17—Lever #1: Your Income (Part Five—The Other Comp Stuff)
Bonuses, stock grants and options, and other compensation
In the last couple of articles, we’ve focused mainly on salary, which, for the majority of you, will be most of your compensation. But for a fortunate few, there are other comp ”goodies” that you may receive, and it’s a good idea to know a little about them before you do.
You may recall that our Financial Life Equation (FLE) includes lifetime income with the assumption that your year-by-year income will not be static:
Future wealth = Starting wealth + Sum of all income (∑It+n ) – Sum of all taxes – Sum of all giving – Sum of all living expenses + Sum of interest earned – Sum of interest paid, or:
These additional “goodies” are typically one-time events that can affect your total income in any given year. So be careful how you factor them into your stewardship plan: companies giveth and companies taketh away.
I can (almost) remember the first time I was given some ”stock options.” I was not in a mid- or senior-management position, just a first-level IT network planning manager, so it immediately made me feel like a big shot. Don’t only CEOs and other executives get these? What are they anyway? (I was a bank “VP,” but as someone once said, “We have more VPs than we do employees.”)
Well, I soon learned that in some companies, many employees get them; the difference is in HOW MANY and at what price. Once I realized that, I didn’t feel like such a big deal.
And, as I and many others experienced after the 2008 crash, they can quickly go ”underwater,” which is a weird way of saying ”become worthless.” (A year or two after another bank took over the one I worked for, I started getting letters telling me that I could exercise options for a share of stock valued at $43.00 for the option price of $196.00—the option price was initially at around $20.00, as I recall. Uhhhhh. . . NO THANKS!)
I lost a lot of money, at least on paper, but since I hadn’t committed it to anything or “spent it on paper,” it didn’t really hurt me financially. But it hurt my feelings, if you know what I mean, and taught me some valuable lessons about not holding on to things too tightly—easy come, easy go.
A more common form of extra compensation is bonuses and performance incentives. These are usually paid as part of regular taxable income, sometimes at year's end or early in the following year. (Keep an eye on taxes; a bonus can sometimes push you into the next marginal tax bracket—more on that in later articles).
You could get a hiring ”bonus”—a one-time lump sum incentive to accept a company’s offer to come to work for them. That may be the only bonus you ever receive from them, but maybe not.
Some companies pay bonuses, and some don’t. Even those who don’t give them to everyone usually only give them to those over a certain pay grade (and they also tend to be manager/executive types). Highly compensated individual contributors in key positions sometimes get them, too.
Bonuses are usually tied to the company’s overall performance and your performance. So, you could get a bonus one year and not the next. Those who start counting on them (or spending them ahead of time) can be easily disappointed. Remember Clark Griswold in Christmas Vacation?
What should you do with your bonus if you get one? Well, first of all, be grateful. Not everybody gets them, and some never do. Gratitude is in short supply these days.
Once you get over your elation, you’ll have to pay taxes and other withholdings, but after that, you can do a lot with it. I suggest you have a ”generosity budget” (plan) for your total compensation, not just your salary. If you know you are going to get a bonus, you could defer giving out of your regular salary and then use your bonus. The problem is that’s presumptuous—what if the bonus doesn’t come?
You could spend it, and using it to pay off debt is a very good use of the money. And I also think it is okay to use some of it to splurge on something for you and your family, perhaps something you couldn’t afford with your salary. (Don’t do a ”Griswold” and put a down payment on a new swimming pool—at least not before you actually see the money in your check.)
Stock options are a little complex, and you have some important decisions. You also have some interesting options for your options (but that’s not why they call them options), especially in the area of generosity.
In all likelihood, if you’re awarded some, your company will furnish you with a lot of information about stock options and how they work (vesting, exercising, tax implications, etc.), and I would refer you to the articles on the Investopedia site in the resources section below.
I want to focus on how to factor them into your giving plans (and the tax implications of doing so). Similar to bonuses, stock options, when exercised, provide income over and above your regular salary. Even though you still have to pay taxes, that’s pretty cool. Presumably, you earned them, so good for you! But let’s say you want to use them for charitable giving; you have several options.
Let’s say you pledged to your church’s building fund and have struggled to meet your commitment from your regular salary. (Yes, this happens even to the most well-meaning and generous people.) Let’s also assume you have 500 stock options, which have been vested and can be exercised for $25, and the stock is currently at $50. You could exercise the option and purchase $12,500 worth of stock at $6,250, netting you $6,250 (in stock).
You could also sell all the stock, and if the price didn’t change and you didn’t have to pay a commission, you could pocket $6,250 in cash. Whether you’d have to pay taxes and how much would depend on whether your stock options are incentive stock options (ISOs) or non-qualified stock options (NSOs).
When you exercise NSOs, you have to pay taxes on the difference between the ”grant price” (which is usually the price at which the options were granted) and the price of the exercised option (which is usually higher).
For ISOs, holding the shares for at least one year after exercising and two years after the original grant date qualifies you for favorable tax treatment: capital gains instead of ordinary income (more on that in the tax articles). After you exercise the options, instead of selling the shares for cash, you can donate them to your church instead of selling them and donating the cash. This provides significant tax benefits.
First, you won’t have to pay capital gains taxes on the appreciation. This leaves you with more shares to donate (if you would have sold them to pay the taxes), and you may be able to take a charitable deduction for the fair market value of the stocks on the date of the gift if you’ve held them for more than one year.
When they need the cash, your church can then sell the stock tax-free, and it may be worth more than when you donated it. (You’ll understand this better once we get through the tax articles later.)
Some people like to use a ”Donor-Advised Fund” (DAF) for this purpose. They donate their shares to this charitable fund, receive an immediate tax deduction, and then the funds are distributed to charities over time.
You can also give your options to a charity and then exercise them when you’re ready. (Some companies match charitable contributions but probably won’t do it in stock.) It's easy-peasy.
If you are fortunate enough to receive stock grants or options, I strongly urge you to consult a financial advisor and tax accountant about optimizing them as part of an overall plan, especially if you intend to use them for charitable contributions.
For reflection: What’s the first thing that would pop into your mind if you were. told by your boss that you will receive a bonus or some stock grants or options? How does it line up with what the Bible teaches about what our attitudes should be toward money? How can you use your “mini-windfall” to honor the Lord?
Verse: “As for the rich in this present age, charge them not to be haughty, nor to set their hopes on the uncertainty of riches, but on God, who richly provides us with everything to enjoy. They are to do good, to be rich in good works, to be generous and ready to share, thus storing up treasure for themselves as a good foundation for the future, so that they may take hold of that which is truly life” (I Tim. 6:17-19, ESV).