> There was also a lot of stock, which seemed like a really chincy form of "compensation" considering how old the company is now.
er.. how is it a really chincy form of compensation, considering how well amazon's stock has performed?
er.. how is it a really chincy form of compensation, considering how well amazon's stock has performed?
But I'm not a tax professional so there may be other concerns I'm not aware of.
The day a block of stock becomes vested the value as of that date is ordinary income to you. If you sell immediately you will have no capital gains and therefore pay no capital gains tax. If you hold on to the stock for six months before selling and the stock went up, you will pay short term capital gains tax on the difference between the value on the day the stock vested and the day you sold it. However, because short term capital gains taxes are less (much less) than 100% you will still come out ahead versus having sold the stock on the day they vested.
The problem isn't short term capital gains taxes, it's the risk that the stock will go down. If that happens you will have both lost money on the stock, and have to pay ordinary income tax on the value of the stock before it went down.
I'd say the biggest problem with stock as a form of compensation has nothing to do with taxes, it has to do with the fact that it isn't paid out every two weeks, it's basically a promise to pay a bonus in two or three years if you are still with the company and in an uncertain amount. It's certainly better than nothing, but I'd discount it pretty heavily as compared to salary.
That's the point. If you sell immediately, it's roughly the same as getting cash. If you sit on the stock, you need to worry about capital gains/losses and the tax implications.
> If you hold on to the stock for six months before selling and the stock went up ... you will still come out ahead versus having sold the stock on the day they vested.
Sure, you can play the market-timing game. I don't think that holding stock for less than a year is generally a good idea, due partly to the tax difference but largely because I'm not trying to time the market.
> The problem isn't short term capital gains taxes
Short-term capital gains are a pretty big deal. The gap between short-term and long-term capital gains taxes is up to 20%.
> If that happens you will have both lost money on the stock, and have to pay ordinary income tax on the value of the stock before it went down.
You can deduct the capital loss, up to 3000. You can offset more than 3000 if you have capital gains from other investments.
No, you only need to worry about having a capital loss. A capital gain and the associated taxes are always going to put you ahead of the game.
> Short-term capital gains are a pretty big deal. The gap between short-term and long-term capital gains taxes is up to 20%.
Be that as it may, 60.4% of something is better than 100% of nothing.
> Sure, you can play the market-timing game. I don't think that holding stock for less than a year is generally a good idea, due partly to the tax difference but largely because I'm not trying to time the market.
I'd say it has less to do with timing the market per se, and more to do with already being overexposed to your employer as a source of financial risk. But I agree with your underlying point that for most people it makes the most sense to sell imminently.
I commented to clear up some things about the tax code. Although it is a mess, rarely is it the case that it reverses incentives altogether. And it certainly doesn't here. Having a short term capital gain is a good thing, not a bad thing.
You can say this same thing about any stock you hold at any time for any length of time. Which means it's not particularly relevant to the specific case of an employer issuing a stock grant.
If you get a stock grant, you need to decide if you want to hold the stock or not. If you do, then plan on keeping it for a year or more. If you don't want to hold the stock, you should sell immediately. There are few scenarios where it makes sense to sit on the stock for 6 months. You'd do much better to move the money to a long-term investment immediately. Maybe if you really believe that the stock is going to continue rising (i.e. you would ordinarily hold), but you need the cash in 6 months for a home purchase. Normal volatility in the market could easily turn that 6-month hold into a significant loss, though.
> Be that as it may, 60.4% of something is better than 100% of nothing.
This statement has no utility. Sure, 60.4% of something is better than 100% of nothing. 80% of something is better still. And 100% of the initial value in cash is better than a loss of 50% if the stock crashes.
> Having a short term capital gain is a good thing, not a bad thing.
Sure, but having a long-term capital gain is a much better thing, whether that's in the original stock or a different investment.
Amazon has what they call a 'total compensation philosophy'. Basically, if the stock has done really well in the past year, your salary increase and stock bonus in your next annual review will be adjusted accordingly. If you've done really well and they'd strongly regret you leaving, you can negotiate on this, but only if you've got leverage. After my first full year there they offered me a 2.3% salary increase, zero additional stock[0], and when I pushed back said 'look how well the stock has done! you're going to make way more this year than you had expected'.
I politely informed them that they seemed to be trying to feed me a pile of bullshit, that bullshit wasn't part of my approved diet, and that if they continued trying to do so, this would be my last week with Amazon. My next meeting (a few days later) included a considerably better compensation adjustment.
[0]: This was in part due to confusion on who qualified for equity. I'd started January 3rd of the preceding year. They believed only people employed prior to Jan 1st qualified. I had brought my offer letter to the meeting, after having been warned to be prepared for these sorts of shenanigans, which clearly said that because I'd started prior to Jan 15th, I was absolutely eligible. That would be the end of the story, except they then tried the line "Well, not everyone receives an equity refresh every year". I had exceeded expectations and hit the top leadership bucket. If that didn't qualify for equity, I wasn't really interested in continuing with Amazon.
The irony: the equity grant I eventually received didn't start vesting until ~18 months after that meeting. I quit ~13 months later.
It's my compensation for my employment with you, it shouldn't be a game of D&D with a belligerent DM.
I got <1% increase after my first year.
after my second review, and a "exceeds" rating, I got around 3.5% and a few new shares 2 years out.