Is the Grass Really Greener? by Nate Eads, CFP®Submitted by Moller Financial Services on June 24th, 2019
Is The Grass Really Greener?
By Nate Eads, CFP®
Currently, a lot of financial news is detailing how companies are finding it difficult to procure qualified candidates and that it is a great job market for those seeking work. The allure of higher pay may draw people to start looking elsewhere for employment. However, there are many considerations beyond a bigger salary when looking to make a change.
For most, cash compensation is the first consideration when looking at a new position. Cash compensation is typically split between two components; base pay (salary or hourly) and bonus pay. If a large portion of compensation is dependent on bonus pay, it is important to understand the details of the bonus pay structure. Is bonus pay dependent upon your individual performance, or is it tied more to group or company performance? If geared more towards individual performance, are the performance measures attainable and what has been the history of prior employees receiving their bonuses? If tied more to group performance, could your compensation be lackluster even if you are performing at a high level due to performance measures that are beyond your control? Another consideration is managing your personal cash flow if your cash compensation varies week-to-week or month-to-month.
For public companies, equity/stock compensation is often a significant portion of overall pay, especially when it comes to upper management or executive positions. Often, bonuses are paid out in the form of Restricted Stock Units (RSUs) or stock options rather than directly in cash. Typically, RSU or option grants are tied to a vesting schedule, meaning the employee must remain with the company for a certain period in order to “cash in” on the grants. Usually this period is 3 – 5 years. The RSUs or options then allow the employee to purchase shares of the company stock, usually without having to make a cash outlay. Obviously, the value of these grants is impacted by the success of the company and its stock price. When the company’s stock price goes up, it can often result in significant additional compensation for the employee.
Another method of obtaining company stock is through an Employee Stock Purchase Plan (ESPP). An ESPP allows employees to use their own money to purchase shares of the company at a discount, often 15%- 25%. Again, if the company is performing well and the stock price is rising, this can be of significant value.
It is important, however, to understand the tax treatments of different types of compensation, as RSUs, qualified options, non-qualified options, and ESPPs are taxed in different manners. It is also important to manage employee stock holdings in light of the employee’s overall investment portfolio and financial plan so that they don’t end up having too concentrated a position in the same company that is also responsible for their livelihood.
Smaller private companies may also offer equity compensation to their employees. One method is through an Employee Stock Ownership Program (ESOP). ESOPs allow employees to own stock in their company without having to purchase shares. Again, depending on company profitability and the amount of shares an employee receives, this can end up being a nice addition to cash compensation. However, the shares in an ESOP are not readily available to the employee so they typically don’t benefit from owning the shares until they retire or leave the company.
Another form of compensation for private companies is for employees to receive shares of ownership, often with the hope that the company will at some point go public. While ownership of the shares may not result in a significant amount of current income and typically have restrictions around the ability to liquidate the shares for cash, a windfall may be created if the company is bought or goes public and owners are paid out for their shares.
The type and structure of an employer’s retirement plan can also have a big impact on the overall value of an employee’s compensation. For starters, if a new employer doesn’t have a retirement plan then it is up to the employee to save for retirement on their own, a task many find difficult to do.
Assuming a retirement plan is offered, it is imperative to understand the features of the plan when determining an overall compensation package. What are the contribution limits to the plan for employees? Does the employer offer matching contributions and, if so, to what extent? Some employers may also make profit sharing contributions to retirement plans, which can make these plans much more valuable than plans that don’t offer profit sharing.
While not as prevalent as they were decades ago, some employers still offer defined benefit plans, commonly called pensions. These types of plans are funded by the employer and provide an income stream for retirees. However, the amount of the pension is often determined by the length of service and level of compensation. In order to receive a significant pension, employees often must work for the same company for many years or even decades. Also, while there are some guarantees around defined benefit plans, there is a risk that if the company falls on financial difficulty the benefits may not be what were anticipated.
Healthcare and Other Benefits
For younger employees without dependents, healthcare plans may not be a significant part of compensation, but for an employee with a family the features of a company-provided healthcare plan may comprise tens of thousands of dollars per year. Who is responsible for paying the healthcare premiums, what are the plan deductibles, and what is the maximum out-of-pocket expense make a huge difference in the value of the plan. Another sometimes overlooked consideration is the plan’s network and structure. While a new employer’s plan may look to be financially similar, if it’s structured as a HMO and/or has a different network of physicians and hospitals, the plan’s overall value may be significantly less if these features are important to the employee.
Health Savings Accounts (HSAs) are becoming more common in health care plans as well. While they are tied to high-deductible health insurance plans, meaning more out-of-pocket expenses may be incurred when care is needed, for those who don’t have much in the way of medical costs a HSA can be of significant value as another tax-deferred savings vehicle.
Other benefits such as Flexible Spending Accounts, travel reimbursement, health club memberships, and even employer-provided child care are other things to consider when comparing job offers.
While not quite as easy to assign a dollar value, how a company treats its employee’s time away from the office is very important. For busy families, a flexible work schedule or the ability to work from home may be of significant value. What is expected from employees when they are not officially “on the clock” can vary drastically. In today’s world of smartphones, email, and text messaging, does the employer expect everyone to be available even when the workday is done?
Of course, the amount of vacation days and sick days is a significant benefit, but getting a sense of how workload is structured when out of the office is important as well. When on vacation, are employees still expected to be available or does the company have systems in place to truly give the employee a break from work? Also, are there systems in place so an employee doesn’t return from vacation only to have to put in a significant amount of extra time at the office just to get caught up?
While the appeal of a bigger paycheck can be an enticing reason to jump the fence to a new employer, many other factors need to be considered to tell if the grass really is greener on the other side.