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Jargons That You May Encounter While Reading Your Employment Contract

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Since your compensation will slide effortlessly into the contract, the best we can do at this point is to give you a hand with the jargon you may encounter. Plus a few comments, wherever we think they might be helpful:

Base Salary. You want it to be upwardly open-ended..."at least X" and "to be reviewed annually," if escalations aren't prenegotiated.

Bonus. In general, you'd like any bonuses to depend to a reasonable extent on your performance, or on a smaller unit you'll influence in a major way... not just a huge entity you won't make much difference to.

First-Year Guarantee. Make sure that-at least during the first year-you're assured of making 25% to 30% more than if you stay where you are. Maybe your new salary alone will cover the incentive to move. If not, you can probably get the first-year's bonus "guaranteed" by pointing out that, after years of experience, you know almost-to-the-penny what your bonus will be where you are. Obviously, you're far less certain of the new situation. In the second year, of course, you're happy to be treated just like everyone else.

"Signing," "One-Time," or "Special" Bonus. To make up for not immediately coming under intermediate- and long-range compensation programs and to make your relocation more painless than under standard policy-while still not putting your base-and- bonus out of line with other executives at your level-you may be given a "signing bonus," which occurs only "one-time." It's a sensible solution that's used to take care of a variety of problems, and these days very substantial amounts of money may be involved.

Short-Term Bonus Plan. This is the traditional annual bonus, and it is the most universally used incentive compensation device. You may have to meet goals to get paid, and the amount may vary with performance. But normally, whatever you get is paid in cash and subject to income tax.

Long-Term Bonus Plan. This bonus is paid years after it is earned as if it were deferred compensation and usually depends on your individual performance, rather than the success of the overall company. Payment may even await the time you exit the company, retire, or die.

Stock Option Plans. These differ from company to company, and the same company may have more than one plan operating simultaneously.

Incentive Stock Options. Often referred to as "ISOs," these options are highly attractive to employees because the profit they generate is treated as a capital gain, rather than ordinary income. There's no tax due when you buy your shares at the less-than-market option price. The only tax occurs when you sell the shares at a profit, and capital gains rules apply.

To enjoy this advantage, however, you will not be permitted to exercise the options until two years after they were granted, and the price-per-share at which your options are pegged must be 100% of fair market value on the day they were granted. Moreover, you can only exercise options worth up to $100,000 (valued at grant) per year.

Stock Grants. You don't buy the stock. The company gives it to you...usually as a reward for having been with them awhile and/or for having done outstanding work. The purpose is to give you an immediate sense of owning a stake in the company. Normally grants are not made to attract a new unproven person, but rather to reward and encourage a valued employee. The stock may be provided at no charge, or you may have to pay a less-than-market price for it. When you get the stock, you pay income taxes on the difference between what you're paying and the fair market value.

Restricted Stock Grants. Here the company "gives" you stock, but you have to stay a certain period and/or meet certain performance goals; otherwise, you won't actually get it. The tax law calls what they've granted you "substantially non-vested"...oh so true! This device is used to attract and/or retain employees. When you get a grant of restricted stock, you have a 30 day period during which you may elect to pay income taxes on the then fair market value of the stock...either the full market value if you pay nothing for the stock, or market value less what you pay, if you are asked to pay.

If you don't elect to pay income taxes at the time of grant, none are due at that time. But if you do elect to pay taxes then, the increasing value of the stock in the future will be subject to capital gains tax rules, rather than ordinary income tax rules. Moreover, when the restrictions have been fulfilled and you gain ownership of the stock (it "vests"), there is no tax consequence. You're taxed only under capital gains tax rules and only at the time you actually dispose of the stock. However, there's a downside to all this. If the stock becomes worthless before you're scheduled to actually get it, or if you fail to meet the restrictions and never do get it, there's no refund of the income tax you voluntarily paid at the time of the grant.

If you do not elect to pay income tax during the first 30 days after the grant, then income tax must be paid on the difference between fair market value of the stock and what-if anything-you are paying for it when it vests.

Regardless of your decision on the, you may-or you may not-receive the dividends on the unvested shares and/or be able to vote those shares, depending on the terms of the grant. However, if you don't elect to pay the tax, then any dividends paid to you before you actually own the stock are treated as compensation income and can be deducted as an expense by your employer. If you do elect to pay income taxes at the time of grant, then the dividends to you are considered dividend income and your employer cannot deduct them as an expense.
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