Climb the Money Ladder at Work
All workers can use these five tips for corporate executives to make the most of their compensation packages.
Highly paid corporate executives are often compensated with a complex web of bonuses, stock grants, insurance, pension plans and other financial instruments. Unfortunately, even though these company plans are their most valuable assets, many executives often wait years to develop a strategy to manage this wealth.
After developing financial strategies for numerous corporate executives over the past 15 years, I have found that the most common reaction once we have a plan in place is, "I wish I had done this years ago." They feel a sense of relief and optimism because they now have a financial plan in place to maximize the value of these assets accumulated during a long career.
For corporate executives seeking to maximize the value of their financial assets, here are five tips to consider:
1. Resist "lifestyle creep."
With each new promotion, an executive often earns more in salary, bonuses and other compensation. But what I call "lifestyle creep" is a major reason that people don't accumulate more financial gains from their promotions.
After each promotion, people tend to increase their lifestyle—they take on a bigger mortgage, buy a luxury car, enroll their children in private school or install a large swimming pool in the backyard. The key to financial success is spending less than you earn and investing the difference wisely over a long period. To accomplish this goal, consider the following with each pay raise:
- Increase your 401(k) contribution if you are not already contributing the maximum amount each year (in 2016, the limit is $18,000 for those under age 50 and $24,000 for those age 50 and over).
- Consider setting up or increasing automatic monthly transfers from a checking account to savings, or to college accounts, individual retirement accounts or other investment accounts.
If you direct the money received with the new pay raise straight into savings, you'll never miss the temptation to spend it. And, you'll be in better shape to retire early.
2. Understand how company compensation plans work, especially stock plans.
People moving up the corporate ladder often receive stock grants. These grants can be quite lucrative, but the rules governing them can be complex. In addition, company plans tend to change over time, so the grants received this year may differ two, three or five years from now.
Know the answers to the following questions: When do the stock options or restricted stock grants vest? How and when are taxes paid on these stock plans? If you leave the company this year, which grants will you be able to keep? Finally, what age is considered "full retirement" in order to retain all your stock grants?
For young executives, accumulating a large amount of stock can help build wealth. But make certain to strike a balance among all investments; owning too much stock in one company—any company—is not sound. If you have accumulated a heavy amount of stock in your company, consider setting up a multi-year diversification plan so that by the time you retire, your investment portfolio consists of no more than 10% to 20% in company stock.
3. Take maximum advantage of your company's pension plan.
The benefit is not as commonly available as it once was, so anyone working for a company that offers a pension should consider working there for as long as possible. The reasons are obvious. A pension makes it easier to meet income goals during retirement. You'll feel less pressure to save your personal dollars to support your entire retirement. And since your company has set aside funds for your retirement, your personal savings requirement is lower.
4. When you are young, buy life and disability insurance.
The more money you earn, the more valuable you become for your spouse, partner and children. Companies often allow a person to buy a lot of insurance through their group plans. For those people that tend to jump from company to company, consider purchasing individual insurance policies from a trusted agent not tied to an employer's plan.
5. Seek out tax advice.
Those working in corporate America are likely paid as W-2 employees, which means they have a limited number of ways to save income taxes, so you should be sure to take advantage of the ones that do exist. Also, as a result of promotions, big bonuses and stock plans paying out, executives can move in and out of high tax brackets over their working years. Partnering with a competent tax adviser can help smooth out and minimize taxes, allowing you to further maximize your wealth.
Lisa Brown is a partner and wealth adviser at Brightworth, an Atlanta wealth management firm. She specializes in investment management, executive compensation, retirement transition and estate planning.
Lisa Brown, CFP®
Partner and Wealth Advisor, Brightworth
Lisa Brown, author of "Girl Talk, Money Talk, The Smart Girl's Guide to Money After College," is the Chief Strategy Officer for corporate professionals and executives at wealth management firm Brightworth in Atlanta. Advising busy corporate executives on their finances for nearly 20 years has been her passion inside the office. Outside the office she's an avid runner and supporter of charitable causes focused on homeless children and their families.