Upstate New York

I grew up in upstate New York, and I’ve always been a New York Giants fan. Odell Beckham Jr. is a player I’ve followed even after he left the Giants, so I’m excited he will have the opportunity to play in the upcoming Super Bowl for the Los Angeles Rams.

Recently, I was surprised to read about a financial decision he made. When he became a free agent in November, Odell decided to be paid his $750,000 salary in bitcoin. After bitcoin’s recent plummet in January, and after taxes, the news report estimated he will net approximately $35,000 from his contract with the Rams for the entire year.

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Fortunately, Odell’s previous contracts with the Giants and Cleveland Browns paid him tens of millions of dollars – so he may have seen the risk as minimal.

But Odell’s situation has some interesting implications for executive compensation.

Many Executives Face Similar Decisions

Executives, especially when they change jobs, often get a chance to negotiate their compensation.  In some cases, they can take a signing bonus in company stock instead of cash.  Or, they can take a bonus that is split over a couple of years, assuming they stay with the company long enough to collect.

At some companies, executives are also given a choice about how to receive their long-term incentive award. For example:

• They can take stock options. If the company’s price rises, there can be major upside here, though the stock could also drop, causing the options to be worthless.
• Restricted stock. As long as the stock has any market value whatsoever, an executive will receive some value if they stay at the company long enough for the stock to vest.
• Performance-based restricted stock. If the company meets the goals required, the executive could receive a payout of 100% to 150% or more of their original grant based on the company’s stock price when the award cycle ends. But it can also be worth $0 if the company does not hit its performance targets.

Some Rules of Thumb to Consider

So, what is the right choice?

Many executives take long view, which means using these long-term equity awards to meet their retirement or college savings goals, as well as help cover expenses in retirement.

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If there is a choice of all three – stock options, restricted stock and performance-based restricted stock – I like a combination of all three, split into one-third each. This, in essence, is a diversified portfolio of company stock plans that doesn’t place all the pressure on the stock market or the individual company’s performance. 

For the executive who consistently saves money from their salary and cash bonuses over the years, they often can afford to take more risk and elect just the stock option component.  Others who rely on their long-term incentives to meet living expenses or other short-term goals may want to go with the more conservative route and choose only restricted stock awards.

One of my clients who works for a Fortune 500 company has seen his stock options increase in value by 500% while the company stock price has risen 200% in the past two years. He immediately takes the cash proceeds from the stock options and reinvests them in retirement accounts, children’s college accounts, and reduces debt.

What If I Work Overseas?

Executives who work abroad face different compensation options. If given the choice to be paid in the local currency or U.S. dollars, the executive needs to think about the currency that will pay for most of their living expenses, as well as the currency’s stability against the dollar.

A client recently shared a story about her colleague, a U.S. executive working in Turkey, who is paid in lira.  The executive pays her nanny in U.S. dollars.  Due to recent currency conversion differences, the nanny is making almost as much as the executive!

The Final Word on Odell and Executive Compensation

Getting back to Odell. It’s quite possible he believed he could turn his $750,000 salary into multiplies of that amount by investing in cryptocurrency. And if bitcoin rebounds dramatically, he may not regret his decision.

Similarly, most executives shouldn’t take heavy risk with compensation decisions unless they are already financially independent, or are saving enough outside of their stock awards, for example, to meet their short- and long-term financial goals.

Remember that all risk assets can have periods where the asset price moves lower. With the stock market off to a rocky start in 2022, there is always the temptation to seek assets that could deliver a higher yield now. But most executives should look at their compensation decisions as part of a comprehensive financial and investment plan, so money will be there when they need it.

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