By: AnnaMarie Mock, CFP®
Congratulations! You are a pharmaceutical professional or executive that has received a well-deserved promotion but are unsure of what that means for your total compensation.
Types of Compensation
There are three main types of compensation, and it's essential to understand the type, timing, and amount of each to have a clear picture of your financial plan.
Cash Compensation:
This includes your base salary and cash bonus. Bonuses are short-term incentives because they can depend on company profits or are merit-based. Bonus percentages can vary widely depending on the industry and job level. Because the bonus amount can change, this is discretionary income, while salary is fixed income. Both are taxed as ordinary income.
Understanding your cash flow is a foundational concept for the planning process because this is key to creating a spending plan for your lifestyle and goals.
A spending plan is a blueprint for your money and gives you an actionable guideline to spend intentionally without guilt. A spending plan is not a strict budget. We get it; life happens! There will be months with higher outlays than usual, and the objective is to be prepared for those unexpected months while having sustainable money management skills. Mindful spending is awareness of how you think, feel, and act with money.
Equity Compensation:
Equity compensation is simply non-cash pay, encompassing stock options and grants available to employees. Options and grants are forms of long-term incentive compensation because they typically vest over three or more years. The employee may receive the options at the grant, but until the options vest, there is no tangible value.
An employee's decisions and actions can directly impact the performance award; in other words, your 'sweat equity' increases your merit-based milestones and the company's performance, which presumably may lead to a higher market price.
Restricted Stock Units (RSU): An employee gets shares of company stock on a future date (vest date) where the vested dollar amount is considered ordinary income that year.
Non-Qualified Stock Option (NSO): An employee has the right to buy (exercise) some shares at a preset price (grant price) when the units vest. At vesting, the employee will pay ordinary income tax on the difference between the grant and exercise prices.
Incentive Stock Options (ISO): An employee has the right to buy (exercise) some shares at a preset price (grant price). There are no ordinary tax implications for exercising but may trigger AMT (alternative minimum tax). Once exercised, it can either be sold immediately (disqualifying event) or held for a set period (qualifying event). Each event has different tax implications associated with it.
Stock options and grants can be a way to reduce the cash compensation that companies pay directly to their employees while also affixing part of the compensation to the company's growth.
The employee should incorporate non-cash compensation into the broader financial planning picture by identifying a purpose for the stock incentive proceeds.
Making decisions about your compensation plan concerning your overall financial picture is complicated, so seek impartial advice on managing the different types of stock incentives and how they impact the larger goal.
Benefits:
Non-monetary compensation is simply compensation rewarded in a non-cash form and can be a treasured part of your total compensation package. These benefits can significantly reduce household expenses or offer tax deferrals.
Non-compensation benefits include insurance (e.g., medical, disability, life), retirement plans, and fringe benefits (e.g., tuition reimbursements, pet insurance, gym memberships). It can also include paid time off (PTO), career development opportunities, and work-life benefits/ flex-time. All Benefits deserve careful consideration as part of your financial plan and current lifestyle structure.
If you have any questions regarding your compensation packages, contact the HIGHLAND team.
AnnaMarie Mock is a CERTIFIED FINANCIAL PLANNER™ and Partner at HIGHLAND Financial Advisors, LLC, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, employer retirement planning, and investment management. AnnaMarie graduated from Montclair State University with a degree in finance and management and successfully passed the CFP® national exam in 2016. She has been working at Highland Financial Advisors since 2013 as a fee-only, fiduciary Wealth Advisor and is a member of NAPFA.