As an Amazon employee it is important to understand how your compensation structure works and to develop an investment strategy. The way you are compensated in your first two years of employment looks very different than how you are compensated in years three, four, and beyond which in turn shapes the ways in which you should think about investing.
In the video below we walk you through an example of how to automate your investing year by year, helping you grow your retirement savings, decrease your concentrated stock risk, and boost your short and mid-term saving goals
Starting With the Basics – How Do You Get Paid at Amazon?
There are three ways you are compensated:
- Base Salary: This is straightforward, simply the paycheck you receive every month
- Year 1 and Year 2 On-hire Bonus: Think of this as additional base salary. The bonus is paid out with every paycheck, so for example, in Year 1 if you receive an on-hire bonus of $60,000, you’ll receive an additional $5,000 per month. The same method of payment will occur in Year 2, simply divide your bonus by twelve.
- Restricted Stock Units (RSUs): These are shares of Amazon stock that you will receive over time. 5% of your shares will vest on (or around) your first anniversary. 15% of your shares will vest at the end of Year 2, and then 20% of your shares will vest every 6 months until you’ve been with the company for 4 years.
Predictable Pay vs. Variable Pay
In your first two years at Amazon most of your compensation will come from your salary and on-hire bonuses (predictable). In subsequent years, a higher percentage of your total compensation will come from RSUs (variable). In the example below, you can see how your pay goes from predictable to variable in your first four years. Our example employee makes $150,000 in their first year at Amazon and receives an increase in salary over time. This same employee also receives an on-hire bonus for years one and two as well as a small percentage their RSU vests (5% and 15%). Their RSU vests increase substantially in years three and four when 40% of their shares of Amazon stock vest per year.
In this graphic you will notice the dramatic change between predictable and variable income when you look at Year 2 compared to Year 3. In Year 3, our example employee did not receive an on-hire bonus (predictable), but they received a much larger percentage of their Amazon stock grants (variable).
Automate Your Investing
Looking specifically at your comp structure for Year 2 and 3 can help to illustrate how an employee can automate the way they invest for retirement and for other savings goals. When saving for retirement you will have the ability to max out your Amazon 401(k) and the Mega Backdoor Roth 401(k) available to Amazon employees. You can invest for your short and mid-term saving goals using a taxable brokerage account. A taxable brokerage account is for money you want to save above and beyond your retirement accounts – this can be an individual or joint account at Fidelity, Schwab, TD Ameritrade, etc.
In our example below, we will demonstrate how to automate your investing when your income shifts from more predictable (Year 2) to more variable (Year 3 and beyond). Our example employee knows how much they need to spend annually which informs how much can go into each of their saving buckets – 401(k), Mega Backdoor Roth 401(k), and taxable brokerage account.
In Year 2, it’s fairly easy for our employee to automate their investing because so much of their income comes from their salary and on-hire bonus.
In Year 2 this employee has enough income to fund their retirement savings and quite a bit leftover to save into a taxable brokerage account. The nice thing about this is that nearly all of the savings can be automated because it is coming from predictable income. Our employee gets things set up once and the saving and investing process will automatically happen every month.
In Year 3, our employee will need to be more strategic about their investing because a lot more of their income will come from vesting RSUs (shares of Amazon stock). When RSUs vest, by default, they are given to the employee as shares of Amazon stock. We encourage folks to sell these shares right away (a process which can also be automated) and to invest excess proceeds into a taxable brokerage account. This enables the employee to diversify their portfolio away from a concentrated holding in their own company stock, and instead, spreads risk over thousands of companies in a well-diversified portfolio.
You can see below that the dollars being saved automatically, into the taxable brokerage account, are substantially smaller because of the larger percentage of RSUs vesting in Year 3. Our employee will need to be more intentional about selling their RSUs and investing those dollars.
This example demonstrates the importance of automating as much of your investment process as possible because you will have more to consider when it comes to your stock vests. You will want to remain focused on how you invest your RSUs to ensure you maintain your short and mid-term saving goals.
The Importance of a Plan
We encourage Amazon employees to automate as much of their investing as possible and to develop an investment strategy based on your financial goals and needs.
Too busy to do all this on your own? Have a question about your situation? Looking for a financial advisor to offload all this work to? Let us know if we can be a resource for you.
Disclaimer: Third Party: Avier Wealth Advisors is not affiliated with Amazon. There is no guarantee that the information we have provided is accurate. Amazon employees are encouraged to contact their employer should they have any questions regarding their employee benefits.
Taxes: Avier Wealth Advisors does not prepare taxes. The tax ideas presented are meant to demonstrate general concepts rather than precise calculations. We consult with your tax professional for exact calculations.