💰 Salary is just the start: financial factors beyond base compensation

☕ Good morning!

Is the glitz and glam of the modern compensation package gold or glitter?

After analyzing thousands of high-earner compensation packages, it’s become evident why discerning between what provides true value and a superficial attraction has become so tricky. 

Perks like gourmet lunches, in-house massage therapists, nap pods, and nitro cold brew are nice, but they’re far from something that’ll help you build multigenerational wealth. 

This week, we’re discussing the meat and potatoes—the crucial financial factors to consider beyond salary when evaluating your current and future compensation packages. 

A great compensation package's four core financial components address four key needs. 

💰Pay you what you’re worth through salary and bonuses

📈Give you skin in the game through equity and stock incentive plans

🗝️Protects and fast-tracks your future through retirement plans 

❤️Protects your present through health and other insurance

Of course, you have various quality-of-life improvements (arguably necessities in this day and age), like as remote work options, vacation policies, and parental leave, but let’s focus on the longer-tail life improvements for now. 

🎁 Bonuses and Incentives– More Than Just Extra Cash

Bonuses vary widely by industry and role, often tied to performance metrics. 

Investment bankers, hedge fund managers, and private equity analysts often receive substantial performance bonuses tied to individual achievements, fund performance, or overall profitability, sometimes equaling or surpassing their base salaries.

Software development or cybersecurity bonuses may be tied to project completion, product launches, or achieving specific performance metrics.

Sales professionals frequently receive bonuses based on meeting or exceeding sales targets.

They can be a significant part of your compensation, especially in high-performance roles like sales or finance.

💪 Performance bonuses are tied to individual or company performance; these can boost your income significantly but come with variability.

📝Signing bonuses are one-time payments that can offset lost benefits from a previous employer or serve as an incentive to join a new company.

🪢Retention bonuses are commonly used during mergers or acquisitions; these encourage key employees to stay during transitions.

If your bonus is a substantial part of your compensation, evaluate the company’s history of bonus payouts to gauge the likelihood and consistency of receiving these bonuses.

💼 Building Wealth Beyond Your Paycheck with Equity Compensation

Equity compensation can be the golden ticket to the Willy Wonka factory, especially in fast-growing industries where companies offer stock options, RSUs, and ESPPs. 

For example, a mid-level employee at NVIDIA, not an engineer, accumulated $62 million through the company's Employee Stock Purchase Plan (ESPP), maximizing their ESPP contributions over 18 years. This wizard held onto these shares as NVIDIA’s value skyrocketed. 

Granted, not every company is NVIDIA, but the idea is that equity comp gives you a slice of the upside, potentially propelling you to wealth that would otherwise take multiple generations of toil to build.

Some sort of equity or stock incentive plan is common practice these days: Starbucks, for example, offers its employees, including baristas and store managers, the opportunity to own company stock through its Bean Stock program.

📈Stock options give you the right to buy company stock at a fixed price– pay attention to the vesting schedule and potential tax implications.

📈RSUs provide more certainty since they don't require upfront payment but are taxed as income once vested.

📈ESPPs are often offered at a discount and can be lucrative in their own right. However, understanding the tax implications, including the difference between ordinary income and capital gains, is essential.

Each equity and stock type has different tax implications, and having a focused conversation on this point with a financial planner will help you keep more of what you’re earning rather than paying it in tax. 

🏦 Planning with Retirement Plans

Retirement plans are more than just a 401(k). 

Look closely at employer matching contributions and additional benefits like Roth 401(k) options.

🎉 Understand the 401(k) match percentage and vesting schedule; a typical match might be 50% of employee contributions up to 6% of salary.

Also, check the details of the offer.

Do they allow for after-tax contributions? If so, you can do a Mega Backdoor Roth strategy and legally funnel more money beyond standard limits into a powerful after-tax Roth account. 

What are the investment options and fees? A diverse range of low-cost funds can reduce fees and simplify investment decisions.

🏥Planning for Today: The Benefits Package

Corporate benefits packages are often great ways to get coverage through different types of insurance at discounted group rates, making them more affordable than individual policies.

Consider the full spectrum of benefits that protect your downside (and out-of-pocket expenses) today, including health, dental, vision, life, and disability insurance.

Life and disability insurance are typically offered within a broader benefits package; employers commonly cover a partial amount, and employees can increase coverage while paying the difference.  

The diamond in the rough is the offering of Health Savings Accounts, which provide triple tax advantages. These accounts allow employees to save pre-tax dollars for medical expenses. Contributions, earnings, and withdrawals for qualified expenses are all tax-free.

🧩 Making Cents of Financial Factors Beyond Salary

The actual value of a compensation package is analyzing the financial bedrock that supports long-term wealth. 

Specifically, look into the biggest movers, such as equity compensation and bonus triggers, if any are offered. 

Online resources like Carta’s Equity 101 Course (complimentary) can build basic equity literacy. However, chatting with a financial planner can help you architect a future where you pay the lowest possible tax (sometimes zero!) on your biggest windfalls. 

While perks like gourmet lunches and office massages may offer immediate comfort, the main course—bonuses, equity, retirement plans, and comprehensive benefits—will make the most significant difference in your professional career.

Until next week!

Dan from Tailored Cents

P.S. Follow me on LinkedIn for more tax gems to save you money.