Raises, Bonuses, RSUs, Stock Options, Oh My…

The annual review season is coming up and so I want to give you some important knowledge about raises, bonuses, restricted stock units (RSUs), and stock options so that you have a little better understanding for how your compensation is structured. With this knowledge you can do things like:

  • Make sure your manager understands what you want at review-time
  • Position yourself for the compensation you want
  • Negotiate a better compensation package when you change jobs
  • Understand what message you’re being sent by looking at your compensation change

To start, let’s define each one of these very clearly. I’ll also tell you what they signify in a compensation change. Then, I’ll talk about how you can use this information.

Keep in mind that this is all assuming you work at a typical Corporate America company, have a “typical” corporate america manager, and a “typical” second-level manager. When this isn’t the case, these definitions can be thrown out the window…

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Definition: Salary Increase (a “Raise”)

A raise or “base salary increase” is an increase in your hourly or salary wage. This translates to additional pay in every paycheck. Of course, taxes and any percentage type withdrawals from your check will kick in so you will not see 100% of this amount in your final check. You will see it on the pay stub.

Being given a raise means that your manager sees that your contribution to the company is simply greater than it was the last time you went through an annual or semi-annual review. Salary is pay “no matter what” now and in the future (of course this isn’t completely accurate, but as long as a company is doing okay you can assume you’ll continue getting your base salary.

Salary increases are awesome!

Definition: Bonus

A bonus is a one-time payment on a specific date. Taxes are withheld at a special, higher rate by the federal government and generally any percentage based payroll deductions you have setup will kick in as well (i.e. your 401k).

A bonus is compensation for good work in the previous year that the manager doesn’t necessarily see continuing in to the following year. If you delivered some awesome product, signed up a big new client, or helped the company at a critical time you can expect them to contribute to a bonus.

Definition: Restricted Share Unit (known as RSU’s)

RSUs are a commitment to give you control of shares of company stock on a specific future date. For example, you may be awarded 1000 RSUs with a 5 year vesting schedule. This generally means you will get control of 200 shares per year, starting 1 year from the date you were given the shares. When you get control of shares that is called “Vesting”. At vesting you can hold the shares or sell them… anything you would normally do with stock that you own. Vesting is generally cancelled if you no longer work for the company that granted you the RSUs.

RSUs indicate that an employer wants to keep you locked in at the company you work for. The reason is that they represent “future compensation” that you only get if you work for the company. If you’re given RSUs you know that your management likes what you are doing and wants you to stick around.

Definition: Stock Options

Known as “Options”, these are a lot like RSUs with one major difference. Stock Options are not shares in the company. They are literally, the option to purchase a share at a specific price. Generally these have a vesting schedule exactly like RSUs with one twist. When you leave a company you generally have a limited time to use the option, for example 90 days. If you don’t use the option within that time it is gone. Options themselves generally have an expiration date as well, even if you are employed at the company and common terms are 5 or 10 years. Options work well as future compensation if the stock price of a company increases. If the stock price decreases they aren’t worth anything.

Stock Options indicate that an employer wants to keep you at the company though they are not quite as strong an incentive as an RSU since they have no value if the stock is lower than the day it was given to you. Know that if you get stock options your management wants you to stick around.

How To Get The Compensation Change You Want

The typical annual review process at a medium or large company in Corporate America involves figuring out some measurement of your contribution relative to your peers and then giving you a compensation adjustment (typically no change or an increase).

Since this is generally based on your contribution, either relative to your peers or to a standard, you have a great ability to influence whether you get increased compensation and if you do, how much.

One thing most people don’t realize is that you can also influence which type of compensation increase you get.

Managers generally have a budget to work with that includes:

  1. Base salary adjustment
  2. Bonus pool
  3. RSU -or- Stock Option pool

When they look at their team they have to figure out who is going to get what, loosely based on the meaning of each, and then stay within their budget.

So, if you are planning to buy a house or car and you would rather get a one-time check that you can spend right away, you want to let your manager know you want a bonus rather than salary or stock.

If you are working to grow your salary because you have many years of your career in front of you, let your boss know you want your compensation as salary.

If you are really committed to the company you work for and you see its value increasing then you can take the “greater potential upside” and ask for your compensation to be focused on stock.

Here’s a table to help you see the difference.

Your Situation What You Want What To Ask For
You want to buy a car A one-time check A bonus
You have a long career ahead and want stable pay A base salary increase A raise
You see greater market value in your company in the future and want a potential bigger upside than just salary or bonus Control of stock Stock Options or RSUs

How To Position Yourself For The Compensation You Want

So, now that you know that you know:

  • The typical types of compensation changes (stock, raise, RSUs/options)
  • That you can influence your compensation change

It is time to talk about how to maximize what you will get. Remember that the different types of compensation are really sending you specific messages:

  • Raise: overall increase in your contribution to the company
  • Bonus: recognition of a great delivery this past year
  • RSU/Options: long term desire to keep you at the company

So, if you want to get a big bonus you can focus on major project deliveries and less on your overall personal growth.

If you want to increase your base pay, you need to focus on the breadth of things your boss wants you to improve and the performance values at your company.

If you want RSUs or Options you need to do one of the two I just mentioned and make sure your manager knows you want compensation in stock.

How To Negotiate A Better Compensation Package

When you change jobs within a company or by moving to a new company this knowledge of compensation is really helpful. It allows you to negotiate for the kind of compensation you want based on your own situation. If you’re joining a rapidly growing and successful company you might want more stock in your compensation. If you’re joining an unknown performer you might want more base salary.

Use this knowledge if there is a change underway and make a compensation package that works for you.

How To Understand The Performance Message You’re Being Sent via Your Compensation

Okay, so here is the cool part of this article. Now that you know about these types of compensation changes you can understand what messages your manager is sending you when they give you an annual change. This doesn’t work so well if you are trying to directly influence the pay change you get… because you influenced it, so skip this section if you’re doing that.

A raise means your overall contribution is higher.

A bonus means you did a great job delivering some specific things this past year.

RSU/Options mean that your management wants you to stay with the company.

With these three ingredients you can understand the value that your manager and his/her manager saw in you this year. Here are some examples:

Compensation What it means
Low raise, good bonus, no stock You delivered some good stuff but your manager doesn’t see any long term value changes
Great raise, no bonus, no stock Your manager sees greater value in what you are giving the company
Some raise, some bonus, some stock You delivered some good stuff, your overall contribution is higher, and your management wants to influence you to stay with the company

So, when it comes time to look at your compensation results think about the message you were given and what you want to do differently in the coming year to get what you want.