Moving up in your career usually means a pay bump—and sometimes, that promotion includes a more complex compensation structure.
Stock options, bonuses, equity, and variable compensation plans are just a few ways your paycheck can start to get complicated. These forms of compensation are especially common in fields like tech and finance, and in executive roles.
A salary rounded out with stocks, bonuses and profit sharing presents a powerful opportunity to build wealth, as long as you manage your money strategically and stay aware of tax implications and potential risks.
Here’s what to know when negotiating your compensation package and making the most of your equity.
Components of a compensation plan
The specifics of your compensation will vary based on your individual role, industry, and employer (i.e., large public corporation, private corporation, startup, etc.)
A typical compensation plan may include any of the following:
- Base salary
In most roles, your base salary may be a flat amount that you can count on each year. Some roles also offer a variable salary, which means your salary increases or decreases each year based on your performance and the health of the company. Variable compensation is common in sales roles. - Signing bonus or retention bonus
Some companies pay out a signing bonus for new hires—especially for senior-level employees who may have been poached from another job. A retention bonus is a sum paid to incentivize an employee to stay in their role. - Bonus
A bonus is a percentage of an employee’s base salary, usually paid out in a lump sum. For example, your annual compensation might include your salary plus a bonus worth up to 10% of your salary that you receive once per year. Bonuses are usually tied to how well the company performs—if your company has a lean year, you may get a smaller bonus or no bonus at all. On the other hand, if your company has a strong year, your bonus could pay out higher than expected. In some roles, bonuses are tied to individual performance, such as meeting predetermined sales goal - Profit sharing
This form of compensation is directly linked to the company’s performance. With a profit-sharing model, the company pays out a portion of its profits as a bonus to employees. These payouts may be in the form of cash or stock, and they can be paid out monthly, quarterly, annually or on a different schedule. - Equity
Some larger public companies offer restricted stock units (RSUs); these are stocks that employees are granted after a certain period of time. At private companies and startups, your package may include stock options or incentive stock options (ISOs), which allow you to purchase stock in the company at a discounted rate. - Benefits
Health, dental and vision insurance, subsidized life insurance, and disability insurance are a few benefits to look for in your offer. Ask to see plan details to estimate how much you would pay in monthly premiums and to understand what your coverage would include. - Perks and extras
Compensation isn’t strictly limited to salaries, bonuses, and stocks. Memberships (gyms, clubs, etc.), education stipends, 401(k) matching, flexible work arrangements (hybrid and remote), paid time off, and relocation bonuses are just a few perks that may round out your compensation package.
Understand and optimize non-salary compensation
Unlike a salary that you take home in the form of a regular paycheck, your equity, bonuses, and profit-sharing payouts aren't money in the bank. These forms of compensation can vary from year to year, and equity also comes with some risks: While it has the potential to grow over time, equity—whether in the form of RSUs, ISOs, options or grants—can lose its value if the company doesn’t perform well. There’s always a possibility you’ll never see your equity in the form of cash.
Here are a few tips for optimizing your equity and other non-salary forms of compensation:
- Read the fine print
When do you receive RSUs, and when do they vest? If your compensation includes stocks, does that mean stock grants, which you own right away, or stock options, which give you the right to purchase stocks at a set price in the future? It’s crucial to understand vesting schedules and eligibility guidelines to determine when and how you can cash in on your equity. If you leave the company before your stock grants vest, for example, you’ll be leaving money on the table. - Be aware of trading blackouts
Employees with equity may be subject to blackout periods when they cannot trade company stocks due to their proximity to confidential business information. This can impact your ability to purchase or sell stocks at certain times. - Avoid tax pitfalls
Bonuses, profit shares and stock earnings may be taxed at a different rate than your salary. Work with a trusted financial professional to understand the tax implications of different forms of compensation. - Create a game plan
To turn your company equity into cash, you need a plan. Your strategy could include selling RSUs on a regular basis or exercising stock options by buying shares—and eventually selling them—on a schedule. You should also consider how you'll invest compensation received in a lump sum, like an annual bonus. A financial planner can help you weigh the options and tax implications to create a plan that will maximize your compensation.
Plan for your future
A diversified compensation plan brings many opportunities to build wealth—but it also presents some risks in a dynamic market. As your compensation plan evolves, don’t forget to focus on the fundamentals: Keep saving and budgeting to meet your financial goals.
Ready to make the most of every dollar you earn? A Fulton Private Banker can help you turn today’s compensation into tomorrow’s security.
