facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog external search brokercheck brokercheck Play Pause
Equity vs. Salary Compensation: An Introduction For Separating Cyber Warriors Thumbnail

Equity vs. Salary Compensation: An Introduction For Separating Cyber Warriors

Managing Your Finances

Whether you're retiring from the military or separating, if you have done significant work in the cyber realm, tech companies want you. While they offer salaries, it seems to me that tech companies like to use equity as part of the overall compensation package. And let me tell you, equity compensation is complicated. But like "eating the elephant", we need to start somewhere. So, lets start with the difference between salary and equity compensation.

What Is Equity Compensation?

Equity compensation is compensation for employees in the form of a share of the company’s future profits. This could be through various stock options and/or performance shares, or whatever other arrangements the individual company has decided on. 

Tech companies, especially when they’re just starting out, may not have the cash flow needed to cover the salaries of their employees. But, of course, they recognize the need for incentivizing and encouraging highly motivated individuals to join their team. That’s why some tech companies turn to equity compensation. Typically, this will be offered either in conjunction with a below-market salary offer, or no salary at all.

Pros of Equity Compensation

Being offered a portion of your company’s future profits is an exciting opportunity for employees and an important incentive for high performers to stick with one company for many years. Dependent on the success of the company, there’s an opportunity for equity compensation to provide a bigger payout than a standard salary would.

Risks of Equity Compensation

But as is with any form of equity, where there is a chance for reward, there is risk as well. Compensation via stocks or other equity compensation could leave employees’ pay at the mercy of the market and the company’s performance. And while this is a risk that many understood when agreeing to the terms of their compensation, it can be hard to remember nothing is guaranteed.

In fact, it’s not entirely uncommon for tech industry employees to experience lifestyle creep, which is a rise in spending or standard of living paralleling a rise in income, only to feel the crash hardest when their stock options perform poorly.

Additionally, it’s important for employees to understand the potential tax implications that equity compensation may have on their future earnings. These implications will vary dependent on the structure and specifics of the company offering. But in some cases, cashing out on your stock options may look like a big payout on paper, but taxes could be taking a sizeable chunk out of the check you were expecting to receive. 

What Is Salary Compensation?  

More commonly used throughout the rest of the workforce, salary compensation refers to the base pay one receives based on a predetermined hourly, weekly, monthly or yearly figure. With most salaries, you know exactly how much you are receiving and the number does not fluctuate based on the profits or losses of the company.

Pros of Salary Compensation

In a word: dependable. Every pay period, you know exactly how much you’re going to receive. This makes salary compensation a steady, dependable form of payment that allows you to plan ahead for future spending, saving, etc. because you know how much you can count on receiving on a regular basis.

Risks of Salary Compensation

While dependability is an obvious advantage of salary compensation, it can be considered a disadvantage as well. Why? Because with a salary, there’s really no chance for a greater payout than what you’re already earning. The only way to potentially earn more in this scenario is to take your paycheck and invest it on your own. In addition, pay grades and salary structures can mean you’re capped out at earning a certain amount. And, of course, there is still the risk of job layoffs or a company going under.

Joining the tech industry is an exciting opportunity for Cyber Warriors. But as you navigate compensation options, it’s important to remember both the risks and rewards of equity and salary compensation.

If you liked this article, you might enjoy the following blog posts:

Military Finances 101: Inheritance and Estate Taxes. Do You Know the Difference?

Military Finances 101: 15 Must-Know Financial Terms

Military Finances 101:  The Insurance Triangle

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. C.L. Sheldon & Company, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to C.L. Sheldon & Company, LLC website or incorporated herein, and C.L. Sheldon & Company, LLC takes no responsibility therefore. All such information is provided solely for convenience, educational, and informational purposes only and all users thereof should be guided accordingly. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.