Financial Considerations Of Contract Negotiations For A New Job

Forbes

a day ago

When you are considering a new role, there are so many aspects of financial compensation beyond just salary. It's critical to understand and negotiate not only your base salary, but also bonus options, retirement plan options, insurance, and equity compensation. These are the financial considerations of contract negotiations for a new job.
Understanding Your Worth
Nowadays, understanding the going rate for your role has gotten easier than ever. Between LinkedIn, Glassdoor, and other job sites, you should be able to find a benchmark for salary and benefits for someone in your role with your experience level. Once you have an understanding, you can open negotiations with a fair target in mind.
Employment Type
Typically, employees are faced with two types of roles: contractors and W2 employees.
Contractors typically receive no benefits to minor benefits, paired with a higher salary or commission-based payout. Contractors also usually pay higher taxes per dollar earned, are not entitled to severance, and cannot collect unemployment if they lose their role.
W2 employees typically receive health insurance and a retirement plan at a minimum on top of a base salary and other compensation opportunities. If you're looking at net compensation holistically and want to work for a single employer, a W2 role will typically yield the best results.
Bonuses
When discussing bonuses, it's essential to define metrics for how the bonus pays out. I've seen companies offer employees a 20% performance-based bonus, the person performs above and beyond their job requirements, and the bonus never pays out because the performance threshold was never defined.
You'll also want to understand if the bonus is paid in cash or equity compensation. Typically, when you're looking at equity compensation, there are additional considerations regarding liquidity, risk, and taxation. Once everything is to your satisfaction, ensure the language is included in your contract.
Equity Compensation
How valuable equity compensation is really depends on the company itself. Privately held companies with no hope of ever going public cause shareholders to face significant liquidity risk because they would need to locate a buyer before they can sell their stock. Stocks traded publicly on an exchange are priced daily and match buyers and sellers, making it possible to have cash in hand within a day of choosing to sell.
In a contract negotiation, most people want to maximize their cash compensation and have the equity compensation as icing on the cake.
The most common forms of equity compensation are as follows:
Typically, restricted stock units are doled out as sign-on bonuses and ongoing incentives to stay with the company for a longer time. They also most closely mimic direct compensation out of all these options. Stock units come with vesting schedules so if you leave your employer while the stock is still unvested, you are no longer entitled to that stock. They are also taxable as income as they become available, so if your equity compensation is large and your salary is low, you may be forced to liquidate or pull from other sources to cover your tax bill.
Insurance Benefits
Independently insuring things like healthcare and disability can come at great personal cost. Having sound insurance benefits in line with yours and your family's needs are critical in negotiation because without coverage, a single event can completely dismantle your entire financial plan.
Retirement Benefits
At this point, most employers must offer W2 employees some form of a retirement savings plan. For many companies, this comes in the form of a 401(k). For select individuals and executives, you may be able to negotiate higher profit-sharing levels or other executive compensation plans like deferred compensation, which is additional compensation that is tax-deferred, usually until retirement.
Contractors are in a different position. Like with insurance benefits, many contractors aren't entitled to retirement benefits but that doesn't mean they can't negotiate. I recently met with a woman who is a top-performing salesperson and an independent contractor. Even though the woman is a top performer, she had historically struggled to save money. Then, the employer decided to allow contractors to have a percentage of her commission checks go directly into their personal retirement plans. This change made it so she could meet her retirement goals in a disciplined way while remaining a contractor. She's also said that if she ever moves employers, she will ensure this type of arrangement is included in her contract.
Conclusion
When negotiating a new job contract, financial considerations extend far beyond salary. By evaluating bonuses, equity compensation, insurance, and retirement benefits, you can secure a package that aligns with your needs and goals. Understanding your worth and employment type is key to navigating these discussions effectively. A well-negotiated contract ensures long-term financial stability and career satisfaction.