We often hear of candidates considering opportunities “after bonus pays out”. On the one hand, it’s a great feeling to receive what you’ve worked so hard towards. On the other, there are some common shortfalls in recognising i) the impact of how this waiting impacts your search prospects and ii) what the value of the pending bonus is worth in real terms. Here, I cover why deferring your search to wait for your bonus often resembles a zero-sum game. Additionally, I suggest that many consider foregoing a bonus from an ‘accounting cost’ perspective, while the ‘economic cost’ is often neglected. We consider both the present and probability-adjusted value of your pending bonus, which is becoming increasingly relevant in a time of rising interest rates, inflation, and economic uncertainty.
Bonus timing as a zero-sum game We all know that there is never a ‘perfect time’ to move – and if there is, we only see this in hindsight. Whether in relation to market conditions or your own personal situation, there are always barriers that discourage us from taking the leap. However, timing moves around bonus season is particularly tricky, for several reasons:
1. The competition. Your industry peers (AKA your competition) are also often waiting on their bonus prior to exploring their options. The recruiter sees first-hand how Candidate A was just ‘pipped to the post’ by Candidate B, when each was looking to ‘time the market’ around bonus season. This competition wouldn’t have existed in the same way, if Candidate A had only entered the selection process before the hiring manager had their pick of the bunch.
2. Bonus potential foregone with the prospective employer. Jobseekers often neglect to consider how waiting on a pending bonus can disadvantage future bonus potential. Some prospective employers will offer pro-rated bonuses for a partially completed first year of service. In other cases, prospective employers will have an exact cut-off month, meaning if someone joins shortly afterward, this extra month’s difference can see the new employee be ineligible for the whole of the next year’s would-be bonus. This is always disappointing and unfortunately rarely considered until it’s too late.
3. Accounting for the time spent looking. We need to account for the average time that is spent searching, which often overshoots the bonus pay out date considerably. To consider waiting for your bonus, you are likely more than halfway through the annual cycle. The opportunity that’s worth moving for might take a few months to materialise, and an average process might then take a month. Considering the unlikely scenario that you are both offered and accept the first thing that comes up, this might leave you just 1-2 months shy of being able to resign without sacrificing the bonus due. Here, three options become apparent. Will the prospective employer: i) wait an extra 1-2 months (effectively a longer notice period)? ii) fully/partially buy you out of your bonus? iii) need you to resign now, and walk away from your bonus? In a candidate-scarce market, bonus buyouts need to be acknowledged as a possibility, but not relied upon. In any case, if deciding whether to forego the amount or accept a (possibly partial) buyout, it’s worth defining what your bonus is really worth to you – and not just in nominal terms.
The present value of your bonus While the accounting profession at large focuses on actual cost (i.e., nominal P&L), the economic perspective recognises ‘opportunity cost’ (i.e., comparing P&L to the next-best use of resources available). In an environment of increasing interest rates, the would-be saving opportunity on monthly income (at an assumedly higher salary in the new role) is being foregone on waiting for the future bonus to be received. Equally, we also need to consider the eroding purchasing power of the future bonus amount, due to increasing inflation. The distinction between cash realisable today versus a future date is becoming increasingly relevant. Conscious that many reading this will be (tax) accountants and math aficionados, I will spare you the ‘present value’ and ‘annuity formula’ calculations. However, for anyone unfamiliar with these concepts, these are relatively simple formulas that can be easily found online. These calculations will enable you to calculate your bonus and salary due as present value equivalents and support your decision-making process.
The probability-weighted value of your bonus Once you have arrived at the present value of your bonus (and would-be salary) as a future cashflow – the bonus should be factored to the probability of actually being received. We all saw what happened during the pandemic, and with the recent banking failures, the ‘discretionary bonus’ phrasing in most employment contracts might seem unnerving. Less systemic conditions could also lead to the bonus not being received. Perhaps a sudden change in personal/family circumstances would require a resignation. Perhaps a restructuring, redundancy, or simply not receiving what you were expecting after that key appraisal rating. The possibility of not receiving your bonus may be an unlikely one but is certainly greater than 0%. Putting it all together Timing one’s search around bonuses rarely works out as hoped. There are wider factors that often go unconsidered in timing the market. These include increased competition in candidate-abundant processes in bonus season, sometimes sacrificed bonus potential with the future employer, and considerably overshooting the bonus date to the extent that the actual move often conflicts with the next bonus cycle all over again. The bottom line is that bonuses due should never fully prevent one from being open to other opportunities that may emerge. If bonus due is the only thing holding you back from accepting a new offer of employment, be sure to consider not only accounting cost, but also the opportunity cost using present value calculations.
What is the true value of your bonus? Is it really worth pressing pause on new opportunities? Get in touch with Jay via jay.sky@pro-tax.co.uk to discuss current opportunities which may tip the scale
