Many companies offer Life Insurance and Long-Term disability (aka LTD) as benefits. However, in most cases you’ll likely get only bare minimum Life Insurance coverage by default, and LTD may be something you have to pay for out of pocket. So is LTD and additional life insurance worth it? You might think, “I’m young, I’m healthy - nothing could possibly happen to me. Why waste the money?”
I actually got my first management job many years ago when my own manager went on Long-Term disability for Carpal Tunnel Syndrome. It turned into a permanent disability, alas, and I was promoted into that management position. And not only that, another person from that company later went on LTD for the same Carpal Tunnel issue. So it just goes to show, you don’t have to be a skydiver to be at risk of an LTD.
BTW, that company had provided free LTD insurance until then, but as soon as my manager started collecting benefits the premiums for the company apparently shot up, and we had to start paying out of pocket for the coverage.
The same goes for Life Insurance. You may not lead a risky lifestyle, but as they say you never know when you might get hit by a bus. If you are single with no dependents you might think that life insurance is superfluous. However, your parents might have sunk a ton of money into your college education and might be expecting a return on that investment in their old age – so don’t’ forget about them. And of course if you are married or have other dependents, adequate life insurance should be a no brainer.
Thursday, July 10, 2008
Wednesday, July 9, 2008
401K Plans
Personally I think the 401K is the greatest thing since sliced bread. It’s one of the few legitimate ways you can reduce the taxman’s bite. And yet many people still don’t participate. Why is that?
Participating in a 401K allows you to defer taxes on your contributions. Even better, many companies will match some portion of your contributions, typically up to about 3-6% of your pay. That’s free money you’re throwing away if you don’t participate. Some companies will make a small contribution on your behalf even if you don’t participate, but even then you’re still missing out on most of the employer match.
Some people claim that putting your money into a (Roth) IRA is a better investment than a 401K. But there’s no reason you can’t do both; first put enough money into your 401K to get the full company match, then put the rest into a (Roth) IRA.
For instance, say your employer matches 50% of your contributions up to 6% of your salary. In that case you should contribute at a 6% rate to get the full 3% company match, then start putting any extra money you have left over into your IRA. And remember, you can always roll your 401K over to an IRA when you leave you current company.
Another anti-401K argument is that when you start drawing on a 401k in retirement you’ll pay taxes on your withdrawals at regular income tax rates (perhaps 28% or so), whereas if you invest in a taxable mutual fund instead, you might only pay 15% on long term capital gains over the years and nothing on the withdrawals. But this argument ignores the tax-free compounding aspect of a 401K. Also, if you put money in a mutual fund you’re paying taxes twice: first in your regular payroll taxes, and then again in the 15% capital gains taxes.
Given these benefits of 401Ks then you can see why I’m amazed that some people still don’t participate. Certain companies have taken the initiative to automatically sign up new employees for 401Ks without requesting their permission. But while I’m a big supporter of 401Ks, I have a hard time agreeing with this approach. It smells too much like Big Brother to me.
Participating in a 401K allows you to defer taxes on your contributions. Even better, many companies will match some portion of your contributions, typically up to about 3-6% of your pay. That’s free money you’re throwing away if you don’t participate. Some companies will make a small contribution on your behalf even if you don’t participate, but even then you’re still missing out on most of the employer match.
Some people claim that putting your money into a (Roth) IRA is a better investment than a 401K. But there’s no reason you can’t do both; first put enough money into your 401K to get the full company match, then put the rest into a (Roth) IRA.
For instance, say your employer matches 50% of your contributions up to 6% of your salary. In that case you should contribute at a 6% rate to get the full 3% company match, then start putting any extra money you have left over into your IRA. And remember, you can always roll your 401K over to an IRA when you leave you current company.
Another anti-401K argument is that when you start drawing on a 401k in retirement you’ll pay taxes on your withdrawals at regular income tax rates (perhaps 28% or so), whereas if you invest in a taxable mutual fund instead, you might only pay 15% on long term capital gains over the years and nothing on the withdrawals. But this argument ignores the tax-free compounding aspect of a 401K. Also, if you put money in a mutual fund you’re paying taxes twice: first in your regular payroll taxes, and then again in the 15% capital gains taxes.
Given these benefits of 401Ks then you can see why I’m amazed that some people still don’t participate. Certain companies have taken the initiative to automatically sign up new employees for 401Ks without requesting their permission. But while I’m a big supporter of 401Ks, I have a hard time agreeing with this approach. It smells too much like Big Brother to me.
Tuesday, July 8, 2008
Relocation Costs
If the company offers you relocation assistance it may be a in the form of a lump sum payment or a selective reimbursement. There are tax differences for the two approaches; you (probably) won’t be taxed on reimbursed moving expenses, but a lump-sum relocation payment will most likely be taxable, though many moving expenses can be deducted from your taxes. But keep in mind, INATA (I’m Not A Tax Attorney).
If you have to sell your house the company may also offer to pay for closing costs, or in a poor market they may even buy your house outright. This is a significant benefit that may be worth tens of thousands of dollars in many cases. However, this type of benefit is more the exception than the norm unless you are an executive level candidate.
You should be aware that the costs for transporting household items can be outrageous, especially for heavy items like furniture. It can easily cost thousands of $ to move a few rooms of furniture across the country. Hence unless you have high quality furniture it may be better to sell it before you move and buy new furniture at your destination.
Finally, keep in mind there are many other costs involved in moving that might not be obvious at first. You should account for these things when considering relocation.
If you have to sell your house the company may also offer to pay for closing costs, or in a poor market they may even buy your house outright. This is a significant benefit that may be worth tens of thousands of dollars in many cases. However, this type of benefit is more the exception than the norm unless you are an executive level candidate.
You should be aware that the costs for transporting household items can be outrageous, especially for heavy items like furniture. It can easily cost thousands of $ to move a few rooms of furniture across the country. Hence unless you have high quality furniture it may be better to sell it before you move and buy new furniture at your destination.
Finally, keep in mind there are many other costs involved in moving that might not be obvious at first. You should account for these things when considering relocation.
- House / apartment hunting trips
- Temporary housing while you find a new home
- Security deposit and first & last month’s rent at new apartment
- New furnishings at new home
- Lost / broken items during the move
- Lost income while your spouse finds a new job
Monday, July 7, 2008
Other Benefits
Continuing on my previous post, I want to discuss a couple of other non-salary components of the offer.
First, the medical plan. If you are young, single and healthy, you might not care much about medical coverage. If you have a choice you could select the cheapest option (which is always the HMO) and be done with it.
For anyone else, and especially those with families or dependents, I recommend a PPO. Sometimes you might have a choice of two or more PPOs, in which case you should examine the plan details:
You may also want to check whether the company offers medical coverage for domestic partners. Plans may also have varying coverage for things like mental health and acupuncture.
Secondly, you should examine the company’s Paid Time Off policy. Many companies still provide unlimited sick leave, but some combine vacation days with sick days. For instance, company A might give you two weeks of vacation and unlimited sick days, and company B might give you 15 days of PTO (Paid Time Off) which you can use as either vacation or as sick days. Hence if you exceed 5 days of sick leave, you’d be better off with the unlimited sick leave option; however, if you rarely take sick days, the combined PTO option would let you take the unused days as vacation time.
Finally, a vanishing breed is something called ”Comp Time” or “Time In Lieu Of”. This is more common at non-tech shops, and it means that for each hour (or two) that you work overtime, you’ll get an hour of vacation time. Alas, in the tech world this benefit is now as elusive as the abominable snowman.
In reality you won’t be able to negotiate the details of most of these benefits since it will be the same package for everyone. But in some cases you might be able to negotiate for more vacation or PTO time.
First, the medical plan. If you are young, single and healthy, you might not care much about medical coverage. If you have a choice you could select the cheapest option (which is always the HMO) and be done with it.
For anyone else, and especially those with families or dependents, I recommend a PPO. Sometimes you might have a choice of two or more PPOs, in which case you should examine the plan details:
- Medical Premiums. Often it’s $X for an individual, 1.5 - 2X with a dependent, and 3X for a family.
- Deductibles – Typically you’ll pay around $250-500 each year before insurance kicks in.
- Coinsurance rate – i.e., the percentage of the insurance covers after the deductible. Typically 80%, or 90% with the better plans.
- Doctor visit co-pays – The better plans have a fixed amount you pay out of pocket for each visit to a doctor for basic outpatient services. Other plans cover at the standard rate (e.g., 80%).
- Prescription Drug Coverage – Some plans charge you a fixed amount, as in $15 for generics and $30 for name brands. Others charge a percentage, as in 10% of the total cost for generic s and 20% for name brands.
- Out of pocket limit – this caps the amount you have to pay out of pocket in a given year; after that the insurance picks up 100% of covered expenses.
You may also want to check whether the company offers medical coverage for domestic partners. Plans may also have varying coverage for things like mental health and acupuncture.
Secondly, you should examine the company’s Paid Time Off policy. Many companies still provide unlimited sick leave, but some combine vacation days with sick days. For instance, company A might give you two weeks of vacation and unlimited sick days, and company B might give you 15 days of PTO (Paid Time Off) which you can use as either vacation or as sick days. Hence if you exceed 5 days of sick leave, you’d be better off with the unlimited sick leave option; however, if you rarely take sick days, the combined PTO option would let you take the unused days as vacation time.
Finally, a vanishing breed is something called ”Comp Time” or “Time In Lieu Of”. This is more common at non-tech shops, and it means that for each hour (or two) that you work overtime, you’ll get an hour of vacation time. Alas, in the tech world this benefit is now as elusive as the abominable snowman.
In reality you won’t be able to negotiate the details of most of these benefits since it will be the same package for everyone. But in some cases you might be able to negotiate for more vacation or PTO time.
Thursday, July 3, 2008
Evaluating the Stock Option Package
How should you value stock options that are dangled as part of an offer? To a large part it depends on whether the company is an established public corporation vs. a pre-IPO startup.
If the offer is from an established corporation, you’re not likely to be offered very many options unless you’re an executive. So going in as an engineer you might be offered a token amount, perhaps a couple of thousand shares. And given that an established company’s stock is generally not likely to shoot up like a rocket, the value of those options is likely to be modest at best.
If the offer is from an early stage startup (i.e., pre-IPO), you should value the options differently. You should look at the potential size of the company if it’s successful, and the likelihood that it will go public (or be sold). This of course is very difficult to judge, especially for an early stage startup. Hence you may want to pull some numbers out of thin air (that’s what I usually do).
Consider that a hypothetical situation where you are granted 5,000 stock options with a strike price of 10 cents. Such a grant would not be out of line for a midlevel engineer joining a pre-IPO startup.
Say that after four years your options have vested and the company has gone public at $10 a share. Your capital gain on each option would be roughly $10, for a total of $50,000. After capital gains taxes and state taxes your net take might be $40,000. That’s about $10,000 per year for four years of work, which is a nice bonus but not enough to change your life. And it’s certainly not enough compensation if you had to work like a dog for those four years.
And remember, this is in the case of a positive outcome for the company. There are many companies that burn out spectacularly, and many more that just quietly fold.
My conclusion? Consider stock options to be a perk and not an essential part of the pay package. The only exception is if you come in at the executive level and are offered hundreds of thousands of options.
If the offer is from an established corporation, you’re not likely to be offered very many options unless you’re an executive. So going in as an engineer you might be offered a token amount, perhaps a couple of thousand shares. And given that an established company’s stock is generally not likely to shoot up like a rocket, the value of those options is likely to be modest at best.
If the offer is from an early stage startup (i.e., pre-IPO), you should value the options differently. You should look at the potential size of the company if it’s successful, and the likelihood that it will go public (or be sold). This of course is very difficult to judge, especially for an early stage startup. Hence you may want to pull some numbers out of thin air (that’s what I usually do).
Consider that a hypothetical situation where you are granted 5,000 stock options with a strike price of 10 cents. Such a grant would not be out of line for a midlevel engineer joining a pre-IPO startup.
Say that after four years your options have vested and the company has gone public at $10 a share. Your capital gain on each option would be roughly $10, for a total of $50,000. After capital gains taxes and state taxes your net take might be $40,000. That’s about $10,000 per year for four years of work, which is a nice bonus but not enough to change your life. And it’s certainly not enough compensation if you had to work like a dog for those four years.
And remember, this is in the case of a positive outcome for the company. There are many companies that burn out spectacularly, and many more that just quietly fold.
My conclusion? Consider stock options to be a perk and not an essential part of the pay package. The only exception is if you come in at the executive level and are offered hundreds of thousands of options.
Wednesday, July 2, 2008
Non-Salary Components of the Offer
An offer is more than just the salary. It may also include the following:
- Bonus or Profit Sharing plan
- Stock Options
- Discounted Stock Plan / ESOP (Employee Stock Ownership Plan)
- 401K with matching employer contribution
- Medical Insurance
- Dental Insurance
- Vision Coverage
- Relocation
- Vacation
- Holidays & Floating Holidays
- Sick Leave / PTO
- Educational Reimbursement / Training
- Gym / Health Club benefits
- Free or discounted meals
- Commuting allowance or discount
A few of these items may seem frivolous, but others are significant and merit additional attention. Don’t be afraid to ask HR for more detail before you accept an offer.
For instance, regarding the Profit Sharing or Bonus, you might want to know the following:
- When the bonus is paid? Is the payout fixed or is it variable?
- Is payout based on individual or company performance?
- What is the historical payout rate?
Likewise, you should get details about the stock option plan if they have one:
- The total # of shares - and for a startup, the % ownership the stocks represent
- The vesting schedule for the options (typically 4 years)
- Any selling restrictions (e.g., a “freeze period” after an IPO).
For a 401K, you should look at the following:
- What percentage of your contributions will the company match, if any? Some companies will contribute a certain amount even if you don’t’ contribute anything.
- What is the vesting schedule for the company’s match?
- What is the maximum % of your pay you can put into a 401K? Some companies limit this to 10% or so.
Tuesday, July 1, 2008
Receiving an Offer On The Spot
Surely all of us have imagined scenarios where we so impress our interviewers that they flat out offer us the job right then and there. But it never happens. Or at least I’ve never seen it happen in any company I’ve worked at.
I have heard of situations where a candidate is told up front (and I was told this myself once) that they might be offered a job at the end of the in-person interview, but then they’d have to accept it or reject it right then and there. That’s a terribly unfair situation to put the person in. Usually the practice is to give a candidate a day or two, or possibly the weekend to accept an offer.
Sometimes the interviewers will say things to make you think you’ve landed the job. But don’t be fooled. They may indeed be impressed with your qualifications, but they will most likely interview multiple candidates, and the next person to sit in your cahir may impress them even more.
My advice? Never assume you have an offer until you have it in writing. Definitely do not stop interviewing elsewhere just because you think you aced an interview, or worse, because you were sweet-talked to by an interviewer.
I have heard of situations where a candidate is told up front (and I was told this myself once) that they might be offered a job at the end of the in-person interview, but then they’d have to accept it or reject it right then and there. That’s a terribly unfair situation to put the person in. Usually the practice is to give a candidate a day or two, or possibly the weekend to accept an offer.
Sometimes the interviewers will say things to make you think you’ve landed the job. But don’t be fooled. They may indeed be impressed with your qualifications, but they will most likely interview multiple candidates, and the next person to sit in your cahir may impress them even more.
My advice? Never assume you have an offer until you have it in writing. Definitely do not stop interviewing elsewhere just because you think you aced an interview, or worse, because you were sweet-talked to by an interviewer.
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