The Biggest Financial Mistake New Executives Make is Negotiating the Wrong Number
When a raise at work materially boosts your discretionary income and ability to save—while in your twenties and thirties—cash probably matters most. But in your forties and beyond, especially at the highest marginal tax rates, receiving more of your compensation as equity gives you a shot at exponential growth and is far more likely to boost your net worth over time.
Generally, by the time you’ve reached the executive ranks of a company, a bigger paycheck rarely changes your day-to-day spending capacity in a meaningful way. By contrast, equity can move the needle tremendously. Whether via restricted stock units (RSUs) or performance share units (PSUs), if you’re negotiating a new executive compensation package, prioritize equity over cash.
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When offers land on the table, the spotlight almost always falls on base salary and cash bonus because they’re the easiest numbers to compare. Ironically, though, they’re the least powerful levers you can pull once you’re in the top three tax brackets. A higher salary or bigger annual bonus suffer from diminishing returns because so much of the incremental dollar is taxed away the moment you earn it.
For instance, a $200,000 bump in pay might shrink to nearly half of that after federal, state, and local taxes, leaving you with far less to show for your hard work. That’s why fixating on the cash component can feel both satisfying during negotiations yet underwhelming after you do the math. Equity, contrarily, offers you a chance at long-term wealth-building as opposed to a one-time paycheck.
To take it a step further, the type of equity you receive can have a tremendous impact on your long-term financial success as well. While most employees who receive equity are granted RSUs, as a senior manager or executive, PSUs are the real game changer considering they tie more of your upside to the very outcomes you were hired to influence.
PSUs can create the kind of asymmetric financial motivation that made incentive stock options (ISOs) such a powerful wealth engine for many tech executives in the 1990s and early 2000s. PSUs are also simpler in practice than ISOs since a decision about when to exercise is not required and there is no need to raid your savings account to fund an exercise. PSUs generally convert to shares on a schedule you can anticipate, making it easier to pair with a standing 10b5-1 plan that gradually sells a portion of vested stock to manage concentration and tax liability.
Unlike time-based RSUs that only require you to continue showing up to work for a payout, PSUs move the dial based on performance. They are typically granted as a target number of shares with a 0%–200% payout range depending on how the company performs over a multi-year period.
As long as you and the company meet the established goals, you earn more shares than the initial target. And if you miss, you earn fewer. That leverage helps to align your compensation with the value you help create and gives you a shot at a meaningfully larger outcome than a same-value RSU grant.
But RSUs still serve a purpose. Though they cap your upside at one share per unit, they also serve as the ballast that protects you if the company underperforms or if markets suffer from a black swan event, like the Great Financial Crisis or the Covid-19 Pandemic. When asked, many compensation committees will default to a 50/50 or 60/40 blend of PSUs and RSUs, which is perfect because it allows you to achieve better pay-for-performance while still preserving some downside protection via RSUs.
Either way, by putting your negotiating energy where it actually matters—the structure of the equity, not the salary and cash bonus—you turn what would have been a one-time pay bump into an opportunity to build something that compounds well beyond your tenure. With the right blend of RSUs for stability and PSUs for upside, your equity package becomes less of a reward for past performance and more of an opportunity to build lasting wealth in the future.
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Malcolm Ethridge is the Managing Partner at Capital Area Planning Group, based in Washington, D.C. His areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits.
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The information provided is for educational and informational purposes only, does not constitute investment advice, and should not be relied upon as such. Be sure to consult with your legal advisors before taking any action that could have tax and legal consequences.
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