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The problem with bonuses is that you aren't attracting talent with them. Say on paper you're offering a new hire 80K. At the end of the fiscal year they end up

The problem with bonuses is that you aren't attracting talent with them. Say on paper you're offering a new hire 80K. At the end of the fiscal year they end up costing you 80K + the bonus. Sure you'll have happier workers, but your getting lower quality people. We have the same problem at the company I work at. We have a ~20% 401k (not matching, just on top of you salaray - it's an ESOP). So your effective salary is 20% higher then your listed one. However, would you rather get 100K and 20K in a 401k, or a taxable 120K? Most young developers would say 120K - I have student loans to pay off! So weird benefits packages, like large semi-random bonuses, are kind of bad because you can't compare them to straight up money.

rdl 13y ago
I'd love having a marginal dollar in tax advantaged vs cash, but I see your point. It is probably the responsibility of the hiring manager to walk candidates through the offer. If you are hiring from your network, you might even be able to advise the candidate on his other offers as well (showing that our total package of 150k is better than the other job with a total package of 120k, but is less than the bigco offer at 200k, but there are these other non financial considerations too). I think this gets even harder when you have employees in multiple offices and potentially multiple countries. I've seen posted wages for jobs where "Asians" got 1.37/h and "Western" got $20.45/h, posted on a sheet in the actual workplace wall.
dylangs1030 13y ago
Regarding your example about 100k and 20k 401k vs taxable 120k, it's probably not fiscally responsible to choose the latter except for certain fringe cases. Without going into the deep financials, it's much easier to live below your means now in your 20s then when you are raising a family later on in life. It would therefore be wiser to live below your means (even if this means living like a college student in San Fran or NYC) and choose 100k, be relatively frugal, and put away that extra 20k without tax. Starting a solid 401k in your early 20s is one of the most fiscally sound decisions you can make. I don't mean to criticize your reasoning, I'm just offering another perspective.
- rdl 13y ago
  It's great to say that (and it may be technically correct), but it's a generalization of cashflow > revenue at startups. If you're established and have a buffer, it's safe to optimize for revenue. Early on, you optimize for cashflow. If I were a 22 year old with 120k in college debt, I'd probably prioritize building a cash hoard. Plus, there are actually investments in operational stuff which will give you a higher return than even compounded 401k gains, and making those early might make sense. e.g. spending $500 to learn a key technology, living in a place which exposes you to the cofounders of your first startup or your future spouse, etc. 401k > college loan repayments above the minimum, probably generally true -- loan repayments are risk free, but it would depend a lot on the rate. If it's a 9% college loan, and you're in a 22% marginal tax bracket, and can get 3% return on your money, yeah. If you financed your college education on credit cards, ...
- throwmeaway33 13y ago
  This entirely depends on your loans. If you're loan rates are larger than the rate you're making in your 401k, then it's better to pay off the loans.
  - rdl 13y ago
    There's also marginal income tax rate vs. compounded gains to take into account. You can also deduct some student loan interest.
- deleted 13y ago
  [deleted]
philwelch 13y ago
For a non-public company, offering the company's own stock as the only retirement plan is borderline fraudulent in my opinion. For a public company, at least stock is as good as cash. But for a startup, that's akin to paying your employees in lottery tickets and in any case where you can't sell the stock, it's an unacceptable level of risk--if the company goes south, you lose your job and your nest egg disappears?
- rdl 13y ago
  Doing an ESOP as a startup would be weird. You'd be buying common stock (?) at the valuation for cash (?), which would really complicate things. If you were a seed stage company, $20k in common stock could actually be >99% of the company (!!!). It might be a cute way to let someone buy $1.00 or so in stock inside his 401k (0.1%?) and then $19999 worth of S&P500. If it's post-A or post-B it would be a lot more sane, but still $20k might be a lot. If I were an engineer with 0.1% of a company hired at a midway-between-A-and-B company, and I could get $20k in free money, I might put $5k into buying extra company stock if that got me 0.3%, particularly since it would let me sell it and use the gains to invest tax-deferred for the next ~40 years. There is an utterly batshit insane thing called a "Rollover As Business Startups" where you roll your own 401k over into a 401k in your newly-formed business which then buys its own stock and use that to capitalize your business. This basically lets you 1) use your 401k as capital when you can't raise (useful for franchises and traditional small businesses) 2) tax advantages. The IRS hates it, although it's fundamentally legal; they go after it on nitpicking detail compliance, which people often screw up. It's about $50-100k in 401k balance before it makes sense to do, since plan costs are about $10k to set up. I thought you could do it with Roth 401k, but it appears you may not be able to (if that could be done, it would be amazing.) (IANAL/IANATL/IANATA)
  - throwmeaway33 13y ago
    I'm also not a lawyer, but I think you wouldn't be able to make an ESOP for a startup. The value of the stock which you buy from the pool is determined by an outside auditor that evaluated the company. My guess is that startups are too volatile to evaluate and simply no one would do it. Also, the ESOP I work for doesn't have the 401k invest back into itself. lol. That sounds super shady. It's a normal 401k through a 3rd party company, where you choose to invest in different funds. I don't really touch it and just keep it in the default fund b/c I see the whole things as gambling.

rdl 13y ago

I'd love having a marginal dollar in tax advantaged vs cash, but I see your point. It is probably the responsibility of the hiring manager to walk candidates through the offer. If you are hiring from your network, you might even be able to advise the candidate on his other offers as well (showing that our total package of 150k is better than the other job with a total package of 120k, but is less than the bigco offer at 200k, but there are these other non financial considerations too). I think this gets even harder when you have employees in multiple offices and potentially multiple countries. I've seen posted wages for jobs where "Asians" got 1.37/h and "Western" got $20.45/h, posted on a sheet in the actual workplace wall.

dylangs1030 13y ago

Regarding your example about 100k and 20k 401k vs taxable 120k, it's probably not fiscally responsible to choose the latter except for certain fringe cases. Without going into the deep financials, it's much easier to live below your means now in your 20s then when you are raising a family later on in life. It would therefore be wiser to live below your means (even if this means living like a college student in San Fran or NYC) and choose 100k, be relatively frugal, and put away that extra 20k without tax. Starting a solid 401k in your early 20s is one of the most fiscally sound decisions you can make. I don't mean to criticize your reasoning, I'm just offering another perspective.

rdl 13y ago
It's great to say that (and it may be technically correct), but it's a generalization of cashflow > revenue at startups. If you're established and have a buffer, it's safe to optimize for revenue. Early on, you optimize for cashflow. If I were a 22 year old with 120k in college debt, I'd probably prioritize building a cash hoard. Plus, there are actually investments in operational stuff which will give you a higher return than even compounded 401k gains, and making those early might make sense. e.g. spending $500 to learn a key technology, living in a place which exposes you to the cofounders of your first startup or your future spouse, etc. 401k > college loan repayments above the minimum, probably generally true -- loan repayments are risk free, but it would depend a lot on the rate. If it's a 9% college loan, and you're in a 22% marginal tax bracket, and can get 3% return on your money, yeah. If you financed your college education on credit cards, ...
throwmeaway33 13y ago
This entirely depends on your loans. If you're loan rates are larger than the rate you're making in your 401k, then it's better to pay off the loans.
- rdl 13y ago
  There's also marginal income tax rate vs. compounded gains to take into account. You can also deduct some student loan interest.
deleted 13y ago
[deleted]

philwelch 13y ago

For a non-public company, offering the company's own stock as the only retirement plan is borderline fraudulent in my opinion. For a public company, at least stock is as good as cash. But for a startup, that's akin to paying your employees in lottery tickets and in any case where you can't sell the stock, it's an unacceptable level of risk--if the company goes south, you lose your job and your nest egg disappears?

rdl 13y ago
Doing an ESOP as a startup would be weird. You'd be buying common stock (?) at the valuation for cash (?), which would really complicate things. If you were a seed stage company, $20k in common stock could actually be >99% of the company (!!!). It might be a cute way to let someone buy $1.00 or so in stock inside his 401k (0.1%?) and then $19999 worth of S&P500. If it's post-A or post-B it would be a lot more sane, but still $20k might be a lot. If I were an engineer with 0.1% of a company hired at a midway-between-A-and-B company, and I could get $20k in free money, I might put $5k into buying extra company stock if that got me 0.3%, particularly since it would let me sell it and use the gains to invest tax-deferred for the next ~40 years. There is an utterly batshit insane thing called a "Rollover As Business Startups" where you roll your own 401k over into a 401k in your newly-formed business which then buys its own stock and use that to capitalize your business. This basically lets you 1) use your 401k as capital when you can't raise (useful for franchises and traditional small businesses) 2) tax advantages. The IRS hates it, although it's fundamentally legal; they go after it on nitpicking detail compliance, which people often screw up. It's about $50-100k in 401k balance before it makes sense to do, since plan costs are about $10k to set up. I thought you could do it with Roth 401k, but it appears you may not be able to (if that could be done, it would be amazing.) (IANAL/IANATL/IANATA)
- throwmeaway33 13y ago
  I'm also not a lawyer, but I think you wouldn't be able to make an ESOP for a startup. The value of the stock which you buy from the pool is determined by an outside auditor that evaluated the company. My guess is that startups are too volatile to evaluate and simply no one would do it. Also, the ESOP I work for doesn't have the 401k invest back into itself. lol. That sounds super shady. It's a normal 401k through a 3rd party company, where you choose to invest in different funds. I don't really touch it and just keep it in the default fund b/c I see the whole things as gambling.