So you’ve just received a great new job offer with the company of your dreams? There is no denying it, this is a pretty great feeling, especially since it is probably the culmination of years of planning and hard work. So before you take the job or start to negotiate your salary and benefits, stop and take some time to celebrate. You deserve it.
After the celebration, you also may want to take some time to run some numbers, because just getting the job offer isn’t enough. You also need to know what your current job is worth in terms of total compensation (not just money, but benefits too). You need to consider taxes, and also the cost of living in the new town (if relocating). In addition, there are also the “softer” questions to consider, such as whether you will like the new workplace environment or if you will fit in with the company’s culture.
Clearly, there are a lot of factors to consider before taking a new job, but before we dive in and look at several of the most important, consider how a Personal CFO (a fee-only, fiduciary financial advisor) can help you make sense of this decision. He or she can not only crunch the numbers but also provide valuable context regarding the value of certain “soft” benefits in the marketplace today and in your specific situation.
Start with the Total Financial Compensation Adjusted for Cost of Living
Of course, one of the first places you are going to start when comparing a new job offer is the salary. Obviously, it’s a fairly straightforward task to compare your new salary offering to the wage you have now. In addition, you may have the ability to earn bonuses, commissions, and other variable compensation. Again, this is all pretty straightforward to analyze, except for the bonuses, which may or may not actually pay out. To some degree, you have to put a probability on the bonus targets you are given, and of course, that is a difficult task since you haven’t yet worked a day for this company and don’t know how realistic the targets are to meet.
On top of the salary and bonus compensation, if the company is offering stock-based compensation, such as stock options, stock appreciation rights, restricted stock, or an employee stock purchase plan, these need to be added into the equation as well. Oftentimes young, growing companies will offer this form of compensation because, for them, it is typically an economical way to reward good business results and keep talented employees. However, don’t let that trick you into thinking that stock-based compensation is somehow less valuable to you. It can actually be more valuable than other perks, simply because as the company grows, these can grow proportionately. Sometimes there are healthy tax incentives involved as well.
That brings us to the benefits package, one of the murkiest parts of a job offer. Without knowing what certain perks would cost you out in the open market, it’s difficult to judge what they are worth to you. This is where working with a Personal CFO can be so valuable. Not only can they explain the value of these benefits, they can also help you consider the value to you in your specific situation. For example, many employers offer a workplace long-term disability plan. However, these plans can vary wildly in their specific coverage details; there is no set standard that all companies offer. Additionally, it’s important to realize that one in four Americans will suffer a major disability at some point in their working lives, and of those that do, the average time out of work is over five years. And if you think Social Security Disability will help you might want to think again, because 65% of disability claims are denied, and the average benefit for those that are approved is only about $1100/month.
Taxes are yet another important consideration. While obviously, the federal tax brackets themselves do not change from job to job, there may be significant deductions that are lost in some circumstances over others. For example, someone moving from a large house in the midwest to an apartment in New York City may want to consider the effect of the loss of the mortgage interest deduction. In addition, you may have differences in state and local income taxes to account for as well. Some states can be significantly more expensive from a tax perspective: for example, living in Illinois would cost you about 15% in state and local taxes versus Alaska’s rate of under 6%.
Finally, cost of living is a hugely important factor. If one is being transferred to Bangkok, one of the cheapest modern cities in the world, you are going to be able to bank a whole lot more of your salary than you would be living in San Francisco, one of the most expensive. From a purely financial perspective, then, the total compensation package has to be adjusted by the cost of living to get an apples-to-apples comparison.
Consider the Employer’s Financial Health before Accepting a Job Offer
The financial health of your future employer is often overlooked, but in my experience, it is vital to your long-term success in the new position. Why? Because companies that are financially healthy, growing, and successful simply make better employers. Think about it; if the company is hiring new employees because business is good, then they will be able to offer more upward mobility within the company itself. It’s easier to promote from within than hire from the outside. They already know that you fit within the company culture and are familiar with their way of doing business. Of course, they will have to hire from the outside to fill some positions, but there will be lots of opportunities to go around if they are growing.
In addition, many growing companies offer stock-based compensation to their most valuable employees. As mentioned above, this is because stock-based compensation is often cheaper for the company to offer, but also tends to motivate and engage their brightest talent. And stock-based comp can be a goldmine for early employees. In fact, I’ve seen situations where employees have funded their retirements almost exclusively from an employer-provided stock option plan. While these situations are rare, they are much more likely in the case of companies that are growing rapidly.
On the other hand, no matter how much you admire a company and enjoy your coworkers, your job will probably eventually be a drain on your morale if your employer is barely scraping by financially. Many companies that we once large and successful, but have fallen on rough times, try to avoid laying off employees as long as possible. While this is admirable, it can often mean supervisors have to squeeze more and more productivity out of their staffs while also requiring them to cut costs on everything from office supplies to travel reimbursement. This constant pushing and squeezing from the higher ups eventually generates morale problems among the staff. Sometimes, unfortunately, the end goal is simply just to get employees to quit so that less money has to be spent in layoffs.
How Close Are You to Financial Independence?
For those who have been financially responsible and also successful at their previous jobs, it may be that you are closer to financial independence than you think. Maybe it’s time to meet with a Personal CFO and run the numbers to see how close you are to financial independence. What if you don’t really need a high-paying job to get across the finish line? Of course, if this is a dream opportunity in non-financial terms, you may still want to take it anyway.
But on the other hand, what if you could start that dream small business you’ve always wanted instead? Or work for that non-profit you’ve long admired? While there are many free retirement calculators online you can use, most if not all of them are not sophisticated enough to give you a good picture of your options. A better approach might be to talk to a seasoned professional who has actually helped others before you reach retirement and then been there along the way to make sure they stay successfully retired. Don’t you owe it to yourself to get answers to these questions before you make a serious career move?
Making a job change is always a complex and difficult decision. Not only do you have a career path to consider, but also you have important other factors such as benefits, company culture, and company financial stability. Some of these factors are easier to analyze than others, but don’t take the easy way out and fail to do a thorough analysis. Once you’ve put in your notice, it will be too late to change your mind, so talk to a fee-only advisor today to help you with this important decision.