The Ins and Outs of Chevron’s Long-Term Incentive Plans (LTIPs)
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Chevron’s Long-Term Incentive Plans (LTIPs) are a key component of executive and senior management compensation, aimed at aligning leadership’s interests with shareholders and rewarding sustained contributions to company performance. This compensation package begins for employees who are at PSG 26 and above.
Since 2017, Chevron’s LTIP package has been built around three award types and the amount granted varies from year to year. The three components are: Restricted Stock Units (RSUs), Performance Shares, and Stock Options or Stock Appreciation Rights (SARs). Each component has its own unique vesting schedule, payout conditions, and tax implications. Understanding these nuances and coordinating when to exercise each grant type is essential for maximizing their value.
1. Restricted Stock Units (RSUs)
RSUs grant employees the right to receive Chevron shares at the end of a specified vesting period, provided certain conditions are met.
- Standard RSU Grants: Generally vest over five years, with payment based on the stock price at vesting.
Termination and Vesting Rules
- If employment ends before January 31 of the year following the grant date, 100% of unvested RSUs are forfeited.
- If employed until at least January 31 of the year following the grant and you are age 65+, have at least 90 points (age + service), or are subject to mandatory retirement, all RSUs vest in full.
- If you are age 60+ or have 75+ points, vesting is prorated based on service completed since grant.
- Employees below age 60 or with fewer than 75 points forfeit all RSUs upon departure.
- Any termination due to misconduct results in forfeiture of all RSUs.
2. Performance Shares
Performance shares reward employees based on Chevron’s performance over a multi-year period, often three years. At the end of this period, the number of shares earned depends on:
- The 20-day average stock price at the end of the performance period.
- An approved performance modifier, which may increase or reduce payouts.
Termination and Vesting Rules mirror those for RSUs, with full vesting for retirement-eligible participants, prorated vesting for mid-career departures, and forfeiture for those below service or age thresholds.
3. Stock Options & SARs
Stock options grant the right to purchase Chevron shares at a fixed “grant price” within a set term, typically 10 years. SARs operate similarly but pay the appreciation in cash or shares without requiring a purchase.
Termination and Vesting Rules
- Full Vesting: Retirement-eligible employees (age 65+, 90 points, or mandatory retirement) have all unvested options/SARs vest immediately, with the right to exercise for the remaining term.
- Prorated Vesting: Employees age 60+ or with 75+ points receive prorated vesting, with the right to exercise vested options for the lesser of five years post-termination or the original term.
- Forfeiture: Employees below these thresholds forfeit unvested options and have 180 days (or the remaining term, if shorter) to exercise vested ones.
- Any termination for misconduct forfeits all outstanding awards.
Managing and Optimizing LTIPs
Additional Tax Strategies
Because vesting is tied to age, service, and calendar-year thresholds—particularly January 31—timing your retirement or job change can dramatically affect your payout. Leaving just days before a key vesting milestone can mean forfeiting significant value.
Diversify Your Holdings
Chevron’s LTIPs can result in a large portion of your wealth being tied to company stock if you also hold ESOP and common stock shares in your Chevron ESIP plan as well. While this shows commitment, it also increases single-stock risk. Considering cashless exercises at the vest date for RSU and PSU shares can allow you to invest the proceeds into other opportunities.
Tax Planning Around LTIPs
Each LTIP component is taxed differently, so thoughtful planning can reduce the tax bite.
Restricted Stock Units (RSUs) & Performance Shares
- Tax Event: At vesting, the value of the shares is taxed as ordinary income.
- Planning Tip for Retirees: For recently retired executives, LTIP vesting counts as ordinary income. This can allow for the individual to potentially make Roth IRA or tax-deductible IRA contributions in retirement if they are under the income phaseout limits.
Stock Options & SARs
- NQSOs: Taxed at exercise on the spread between the grant price and market value. Utilizing a Black-Scholes model can assist an individual with timing on various grants.
- Planning Tip: Spread exercises across tax years to manage income spikes.
Additional Tax Strategies
- Withholding Planning: Chevron will typically withhold shares or cash to cover taxes, but ensure this matches your actual liability and coordinate with your tax professional to avoid underpayment penalties.
- Charitable Giving: Donating appreciated stock can reduce taxable income while meeting philanthropic goals.
- Year-End Coordination: Because January 31st is a critical date, crossing into a new tax year can change timing of income recognition.
Chevron’s LTIPs can be a powerful driver of long-term wealth, but the true benefit lies in how well you navigate the details. Knowing exactly when and how your awards vest, understanding the impact of retirement eligibility, and taking steps to mitigate concentrated stock risk can make the difference between simply receiving shares and strategically turning them into lasting financial security.
If you want to maximize the value of your LTIP awards and integrate them into your broader financial plan, our team at Insight Wealth Strategies can help. Schedule a conversation today to explore strategies tailored to your goals and Chevron’s unique plan structure.
Written by,
Michael Agorastos, CFP®
Michael is a comprehensive, fee-only financial planner who began his financial services career with Insight Wealth Strategies in 2013. His primary areas of expertise cover retirement planning (e.g. cash flow analysis, developing retirement income strategies, stock option planning, corporate benefit analysis, etc.), investment planning, and high-level income tax reduction strategies for individuals and small business owners.
Insight Wealth Strategies, LLC is not affiliated with Chevron.
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Insight Wealth Strategies, LLC (IWS) and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
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