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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.

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