The Legal Department

Show Me The Money: Understanding Incentive Compensation In The Legal Department: Eric Clark BCWM

The Legal Department | Eric Clark | Incentive Compensation


Are you struggling to motivate people in your department? Join Eric Clark, CEO of BCWM, for a deep dive into understanding incentive compensation in the legal department. Learn how Eric crafted a winning compensation plan that goes beyond the billable hour, motivating his team and driving exceptional results for BCWM. Explore how BCWM uses incentives to drive success. Join the conversation! Share your thoughts on incentive compensation in the legal industry with Eric Clark.

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Show Me The Money: Understanding Incentive Compensation In The Legal Department: Eric Clark BCWM


On the show, we have Eric Clark, who is CEO and Wealth Advisor at BCWM, which is a financial planning firm located in Kansas City, Missouri. My husband’s hometown. I’m excited, Eric, to talk to you about some matters of personal finance that affect lawyers. Thanks for being here.


I’m glad to be a guest, and I look forward to hopefully adding some value to your audience.


I know you will. The lawyers and their financial relationships many times it’s like the cobblers’ children have no shoes because you see these high-performing and smart folks. A lot of people in their professional lives deal with other people’s finances even as a lawyer, and yet you go home and things aren’t maybe organized or you don’t understand your finances and your compensation as well as you should, which is one of the reasons I wanted to talk with you. Before we get started, can you talk a little bit about BCWM? What is the specialty focus of the firm? What are your particular areas of specialty?


Before I do that, I find it interesting that you describe lawyers, in general, the way you did, and maybe not always understanding their own compensation plans and how that weaves into an overall financial plan. My career path is the opposite. I got interested in becoming a certified financial planner because I was mostly selfishly motivated. Not that I was earning a bunch of money early on in my career or college. That’s what motivated me to get to understand finances then here I am later serving others in that capacity. To answer your question about our firm and in general. At BCWM, we are a wealth management firm based out of Kansas City, but we have clients all over the country.


In Santa Barbara. Full disclosure, the Bratchers are clients of the firm.


Highly valued clients.


I’m sorry, I interrupted you. Keep going.


We manage roughly 600 million for the overall client base. We don’t have a lot of clients and that’s by design. We’re focused on the few clients we do have and serving them well rather than serving a lot of clients and maybe not knowing them as well as some financial advisors might.


When we talked before, the clients that you serve are many of whom are working professionals and have compensation that has either risk-based or equity-based compensation. That’s one of the areas I wanted to delve into because there is a mix of legal jobs. A lot of the in-house jobs, which I’m an in-house attorney as you know.


Many of them that you will see advertised are for smaller companies or startup companies. They come with different kinds of titles, head of legal or general counsel. What folks may learn is that they get the offer because it’s a smaller or a startup company that will get low cash compensation but be paid in stock or another equity form.


Compensation Package


The numbers look big, depending on what the firm’s valuation is. I wanted to get some advice for our audience when they’re looking at those kinds of jobs. Maybe they don’t even know how to look at what equity compensation would be. I want to get through. If you could talk some basics about stock and think about that as a part of your compensation package.


I would maybe back up even one level and back to describing what our firm does. We’re keenly focused on managing risk. Risk oftentimes has such a negative connotation to it. Risk, if you take it appropriately and you’re in the right place at the right time. It can work out quite favorably to the upside. That’s where equity compensation can be a big part of an overall package.


Many folks who perhaps are conservative by nature perhaps undervalue the upside that could be associated with a well-structured equity compensation component of an overall plan. In other words, if you’ve got 75% of an offer is what I would call a cash-based offer, whether it’s a base salary or even a bonus paid in cash. To me, that’s all a cash component of the overall plan.


Only 25% is stock incentive related. Most conservative people will mostly focus on the cash-based component of the plan. To be fair, if you’re in a dog of a company, that’s probably the safest way to look at it. If you find yourself in a company that has a lot of upside, perhaps on the verge of an IPO or even already a public company, but is super growth-oriented. Perhaps could be acquired within the next five years, but can be a major accelerator boost, if you will, to your personal financial plan if you’re in that type of company at the right time.


By the way, you didn’t minimize the value associated with the stock incentives. Oftentimes, when we’ve got high performers, maybe that has already made it to some degree in their own personal financial plan. We will encourage them to consider risk your career opportunities because they can afford to take that risk. I’m a former baseball player, so I use a lot of baseball analogies.

Consider riskier career opportunities. Share on X

They can swing for the fences if you will. With power hitters in baseball, a lot of times they’ll strike out more frequently than hitters who are more average-oriented. In other words, they get on base more and get singles and doubles. I’m talking about swinging for a home run with stock incentives. You may strike out now. In other words, those stock incentives may not materialize to anything at all.


For some people, depending on where they are in their career path and how that overlays with their personal financial plan. Sometimes it could be appropriate to take that type of risk. Similarly, I would argue, that if you’re just starting your career, why not take that type of risk if you have the opportunity to do it? If you hit that home run early in your career, you can sit there and bunt for the rest of your career. You’ll be fine.


This is a good pump-up, especially where I am in my career. I’ve got kids who are not yet college-age, but thinking about that. It’s an expensive part of life. I’ve got somebody in private school and all those activities that add up. I feel like I’ve got a need for a lot of cash. Let’s just say reliable income as opposed to swinging.


Don’t get me wrong, a highly successful attorney who “only” hits singles and doubles for the duration of their career is oftentimes going to be fine.


I sent you a couple of headlines before our call because it is a CC filing time end of the quarter and general counsels at large companies or public companies. Their comp gets reported. There were a couple in Law 360 last week or the week before that I thought would be a good entry point for us. The UberGC took a huge hit from $10.6 million to $10.4 million. I don’t know how we managed to survive that $200,000 cut, but the reason was that those stock awards took a dive from the prior year. Maybe you could talk a little bit about like thinking about stock awards as part of your compensation package. How can that value fluctuate?


Stock incentives are typically granted annually. If you’re considering a new position with a different company, oftentimes you’re involved in negotiations for the initial employment contract. The cash component and perhaps the stock incentive component as well. Going forward though, particularly for high performers and those that are in the C-suite, which I recognize by definition typically means a super high performer.


Those grants don’t stop from day one. You typically get additional grants thereafter. Depending on what types of grants they are, in other words, what type of incentive. Whether they’re options or restricted shares. We can get into some of those details however you so prefer. Those can vary from year to year as to what’s vesting. Typically, what we see on our end working with these types of individuals is the taxable income that ultimately needs to be reported. It can vary based on the price of the stock. It also varies based on how many incentives are vesting in any given year.


Let’s dig into that a little bit. Let’s break it down because you talked about options and restricted shares. Let’s do each of those and then talk about how timing seems to play a role here. What’s that worth options? What are those? How do they work?


I would argue options are the more fun. They’re a little bit higher risk type of stock incentive because they can end up being worth nothing. There’s some leverage, as I like to this it, embedded within them. They can also end up being worth a lot if you’re in the right company at the right time. I talked earlier about perhaps an overall comp package being maybe 75% cash, base, or bonus 25% stock incentive.


Once you start looking at that 25% specifically, in other words, the stock incentive component of the overall comp. That can vary wildly as to what types of incentives are being offered by any given company. Oftentimes, you might see options be more common with smaller startup-type companies. As companies mature, you may start to see more restricted shares being offered.


There are other plans like stock appreciation that are a hybrid of the two. Even some performance units could be awarded that fluctuate based on the metrics defined by the company. It’s not an incentive plan but with the most mature companies. Some of those will offer what are called employee stock purchase plans as well, where you can buy in at a discount. Anybody could do that, whether you’re a high performer getting stock incentives or not. For some of our clients, not all, but some, may have a choice in any given year for their incentive grant. I’ll throw out a hypothetical number.

The Legal Department | Eric Clark | Incentive Compensation
Incentive Compensation: The most mature companies will sometimes offer Employee Stock Purchase Plans.


Let’s say any given company is willing to grant a high-performing employee $100,000 worth of stock incentives that may comprise an overall comp plan of $400,000. The $300,000 is the cash. Now we’re talking about the incentive part. They may have a choice depending on the company. Do you prefer to take those as options or appreciation rights which are similar? Do you want to take them as restricted shares or do you want to change in any given year relative to the prior ratio of those two?


Let’s talk about how would somebody evaluate that question and opportunity.


Typically, because the options are a little higher risk, in other words, there’s no guarantee they’ll materialize into anything. Whereas restricted shares, you get the actual quantity of shares that are granted to you. It’s to the date in the future. In other words, that’s why they call them restricted shares. They will not vest until oftentimes three or maybe four years into the future. At that point, once they vest, now they will fluctuate in value inevitably over that time period. When they vest, net of whatever tax withholding, you have associated with them. You get to keep those shares. They’re yours.


What if the price tanks? What if you get restricted shares and it’s $100 a share and once they vest, it’s down to $30 a share?


Fair point. You just lost 70% of your compensation associated with that. My point is that you still get the remaining 30% of the value that’s there, whereas with the options, it’s the exact same scenario.


Let’s talk about what an option is.


With the options, if the exact same scenario played out, you’re almost certainly left with nothing. Options, when they’re granted, they have what’s called a strike price on them, which should be very close to the market value at the time of grant. Let’s say hypothetically that a company issues a grant of stock options and the strike price is $9 a share.


Which means I can buy it or I can redeem it when it’s at $9 a share, or what does that mean?


That is correct. That means you can redeem it and pay $9 per share at some point in the future after it vests. You can’t do anything until it vests, but once it vests, then you have this period before it expires, which we can talk about what that means as well. You have this period between vesting and expiration where you can go out and pay $9 a share for those options.


Even if they’re worth $100.


That is correct.


You’re buying potentially below market.


Sometimes it could be significantly below market. To be fair, sometimes as a near example, if the market price has dropped to $3 a share, you have no value whatsoever. Obviously, you’re not going to go out on the open market and exercise that option.


What you thought was comp evaporated. I understand the comp.


Let’s say a common offer from an employer might be back to that $100,000 example. You might be able to receive half of your $100,000 economic value in stock incentives as options and the other half as restricted shares. What’s funny is that you’re going to get more options from a quantity perspective than you will restrict shares.


Do you mean the employer will probably offer you more?


Correct. If you’re splitting the economic value 50/50 between the two. You might get $1,000. restricted shares, but 2,000 options.


Is it because of the risk involved?


That is correct. Even though the economic value associated with them is roughly 50/50 over time.


As you said when you started off, this is all a risk-tolerance exercise.


It is. Sometimes it’s a little bit of a market timing exercise as well. If you’re in a good company that happens to be depressed in the short run for whatever reason. You might choose to receive your grant being more options than restricted shares. Conversely, if it’s at an all-time high and you’re trying to figure out why. You might want to take more restricted shares a little bit more of the “guaranteed benefit.” Now, that as well can fluctuate, but at least you’re guaranteed something and invested unless the company goes bankrupt.


Stock Appreciation Rights


What are stock appreciation rights?


I describe them as a hybrid between options and restricted shares. With true options, they’re granted in two different types. They’re either called incentives stock options in ISOs or they are non-qualified stock options NQSOs. Many years ago, it was exceedingly common to have options granted as the incentive type. If you happen to be at a company that grants options that way, you’ve got some massive tax planning opportunities around those.

Stock Appreciation Rights is a hybrid between options and restricted shares. Share on X

I’ll be clear here, I’m not a tax professional but we know enough about this to be dangerous and collaborate a lot with CPAs and enrolled agents. If you happen to have ISOs, if you so choose, exercise them. In other words, pay the strike price value but not sell them. If you hold them for the appropriate period of time, you can convert what would otherwise be ordinary income to long-term capital gains, which is a massive benefit in a high-fund company. The risk there is that maybe you’re in a dog of a company and that stop loss that was basically built in by not exercising is now gone. You’ve got the full exposure to the downside.


What is an ISO then? Is it a specific way they’ve designed the option or is it like an IRS request? How would somebody know if they have an ISO or NQSO?


It would very clearly state that in their grant award details, which would be on the administrator’s website for that plan. I don’t pretend to know what would motivate any given company to issue an ISO versus a non-qual. All I know as an individual financial planner or a financial planner for individuals is that rarely anymore do you see incentive options.


Most of what I see are non-qualified options. They still have the leverage embedded in them, but they don’t have the tax planning opportunity. In other words, if you were to ever exercise and sell a non-qualified option, it’s going to be ordinary income on that net equity whenever you do it. Back to your question about what stock appreciation rights are, they’re basically non-qualified stock options that have vesting dates as restricted shares do. The tax treatment is pretty much the same. A lot of times, you’ll see stock appreciation rights offered in lieu of stock options.

The Legal Department | Eric Clark | Incentive Compensation
Incentive Compensation: Stock Appreciation Rights are non-qualified stock options.


I’ve only worked at nonprofits and that’s probably because as you’re hearing, I’m pretty risk-averse financially. I should say I am the economic engine of the Bratchers. I feel like I need to have a stable income for us so everyone eats. I don’t have a lot of familiarity with these different vehicles, but it strikes me if I were to be exploring a role at a company that had plans like this. Having both a financial planner and a tax planner on your bench would be an important thing to have. This seems like it’s very complicated and also to think about it as part of all of your assets because you’re not going to get those. Those restricted shares and options are comp at some point in the future, maybe.


You would need a planner and a tax professional. The planners, in my opinion, are the good ones. They almost serve as a financial quarterback. I’m not saying a good CPA couldn’t, but typically CPAs that serve our clients. They’re looking how I would describe it in a rear-view mirror. They’re accounting for what happened.

The Legal Department | Eric Clark | Incentive Compensation
Incentive Compensation: You would need a planner and tax professional.


Some will do a little bit of forward-looking tax planning but most of it’s accounting for what happened. Whereas, the planner’s role is to look through the windshield. In other words, keep track of when things are going to vest or when things might expire. The accountant’s job is to account for what happened. The good ones can be exceedingly valued because if you’ve got these types of awards as part of your overall compensation.


Part of it flows through your W-2, and part of it flows through a 1099(b) which is when you buy and sell stock. Keeping track of the cost basis for what flows through your 1099(b). Some of which may have flown through your W-2 and overlaying those documents. For most CPAs, they do this regularly. It’s not horribly difficult to do, but there are a lot of bright people that this can confuse quickly.


I’m sure. That’s one of the things we spoke about previously. I’m going to call it financial hygiene like being organized and having a sense of what the assets you have are and how to keep track when you have this incentive. We’re talking about incentive or maybe I’d call it even contingent comp. Who knows it could be?


I would even interject here because I feel like you’re incorrect, by the way, referring to this as part of an overall comp plan. I would argue that we see clients not give themselves enough credit for the material value that’s oftentimes embedded in this part of their compensation. If I’m building a financial plan for any given client, part of what we make assumptions around are how much they’re saving. Intuitively for most people as well, how much am I putting into my 401(k)? Am I getting a company batch? Am I may be doing some non-qualified savings into a brokerage account?


Those are the most common ways. What we would argue should be included in that savings rate for high performers that are getting material grants of stock incentives are these grants. You’re talking about it as compensation, which technically it is, but it can be highly variable from year to year. If you don’t view these as a variable cash compensation equivalent. In other words, you’re not clamoring for them to vest so you can immediately sell them and take the cash then incorporate it into your budget.


If you’re not thinking of them that way, which most of our clients don’t because we encourage them not to. It becomes effective savings into your long-term plan. All of a sudden, if you’re saving 401(k) brokers. Let’s say it’s $100,000 a year and you’re getting another $100,000 a year and incentive grants on top of that. You’re now saving twice as much into your overall long-term financial plan as you perhaps thought you were.


Again, maybe this is personal, but I do think that there is a tendency to set it and forget it, “I got this stock.” I even have a friend who’s worked at several public companies and is at a startup now. They are like, “I’ve got some options coming due and we might do blah, blah, blah.” It always sounds more like found money as opposed to something they were thinking about deliberately or as you were saying as part of the larger financial plan.


That’s where it gets fun for us. A lot of clients have these types of compensation plans, and I’m sure many of your readers do as well. Ultimately, what you’re going to discover is that you’ve got a hodgepodge of a variety of different stock incentives. Some are options and some are restricted shares. Maybe you’ve participated in the stock purchase plan. Maybe all of a sudden you look up and you’ve got a million dollars in your company stock. Maybe your overall balance sheet is $2 million or $3 million.


You’re talking about a big relative portion of your overall network, which again, in my world goes back, is “risky business.” If you’re in the right place at the right time, that risk can result in some material reward. There’s this balancing act. If all of a sudden, your stock incentives comprise a third or maybe even half of your overall network. Even if you’re in a blue-chip company that’s super mature, that by definition means you’re taking a lot of risk.


It doesn’t mean you need to immediately diversify but on everything else that you’re doing with your overall investment allocation. Perhaps you intentionally take less /risk on that side. Systematically look to diversify from your concentrated position perhaps as you’re simultaneously receiving new grants. That happens a lot with our clients. Maybe they’ve been with the same company for ten years and their stock incentives comprise a material portion of their overall balance sheet.

Look to diversify from your concentrated position as you simultaneously receive new grants. Share on X

You’re looking to roll off some incentives while you’re simultaneously getting new ones granted to you such that you’re not necessarily reducing the exposure. You’re making sure it doesn’t continue to balloon. You’re left with choices. Do you exercise and sell some options that are available to you? Do you sell some now unrestricted shares because they’ve vested? Do you sell some of your stock purchase plan shares?


Marinate The Stock Options


That gets fun for us and this is what most people don’t realize. Usually when you’ve got those types of decisions to make and our estimation, again, unless you’re in a dog of a company. You want to let those stock options marinate for as long as possible. In other words, don’t exercise and sell them as soon as they’re available to your investing. Let them marinate oftentimes closer to the expiration date and use that leverage that’s embedded in them to your advantage.


Let me give you a mathematical example. We talked about that $9 strike price on an option. Let’s say investing. The company stock is now trading at $10 instead of $9. You don’t immediately exercise. All of a sudden, you look up a year later and now it’s up to $11. If you just owned the shares outright going from $10 to $11, you would get a 10% rate of return. The beauty of the options is you didn’t have any equity in your options until they got above $9 a share.


If you’re planning to hold some company stock regardless. Why not hold it in the options? From $10 to $11, you get your equity starting at $9. From $10 to $11, your rate of return on your equity was 100%. It can start to compound in a very material way. Not always, but most of the time, we would argue if you’ve been with a company for a while.


You’ve built up a big concentrated position in company stock. You’re looking for whatever reason to maybe diversify a portion of it. Very rarely do we recommend the options are considered until they get closer to the expiration date because you probably have some unrestricted shares that don’t have the same leverage and benefit in them. They don’t have an effective stock loss built in. Take those off the table.


I do think though and you’ve referenced it a couple of times that it depends on the company and how you feel like it has gas in the tank. Is it a growth organization? I don’t know if the financial planner helps you with that. Hopefully, you’re picking a job for the right reason that you think it’s a place where it aligns with your values and you feel like you can make an impact. There’s a juicy compensation package and there’s upside. You hope that you make it for the right reasons but those options sound great if I’m going to go from $9 to $11.


Agreed. As financial planners, we would have a role in helping any given client evaluate opportunities like that. There’s only so much you can do to develop a level of certainty. As I said earlier, it’s sometimes it’s just luck.


We talked about that.


Especially if you’re evaluating a startup. Is the startup being founded by someone who’s done it before? It doesn’t guarantee success, but perhaps, there’s a higher likelihood of it. If they’ve been through it once before, they probably have a better idea of what they need to do to position that company for IPO or acquisition. I’m not saying someone who’s founding their first company couldn’t be successful at it. Those who’ve maybe done it a time or two before. If I were evaluating that as a career option, I would give it a heavier weight toward my acceptance than I would maybe one who’s trying it for the first time.


For sure. Again, I have another colleague who left the very established company to go to a company that wasn’t yet public but was a subsidiary of a very well-known major tech company. It looked shiny and there were a lot of incentives and big stock that was put forward. It doesn’t look like it’s a real thing. This goes back to our original conversation about risk. What I’m hearing is that to evaluate all of these different vehicles in the context of your larger plan and your risk tolerance.


 In your example you gave there and again, sometimes this goes back to lawyers and even accountants. I’ve got an accounting degree. That’s how I started. I put myself in this category as well. Sometimes we’re almost too conservative and that can mean you maybe don’t consider risky career opportunities that may have a bunch of upside. It may also mean that we stay in the same place for longer than most other people would.


It feels more comfortable to us. I would argue that if you’ve chosen to take a risk like this friend of yours you described. You also probably need to be a little more quick to cut bait once you realize it’s not materializing anywhere close to what may have been forecasted. You decide, do you take another swing at the fences or do you tone it down for the next phase of your career?

The Legal Department | Eric Clark | Incentive Compensation
Incentive Compensation: If you’ve chosen to take a risk, you need to be a little quicker to cut bait once you realize it’s not materializing any work clothes to what may have been forecasted.


That’s good advice. I maybe overused this idiom a little bit but don’t set it and forget it. Don’t walk through. Sleepwalk through your career and think, “I’ve always done this or whatnot.” Can I take us in a little different direction? I’m personally not at a startup. I don’t know if I’d ever be up for that. Maybe or maybe not, but I do and work with your firm.


The question that I always talk with Lauren Cindy about is retirement. What does retirement look like? They ask me and I have no idea how to answer this question so I’m asking you. How much money do you think you’re going to need in retirement? I honestly don’t know how to approach the question because am I going to be living here? Where are my kids going to be? Are they going to move back to the Midwest? Which I think is a hard no, by the way. Are they going to go to the East Coast because they’ve never grown up with snow? Is my husband and I going to have health problems? I can’t even get my mind around how much I might need, so then I am a squirrel. I want to save it all and be super conservative.


Financial Planning


I understand your frustration perhaps with not being able to specifically quantify or even think through how to quantify the answer to their question. I would respond with financial planning. I like to describe it as it’s a variety of shades of gray. Very rarely is anything Black or White. I told you I’ve got an accounting background. A lot of what I help our clients within our firm is tax planning considerations. One of the most common ones is, do I convert my traditional IRA to a Roth now or later?


It’s a similar issue that they have thinking through that typically because it’s like, I can tell you what the tax rates are now, but aren’t they going to go up significantly in the future? It’s similar to what you described. Am I going to continue living where I am now? Where will my kids be? How much might they need me to continue to subsidize them assuming I’m even willing to do it?


That’s not happening in the Bratcher house.


That’s not my call to make as a financial planner. That’s yours. What I typically like to distill decisions like this down to. Whether it’s tax planning or retirement planning like you described, don’t allow yourself to think too much about the what-ifs. Think as clearly as you can about what you know currently. In other words, what is required for you to maintain your current standard of living? Let’s assume that that’s what will also be required in the future.


Now, we’ll put a cost of living adjustment on that. Who cares ten years from now if less of it’s going towards maintaining your home as an example and more of it’s going towards travel? That’s been our experience. The lifestyle creep that inevitably happens and has probably happened as you make more money. It’s very common but when you’re thinking of answering the question that they pose to you, which helps them tell you how much risk you need to take, by the way. Keep it simple and quantify it very specifically based on what’s required to maintain your current standard of living.

The lifestyle creep that inevitably happens as you make more is very common. Share on X

The only thing you might want to strip out of that is your savings rate. When you’re in retirement, you’re not going to need to save anymore. Other than that, keep it all in there. You’re still going to have to pay some taxes. As I said, most of our clients, they’re typically spending a comparable amount. It’s just maybe the expenditures.


On different things.


Even if you moved to the Midwest and had lower housing costs. You’d probably find some other way to allocate that part.


It’d be all airfare to get out of that crappy weather. It’s so funny you say that because we do scenario plans and they show me, “If you moved to a lower-cost market, this is what that would look like.” I’ve started to like to try to get the Bratchers on board with moving back to Kansas City and I haven’t recruited anyone yet, because it is. Eric, thank you so much. This has been a great conversation and I’ve learned a lot. I always end each conversation with the same question and I think given your baseball experience, I hope this is a softball for you. What is your walk-up song or what I call the pump-up song?


I was in high school back in the ‘90s, and where I grew up, we were all into country music. I’m a big Alabama fan. I don’t know if you remember that. One of my favorite songs was I’m in a Hurry. I’m in a hurry to get things done. We can get a little clip of that to pump in there while I’m walking up to the play. That’d probably be my walk-up song.


What about Cheap Seats if we’re on Alabama?


There are a lot of good ones.


Thank you so much. I appreciate it. I’m going to pull up my Alabama on the way in.


There you go. It’ll get you going. I appreciate the opportunity to speak to your audience. Hopefully, it’s been at least a little bit of a help.


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