Time to Negotiate Your Next Pay Increase? Ask for Stock Instead of More Cash
If there is one thing that workers of all job types across every industry can agree on, it is that they could always benefit from having more money in their paycheck. It does not matter how much a person currently makes or the amount of it they actually spend; there is always room for more.
But, if you are fortunate enough, there comes a point where you are making enough money and the next dollar in salary you are able to command will not be very additive to your overall net worth. Though it may sound counterintuitive, once you reach a certain income threshold, every next dollar earned has a diminishing return. That does not mean that it should not be welcomed with open arms, but by delaying the receipt of that dollar, you are able to unlock more of its value. Ultimately, your concern should be less about how much you make and more about how much you get to keep.
Before you arrange a meeting with your company’s human resources team, take a moment to do some homework. If he or she were to grant your request for a pay increase, what would you do with it? After all, once Uncle Sam gets a hold of it, how much would there be left for you as a reward for your bravery? That is not meant to suggest that you should not ask the question. Instead, ask a better one.
If you serve as a senior manager or executive of a publicly traded company, the two main components of your compensation are likely cash (base salary and bonus) and equity (company stock). The cash component is rather straightforward and is likely taxed as ordinary income at a rate of 35%, 40%, or maybe even 50% depending on the state you live in. However, equity compensation comes in multiple forms and its eventual gains are generally taxed at much lower capital gains rates.
For example, a person could have their sights set on landing a promotion where they would earn an additional $25,000 at their current company. If their employer were to grant the request, the way that $25,000 is received could be critical. On an after-tax basis, that extra $25,000 in the form of company stock is, in fact, worth more than a $25,000 bump in salary.
Assume for a moment that same person is in the 35% marginal income tax bracket living in a state with a 5% income tax rate. That additional $25,000 would suddenly translate to only a $15,000 salary increase. However, if that person were to receive that same $25,000 as restricted stock units (RSUs) with a 6-or-12-month vesting schedule, they would ultimately end up with $25,000 worth of stock, and the option of whether to cash in those shares today or wait and realize any positive growth in the stock before selling it. If they chose to wait, that growth would only be subject to the lower capital gains rate mentioned earlier.
This same notion holds true when it comes to negotiating your compensation package with a new employer as well. Once you reach the pivotal point in your career where your skillset is in high enough demand, employers will negotiate with you knowing that you are likely weighing competing offers. Equity compensation can play a big role in these negotiations.
When leaving one company for another, you might be at risk of losing a bonus payment or equity vesting by leaving too soon. However, it is not uncommon to ask for – and receive – a one-time stock bonus to "make you whole” for those losses. And instead of the requirement to wait until the vesting date to exercise options, you can negotiate the ability to exercise the stock options before vesting (often referred to as an early exercise). So, when considering a new offer, do not let the risk of loss prevent you from exploring just how green the grass might be.
The same way it is important to negotiate the terms of what you will receive the day you begin working for a new company, it is equally important to negotiate your exit before you walk in the door. For instance, after you leave a company, you typically have 90 days to exercise any remaining stock options. However, if you are a competitive hire, you can negotiate a longer period. You may also be able to negotiate either a gross-up to cover the income taxes due at vesting or a special vesting schedule that automatically accelerates upon the completion of specific tasks or milestones. So, the same way you would negotiate the dollar value of a stock grant itself, you should also negotiate its underlying terms.
As a rule of thumb, it is always a good idea to request a copy of the benefits guide from a prospective employer so that you are aware of all of the potential levers that may be pulled to get you to the total compensation figure you desire in the end. It is important to know what other forms of compensation your employer offers in addition to salary or a cash bonus. Whether they offer access to a supplemental executive retirement plan (SERP) or some sort of deferred compensation arrangement, these are all details worth having prior to making any demands since you just might get exactly what you ask for.
Moreover, asking for something other than a salary boost may even increase your chances of hearing ‘yes.’ After all, most employers would prefer to meet your demands for higher compensation by granting you a few additional shares of stock rather than committing to paying you additional dollars long term. One goes directly against top line revenue for the year and the other does not. Thus, when it comes to negotiating for higher pay, many companies tend to be more flexible on the equity side of the total comp equation.
Want more on this topic? Read these:
Your Employer Just Granted You Stock Options. Now What?
How Much is Too Much When It Comes to Owning Stock in the Company You Work For?
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Malcolm Ethridge, CFP® is the Managing Partner of Capital Area Planning Group based in Washington, DC. He is also the Managing Partner of Capital Area Tax Consultants.
Malcolm’s areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits.
Disclosures:
The information provided is for educational and informational purposes only, does not constitute investment advice, and should not be relied upon as such. Be sure to consult with your legal advisors before taking any action that could have tax and legal consequences.
Investments in securities and insurance products are:
NOT FDIC-INSURED | NOT BANK-GUARANTEED | MAY LOSE VALUE