The $3 Million Career Move: What Executives Often Overlook
A $3 million compensation package sounds pretty compelling. Before celebrating the a 7-figure package, I would want to know what the executive is walking away from.
I have worked with executives navigating complex compensation decisions, and one thing is clear: the headline number rarely tells the whole story.
Consider a senior executive leaving for a new opportunity. There is a substantial signing bonus, a generous equity package, and the potential for significant performance-based compensation.
Sounds great. But I have questions.
What happens to the unvested equity at the current company? Are there vested stock options that need to be exercised before they expire? Is the signing bonus really replacing what the executive is forfeiting, particularly on an after-tax basis? Are you going to forgo an annual bonus at your current company?
What happens when a signing bonus, stock-option exercise, and compensation from two employers all fall within the same tax year?
Are you paying attention to the withholdings for these significant events?
For someone already in the highest tax bracket, every additional dollar can carry a significant tax cost. It is not unusual for me to see withholdings on a large bonus fall well short of the final liability. Anecdotally, I have a client whose W2 income is consistently north of $1M. On a $450,000 STIP, the executive’s company withheld 24% for the Federal Government and withheld 1.45% for Medicare. In this scenario, the withholding should have been 37% for the Federal Government and 2.35% Medicare. Between Federal Government taxes and Medicare, the company was short approximately $62,550.
My work with executives often brings together stock-option exercise strategies, concentrated equity positions, investment decisions, and tax planning. These interconnected choices should not be made in isolation, especially under the pressure of a departure deadline.
Look Beyond the Offer
Executives understandably focus on securing the strongest possible offer. But they may spend less time considering how that offer fits with the wealth they have already built.
That is why the conversation should broaden.
Before signing, I would want to assess the compensation being forfeited, the tax consequences of leaving, the liquidity of the new equity, and any added concentration risk.
A $3 million offer is not necessarily a $3 million financial opportunity.
The headline number matters. What you keep and what you give up matters more.
Meet the Author
Rachel DeCosta
Wealth Advisor
SAX Wealth Advisors
Disclosure:
This article is for educational and informational purposes only. It is general in nature and is not tax, legal, accounting or investment advice, or a recommendation to take or refrain from any action. Withholding and tax liability depend on individual facts, employer payroll practices and the tax year, so please consult your own qualified tax professional or attorney.