Employers do their best to retain their best talent. And, as more executives and senior executives reassess their careers after two years of working from home, companies are trying to find new ways to entice them to stay.
While stock options, restricted stock and other deferred compensation plans have long been part of talent retention plans, recent news reports indicate that more and more companies are offering cash bonuses. According to these reports, Google-owner Alphabet adopted a new cash bonus plan in October 2021 that allows the company to award employees bonuses of almost any size for almost any reason. Amazon announced in February that it had doubled its cash compensation cap for employees.
But with more money in bank accounts, it’s tempting for an executive earning a healthy six-figure income to make an expensive purchase that eats up much of that money. It’s even more likely that people will start to deviate from their budget and spend more money. Lifestyle “creep” sets in; with more money to spend, it’s all too easy to be less disciplined. Then, when high inflation hits, a recession hits, or their business downsizes, it’s hard for people to cut spending when times get lean.
A few years ago, a client of mine, a business executive, used a bounty to install a $75,000 swimming pool in her backyard. It may have seemed like a reward for a job well done, but the pooling got in the way of her goal of building up savings for her three children’s college education, which was fast approaching.
Whether it’s a big cash bonus or stock options and restricted stock awards, “what matters most” is a phrase I use to guide my clients. . In this context, here are some of the best ways to invest bonus cash:
Increase your 401(k) contributions before and after taxes
Retirement savers with a 401(k) can contribute up to $20,500 in 2022. Savers age 50 and older can make an annual catch-up contribution of up to $6,500 in 2022 (no change from 2021), for a total contribution of $27,000. If you haven’t already, now is the time.
Set up automatic monthly deposits to key accounts
Saving money for a child’s or grandchild’s college education has never been easier. Regular deposits in a 529 college savings plan will accumulate over years, and in about 30 states, individuals and married couples will be able to deduct a portion of their 529 contributions from their tax returns.
A 30-year-old saving for retirement may need to save half as much money over their career as someone starting to save at 40, assuming similar market returns on their portfolios.
Pay off your debt
With extra cash on hand, it may be time to make extra monthly payments on the principal of your mortgage, credit cards, or other consumer debt.
This is exactly what one of my clients does – after getting her big promotion last year, she immediately took the extra income from her monthly paychecks and sent it directly to the mortgage company . As a result, it will be able to get out of debt at least five years earlier.
When it comes to which payments to prioritize, I have an unconventional approach to getting out of debt. Most people say pay off debts at the highest interest rates first. I advise people to pay the smaller balances first. This will help the debt mountain feel like a small hill quickly, and it will encourage people to keep working on their debt reduction strategy if they have those little successes along the way.
Consider more insurance
Higher income means you’ll likely need more life insurance to protect your family, especially if your lifestyle increases. Adding more disability insurance can also make sense. The higher your income, the more protection you may need if you suffer a serious illness or injury and are no longer able to work full time, especially if you have not yet reached your financial goals of retirement.
Find out about additional liability insurance
Professionals and senior executives may also consider purchasing an excess liability policy. High profile work can increase your risk of being the target of a lawsuit; an excess liability policy – aka umbrella insurance – can help protect your family’s assets in the event of a future personal judgment against you.
Two more tips for stock compensation
For executives receiving stock options and restricted stock awards, the good news is that the vesting period — often three to five years — means there’s plenty of time to plan. when to cash out these allocations and how to invest the proceeds.
With stock prices rising steadily over the past decade, these rewards have been a boon to many. But be careful not to let too many stocks accumulate because its value will drop if the company’s stock price drops. The overall stock market decline so far in 2022 has resulted in double-digit percentage declines in the stock prices of many companies.
Also take the time to understand how and when you can access these rewards. As the vesting period approaches, determine the exact vesting date for your rewards, how to access them, sell the shares, and transfer the money to your checking account. This process can take time if you are unfamiliar with it and it requires your attention to perform properly.
Finally, for those planning to retire in the next few years, start using these options and grants to diversify your stock portfolio. Many executives have acquired their wealth largely through the concentration of corporate stock. But owning too much stock in a company could quickly lower your net worth in retirement. Instead, a diversified plan that includes U.S. and foreign stocks, bonds, real estate, and insurance can be more effective than relying heavily on the stock price of a single company.
Partner and Wealth Advisor, Brightworth
Lisa Brown, CFP®, CIMA®, is the author of “Girl Talk, Money Talk, The Smart Girl’s Guide to Money After College” and “Girl Talk, Money Talk II, Financially Fit and Fabulous in Your 40s and 50s”. She is the Practice Area Leader for Professionals and Business Leaders at Wealth Management Firm Brightworth in Atlanta. Advising busy business leaders on their finances for nearly 20 years is his passion at the office. Outside of the office, she is an avid runner, cyclist and supporter of charitable causes focused on homeless children and their families.
