When your employer’s finance people look at you they see an expense. They may or may not see related revenue and seldom see related profit as an effect of your work. Consequently the cost of you is what they tend to focus on.
The cost of an employee includes salary and benefits as well as related costs such as rent and phone charges. Each one of these items is a potential bargaining chip for you.
Bean counters look at expenses as fixed and therefore indirectly related to the volume of sales, or variable and directly related to the volume of sales. There are all kinds of accounting gimmicks to time and allocate revenue and expense, but basically it is better for your employer if your pay is 100% variable. In a perfect world, everybody would work on a commission basis only. The trouble with this is many job functions are essential but can’t be easily tied to a sale or unitized to a product or brand because they are shared across business units (head office functions). However, the bean counters know that these functions are necessary to the success of the enterprise, their own jobs being an example.
In many organizations, revenue producers call the shots and everyone else “sells” services to them. This is how most insurance companies work. The top sales people, measured in sales for themselves and the people who work for them. These folks control what gets sold where and how much gets spent on back office support. The problem with this model is that the marketplace values insurance companies based on their ability to assess risk (actuarial science), make investments (finance) and process claims (back office operations), all skills successful agents generally lack. Still, the dominance of the income producer can’t be shaken. For profit entities often have this problem. In banking the “line guys” have power. In consumer package goods and high-tech it’s the heads of Lines of Business, brands or sales regions. These potentates in business silos control who gets hired and fired and how budgets get allocated.
What this means to you is that you have to be an income producer to be powerful in any of these kinds of organizations. I will come back to how to do this later. Income for revenue producers tends to include a variable component. If, however, you want income that is both high and predictable you want a portion to be salary. Ideally, your salary covers your basic expenses and your other compensation is the gravy. As a general rule, you should have as low a portion of salary as you can sleep with. The balance should be commission tied to sales. Avoid draws against future earnings. This may sound like a good deal until you realize that it is a loan they are making you against earnings you may or may not make. If you don’t make your quota you can owe them money even if you sold your heart out. In this situation you would have been better off not working for somebody else at all. Being willing to take variable compensation helps a lot in determining how negotiations go, because you can offer employers a financial win-win. They only pay you more to the extent that you earn them more. This means, however, that you have to be accountable for revenue goals that you can actually influence. It also means that you had better be comfortable selling and being measured on what you sell.
There has been much press about stock options and other non-traditional forms of compensation for executives. While some people have done well you should not put yourself in the position of having to be an investor in the company your work for. This is a clear conflict of interest and a poor risk. No qualified investment advisor would ever tell you to be that concentrated in one company where you can also have a conflict of interest or emotional attachment. The same goes for most franchises. No sensible person wants to be in the position they want you to be in – being both part owner and wage-slave/debt serf. That way you can be screwed two ways. Your motto should be, get the cash and invest it yourself.
Don’t borrow money from your employer under any circumstances.
Don’t lend to your employer if you can help it.
If you travel for business you may be expected to use your own credit card and file expense reports for later reimbursement. In some cases, your filing prompt expense reports will not eliminate the possibility that you will incur finance charges on a revolving card balance you have because they paid you back after the ever dwindling grace period elapsed. Always follow the rules on reporting expenses and keep original receipts. Never pad expense reports. Always file your reports promptly. Don’t trust anybody else’s math. Use a corporate AMEX card or Diners Club card if offered. These T&E cards don’t come with lines of credit and don’t report in the same way to credit bureaus in ways that can adversely affect your credit the way using your own credit card can when your employer made a late with a payment. If you do use your own card, have a separate account for business. Never commingle business and personal funds. You may be able to keep airline frequent flier miles or may have to surrender them. Either way, be able to prove which ones are business related. The IRS may one day treat this as income.
Companies want you to cover travel expenses and reimburse you because they don’t trust you. They have found that they incur higher travel costs when they are on the hook than when their employees have to front the money. They are telling you by their policy that they consider you a fraud risk. They have also realized that they can make you do clerical work that they would otherwise have to hire others to do. If you must do this, do it on their time, not yours. Make sure that whatever hourly rate they are paying you is going to doing work that could be done more cheaply by others. An added benefit to them of you fronting the money is that they can manage the float and invest it at a profit. For the time you laid out funds and they didn’t and they have not paid you back you are making an interest free loan to them that they can turn into pure profit. They coerce this loan by making it a condition of employment. This is ordinarily called extortion and is a felony. They can get away with it. Don’t ask me why. However, you can make it a point of negotiation. It doesn’t hurt to ask that all travel and expense money be advanced. If you can’t get an advance, then ask that you be paid interest or late fees charge to you if they are delinquent payers. In any event you should only travel when necessary and only spend what you must. Whatever they agree to, get it in writing and be prepared to send it to any internal bureaucrat who quotes company policy to you. Try to make it a policy not to lend to your employer. It’s fun to quote your “policy” to them and it drives them nuts. I don’t feel guilty about this. It should be illegal for them to force me to be their creditor, pay me no interest for it, make me do a lot of clerical work and be deadbeat borrowers. The least I can do is make zealous drones in Accounts Payable fear me.
As everyone knows and I will not belabor, health insurance is too expensive to buy on your own, especially if you have dependents. No, the Affordable Care Act (a.k.a. Obamacare) did not fix this for most people. The annual increase in this cost alone makes you wonder how the government can continue to claim we have no inflation. Health and other payroll deduction programs are reasons why people stay in jobs they hate. I will treat some of these “benefits,” they make you pay for out of each paycheck namely health, life and retirement deductions.
Every year you pay more from health coverage because your employer does. They may be shouldering a much bigger percentage of the increase than they pass on to you. As expensive as it is for them and you, the total cost of covering you is less than it would be if you were able to buy the coverage on your own. But you probably can’t unless it is part of a short-term COBRA continuation that lapses a short time after they lay you off. It is heart stopping to pay COBRA rates, but these are still the wholesale rates made available to the company. The difference between wholesale and retail rates—where they are even offered—has nothing to do with risk. It has to do with insurance companies wanting to deal with big customers and faceless companies, not emotional sick individuals. This helps explain why the distraction over the percent of households with coverage did nothing to curtail the relentless rise in the cost of care or the fact that healthcare costs are the leading reason for personal bankruptcy in the USA. As dismal as the cost of insurance is, you don’t want to have a major illness in your family and not have coverage. So you have to make the most of a crummy deal and pay the rates, realizing that you will also face hefty out-of-pocket costs beyond what the insurance plan covers. This means you must invest some time in choosing the plan that is right for you from among the choices they offer you.
In the interest of time and space, I am not here going to go into detail about the healthcare exchanges and options available as a result of the ACA. Suffice it to say that the rules are complex, have tax ramifications your accountant has trouble understanding, and are pretty much all a bad deal for the consumer.
For all forms of insurance only pay for the coverage you need. A good rule of thumb is, you should pay to cover risks or hazards that would be catastrophic if they occurred and not to cover hazards that you can afford to pay without making a claim. An example, if you don’t have flood insurance and are in a flood area (they exist in all fifty states) you should have it. The premiums are not very expensive relative to the benefit. Your homeowner’s policy should tell you if you have this. If you are not sure, ask your agent or look up flood insurance on FEMA.org. On the other hand, you should not be paying for eyeglass coverage. You can probably afford to pay for eyeglasses and should not be paying a premium to cover what you can handle out-of-pocket. This is called self-insurance and companies do it all the time.
Getting back to health insurance, it is better to be able to see whatever Doctor or specialist your research indicates can provide the best care – not those who are “in the network.” It is also not a good thing to have to ask for permission from the insurance company to get into an accident and have to visit a hospital. These are good reasons to avoid network coverage plans (Accountable Care Organizations or what used to be known as HMO’s) even though they can seem like a pretty good deal. Yes, you will have higher out-of-pocket expenses in the old style plans but you can also get better coverage for hospital stays, expert help and recommended treatments.
Forget “cafeteria plans” that take your real money and keep it if you don’t incur enough claims that year. This is a scam that should be outlawed. You should not have to make an accurate forecast of all family medical expenses for a year or lose part of your salary if you are wrong. Don’t sign up for use it or lose it plans unless you know you will have large expenses that year that you would otherwise be unable to meet.
If you have an option to get group life insurance for yourself and your spouse at wholesale rates from a recognized, quality provider you should take it. You can get cheep rates and not have to go through medical exams or other underwriting. Check with A.M. Best to see how the insurance provider stacks up. Just keep in mind that if you buy more than an amount your employer will tell you the insurance will be treated as income by the I.R.S. Experts advise buying term life and investing the difference. There is no need for you to take a payroll deduction to buy permanent (cash value) insurance.
Don’t take payroll deductions for stuff you don’t need. Ever! You may be offered disability insurance. While the cost of a disability is high the cost of premiums is too outrageous for most people to bear. You should be maximizing income so as to build a diversified pool of investments to cover a rainy day – not paying half of what you make to insurance companies to cover things that don’t happen.
Now we come to retirement plans. The first thing to keep in mind is that employers used to provide for their employees after they retired. They don’t have to do this any more (unless you are a member of a public service worker union with a guarantee based on the government’s ability to tax other people to pay the benefits). In many cases, they are just refusing to pay obligations they incurred to people who were faithful employees for their entire careers. These obligations come in the form of both financial payouts and continuing health care coverage. A word to the wise: don’t count on anything you can’t take with you when you leave. Don’t do business with telemarketers who swoop down on employees of companies that have announced layoffs. Any plan that isn’t portable is not worth as much as one that is. The bad news is, employers may not have to provide anything at all in the future – not even to those whom they had made promises to in the past. This is another reason why you should maximize current income and save a portion that you invest and control. There is no substitute for doing this. Still, there are some good deals to be had. A good thing to remember is, what the government grants now they can take away later. Also, many of these “benefits” are beneficial to employers and insurers who lobbied for them and wrote them, not you. Ask a qualified tax advisor for help.
It is always nice to get the government to help you save with a tax break. It’s also great when your employer puts money into the account. In a 401k you get both of these things. 401k plans, like IRAs, offer tax deferral. This means you can reduce your pre-tax income by the contribution amount within certain limits. This reduces your tax bill today by putting off the treatment of this income until you withdraw it upon retirement when, the theory goes, you will be in a lower tax bracket. The benefit of this is not as great as it was because current tax law means capital gains get better treatment than salary. You should be maximizing capital gains now and in the future and not counting on the tax code to bail you out. Besides, the government may change the rules later and the benefit of tax deferral would diminish. There are hefty penalties for early withdrawal and complex rules for getting your money out of these plans. The plans also give you some investment choices. The simple thing to do here is to make a simple allocation decision into a mix of stocks in big companies that you couldn’t afford to buy on your own and taxable bonds that you might not want to hold while not incurring trading and high management fees that brokers charge. This means use index funds. The lower cost the fund the better. Buy from the best names in funds, like Vanguard and T. Rowe Price. Don’t buy your company’s stock with your own money in your plan. Keep it simple. Review the mix at least each year. Make sure the allocation meets your goals and risk profile. If you would not otherwise be 100% in stocks, don’t do it here. A mix of 25% government bonds or better will protect you against stock market volatility but does not help you if inflation heats up. This is not an actively traded account so don’t treat it as one. Vested money in the plan means the amount you can take with you when you leave the company. Only the vested amount is truly yours. You are always 100% vested in the money you contribute. You are usually vested on a schedule for the amount the company contributes. The company may contribute 25 cents for every dollar you put in. They call this your “match,” as a vestige from the halcyon days when they contributed $1 for every $1 you put in. In those days, they were so happy to be getting out of the pension business they were generous. Now they don’t feel they owe long-term employees as much. This money may start being added after you are with the company a few years. The schedule of vesting may take several more years, with only a portion available in year one. The trend has been for shorter requirements to participate with lower match rates. Whatever they give you is free money. Don’t let their vesting schedule influence your decision to stay or leave. These plans are portable, unlike conventional pension plans that only started after you had been there for a million years. This means that if you know you are going to leave you need to get the name and address of the plan administrator and any applicable forms you will need to do a rollover into a similar “qualified” plan at your new employer or a rollover IRA at any bank, brokerage or mutual fund company. There are time limits and other qualifications on rollovers. I have not discussed Roth IRAs and other tax advantaged options for which you may qualify. Get help from a licensed professional who is not living off commissions with this.
Profit sharing means they put money in a tax deferred account for you when business conditions permit and senior management feels like it. If the account is tax deferred there are generally the same restrictions on withdrawal and rollover as with a 401k.
Generally, you want cash — the more the better. Profit sharing and other plans can be a nice kicker. Your employer wants you to take anything in lieu of cash. Your best bet is to maximize cash bonus variable compensation and invest what you don’t need to live. Avoid excessive payroll deductions. Self-insure whenever possible. Diversify your investments and your income sources away from dependency on one employer (more on this later).