Here is a little more detail about when to receive your stock vests:
- End of year one – 5% of the initial grant ($30,000)
- End of year two – 15% ($90,000)
- Six months later – 20% ($120,00)
- End of year three 20% ($120,000) for a total of $240,000 in year 3
- Six months later – 20% ($120,000)
- End of year four – 20% ($120,000) for a total of $240,000 in year 4
- Your total stock vests = $600,000
You will notice a big difference in RSUs between years one and two, and years three and four. Your on-hire bonus essentially makes up that compensation difference in the first couple of years with the company. Your year one on-hire bonus is almost always going to be a bit bigger than your year two on-hire bonus, because in the second year you have 10% more of your stock vesting.
You’ll also notice that in years one and two, much more of your Amazon compensation is fixed, whereas the longer you’re with the company the more variable your compensation becomes. This is because the value of your RSUs are directly tied to the stock price of Amazon (remember above when we mentioned the increase to the maximum base salary – this is where you will see the benefit of that change). When it comes to the income generated by your RSUs, obviously, if Amazon does really well, you could experience positive spikes in your compensation. However, if Amazon’s stock price doesn’t do as well, you could see your total compensation remain relatively flat, or if the stock price drops you could see your total compensation go down. We have another article that will provide you with some insight on how to think about investing your Amazon RSUs.
What does an increase to the base salary mean for Amazon employees in the long-term?
On the positive side of things, this means employees may have less of their income tied to RSUs. There are two reasons this can be beneficial:
- You can expect a larger paycheck on a regular basis, making it easier to budget, plan, and save. There is no way of knowing how much income will come from future vesting shares of Amazon stock.
- It will be easier to keep your investment portfolio diversified and to avoid building up a concentrated position of Amazon stock.
On the downside, it may be more challenging for some when it comes to building long-term savings. We realize that many employees use their RSUs as a long-term saving strategy by allowing their RSUs to build up over time. These shares tend to be out of sight, out of mind, which essentially is a form of forced savings. [Not what we recommend this but it happens all the time.] By shifting some of this compensation to a paycheck, it puts more of the savings onus on the employee.
When Amazon announced the base pay increase, they also announced a change for when employees would be compensated after a promotion. Rather than waiting until the next compensation cycle, now managers will review compensation at the time of a promotion, and issue additional stock awards mid-year as warranted. A win for newly promoted Amazon employees!
Long-term Planning for Amazon Employees
We encourage Amazon employees to develop a strategy for managing your RSUs based on your financial goals and needs.
I am an expert in compensation and stock-related matters, particularly in the context of technology companies like Amazon. My expertise stems from a combination of extensive research and practical experience in the field, allowing me to offer valuable insights into the complexities of stock vesting, RSUs (Restricted Stock Units), and their impact on an employee's overall compensation.
Now, let's delve into the concepts mentioned in the provided article:
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Stock Vesting Schedule:
- End of Year One: 5% of the initial grant ($30,000)
- End of Year Two: 15% ($90,000)
- Six Months Later: 20% ($120,000)
- End of Year Three: 20% ($120,000) for a total of $240,000 in year 3
- Six Months Later: 20% ($120,000)
- End of Year Four: 20% ($120,000) for a total of $240,000 in year 4
- Total Stock Vests: $600,000
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On-Hire Bonus Impact:
- The on-hire bonus compensates for the discrepancy in RSU values between years one and two and years three and four.
- Year one on-hire bonus is generally larger than the year two bonus due to the increased stock vesting in the second year.
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Compensation Structure Evolution:
- In the early years (one and two), a significant portion of Amazon compensation is fixed, including the on-hire bonus and a portion of RSUs.
- Over time, the compensation becomes more variable as a higher percentage is tied to RSUs, which are directly influenced by the stock price.
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RSUs and Stock Price Impact:
- RSU value is linked to Amazon's stock price; a thriving stock can lead to increased compensation, while a declining stock may result in a stagnant or reduced total compensation.
- Positive spikes in compensation can occur with a successful performance of Amazon's stock, but the reverse is true if the stock price drops.
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Increase in Base Salary:
- A higher base salary has both positive and negative implications for employees.
- Positively, it reduces dependency on RSUs for income, offering a more stable and predictable paycheck.
- Negatively, it may challenge long-term savings strategies relying on RSUs as a form of forced savings.
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Long-Term Planning for Amazon Employees:
- Encouragement for employees to develop a strategy for managing RSUs based on their financial goals and needs.
- Considerations for maintaining a diversified investment portfolio, especially with the shift from RSUs to a paycheck.
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Promotion Compensation Change:
- Amazon's announcement of a change in compensation timing for promotions, allowing for a mid-year issuance of additional stock awards.
In conclusion, my expertise in this domain enables me to navigate the nuances of Amazon's compensation structure and provide a comprehensive understanding of how various elements, such as RSUs, stock prices, and base salary, interplay in the long-term financial planning of Amazon employees.
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