Executive Compensation Planning: A Complete Guide

Executive compensation is regulated by specific sections of the Internal Revenue Code (409A, 280G, 162(m)) and SEC rules (10b5-1, Section 16). Planning well requires knowing these rules. Planning poorly can trigger six-figure penalty taxes.

The executive comp stack

A typical public-company executive package includes:

• Base salary: $400-800K. Typical top rate applies.
• Annual cash bonus: 50-150% of base. Target-driven, settled annually.
• Long-term incentives (LTI): RSUs, options, PSUs. Mix varies by company culture.
• NQDC plan: non-qualified deferral plan. Annual elections.
• Supplemental retirement (SERP): defined-benefit-style supplemental pension at some large companies.
• Change-of-control protections: golden parachute provisions, often 2-3× base + target bonus.
• Perquisites: car, financial planning stipend, executive physical, club memberships.

Tax-stacking priorities for executives

1. Max 401(k) including catch-up. Modest at this income level but still worth doing.
2. NQDC election — the big lever. See calculator. Annual December decision.
3. Concentrated stock management. Diversification strategies at $5M+ position sizes.
4. 10b5-1 plan for scheduled sales. Setup guide.
5. Charitable planning. At high incomes, bunched giving via donor-advised funds or CRUTs creates meaningful tax efficiency.
6. Estate planning. At $10M+ net worth, estate tax exposure matters. Irrevocable trusts, grantor retained annuity trusts (GRATs), dynasty trusts.

Section 409A — the rule that can hurt you

IRC § 409A governs non-qualified deferred compensation.¹ Once you elect to defer, distributions must happen per the pre-elected schedule. Violations trigger:

• Entire NQDC balance immediately included in income (not just the amount distributed)
• 20% excise tax on top of regular income tax
• Interest penalties retroactive to deferral date

This is why your NQDC election form, which looks routine, is actually the most consequential single piece of paperwork you'll sign each year.

Change-of-control: 280G analysis

If your company is acquired and you receive "parachute payments" (cash + accelerated equity + benefits) exceeding 3× your base amount (average W-2 for prior 5 years), IRC § 280G imposes a 20% excise tax on the excess, plus loss of corporate deduction.² See detailed analysis.

Concentrated employer stock

Most public-company executives accumulate significant employer stock over time through RSU vesting, option exercises, and ESPP. At $5M+ positions, diversification becomes critical. The tax-efficient paths:

• Gradual 10b5-1 sell-down: simple, compliant, works for most.
• Exchange funds: for positions over $2-3M where immediate tax-deferred diversification matters.
• Direct indexing SMA: tax-loss harvesting offsets concentrated-stock gains over 3-5 years.
• Charitable remainder unitrust (CRUT): for charitably-inclined executives with substantial gains.

Exit planning

Executive exits — retirement, acquisition-driven, recruitment to new role — all have specific considerations:

• NQDC distributes per elected schedule (typically triggered by "separation from service")
• Equity vesting often accelerates on retirement with defined age/service requirements
• Post-termination consulting agreements may preserve some equity vesting
• Non-compete and restrictive covenants affect next-role options

Sources

1. IRC § 409A — Non-Qualified Deferred Compensation. Violations: full NQDC balance included + 20% excise + interest.
2. IRC § 280G — Golden Parachute Payments. 3× base amount threshold; 20% excise tax under § 4999.
3. IRC § 162(m) — \$1M Compensation Deduction Limit for Public Companies.
4. SEC Release 33-11138 — Rule 10b5-1 Amendments.
5. SEC — Section 16 Insider Reporting Requirements.

Executive compensation is governed by IRC §§ 409A, 280G, 162(m) and SEC Sections 10b5-1, 16. Every NQDC election is a permanent commitment — specialist coordination is required.