years you will have income from qualifying charities are eligible for this match.
stock option exercises. Deferral elections are made in the
If you have questions about your personal financial
fourth quarter during the open enrollment process. Each
strategy or would like a second opinion, contact us! We
fall when enrolling, look ahead to the next two years of LTI
are frequently at the AOC and SunTrust Plaza, and would
award payments, and consider increasing your deferrals to
be happy to sit down with you to discuss your financial
minimize taxes in upcoming years of big stock option/PSU/
situation in more detail.
Performance Cash Award payouts.
We have set up strategies for our clients to defer almost all
of their salary and bonus, essentially having a $0 paycheck,
but exercising stock options early in the year of expiration
and living off this cash during the year. This takes a lot of
preplanning if you are going to make ends meet on a $0
paycheck for 12 months, but it can save a ton of taxes!
There are a number of investment options to choose
from with your Deferred Compensation Plan. TCCC
common stock is not one of those options. As with your
401(k) investments, this asset allocation should be
coordinated with your overall investment game plan and
rebalanced periodically. We also provide our clients with
specific investment recommendations for the Deferred
Compensation Plan.
5 |Who Is Brightworth? This information is provided as a guide
to assist you in your financial planning.
Brightworth is a nationally recognized, fee-only wealth management firm
The specific examples are provided for
with offices in Atlanta, GA and Charlotte, NC, with over 3 billion dollars of illustration purposes only and are not
investment assets under management. The wealth advisors at Brightworth have representative of specific investments
deep expertise across the financial disciplines, allowing us to provide ongoing, or guarantees of future returns. Please
comprehensive financial advice to over 1,200 families across the country. consult with a professional for specific
questions regarding your particular
situation.
3344 Peachtree Road NE, Suite 2000 | Atlanta, Georgia 30326 | 404.760.9000 brightworth.com
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