With all of the compensation opportunities available, Accenture Managing Directors have the potential to build a large net worth.
However, these opportunities could mean you have negative cashflow each month. The MD cashflow issue starts when the VEIP is fully utilized.
This 30% after-tax contribution means you’ll still pay taxes on the income you won’t see for at least a year.
There are strategies to help you manage through this cash flow crunch, which we’ll discuss below.
The First Year as MD is the hardest
While it might be true the first year as a Managing Director is the hardest because of the challenge of becoming an MD, it’s also the hardest financially!
That’s because you’re fully contributing to the VEIP, but you won’t see any money back until January the following year.
Here’s a VEIP illustration to help explain:
You can’t sell any Accenture shares accumulated in the VEIP program until you’ve fulfilled all requirements and received the VEIP RSU grant on Jan 5th of the next year.
Even though you can start selling after January fifth, you also need to think through the tax consequences of these sales.
If you sell within one year of purchase, your gains will be taxed as short-term capital gains or your ordinary income tax level.
If you wait longer than one year, you’ll pay the long term capital gains tax rate, ranging from 15%-23.8% for federal and varies by state.
Case Study: Cash flow impacts of promotion to Managing Director
Let’s walk through some examples to illustrate the cash flow problem many Accenture MDs experience.
The example below is for an Accenture Senior Manager (Ahmer) who makes $220k per year, and after retirement savings, expenses, and taxes, he still has almost $16,500 leftover per year.
Things are going well for Ahmer, but what happens when he receives his much anticipated Managing Director promotion?
Let’s say Ahmer received a 25% raise and a $40,000 cash bonus. Additionally, he’s decided to max out his VEIP contribution to build as much equity as possible.
Here’s how his updated numbers look:
Ahmer’s gross income is $65,000 higher, but went from almost $1,500 a month positive cash flow down to nearly $3,000 per month negative cash flow!!
This cash flow drop is so drastic because the VEIP purchases are calculated based on gross income and bonus.
Ahmer now contributes $94,000 per year to the VEIP as a Managing Director.
However, he’s still taxed on his full compensation because the VEIP program is non-qualified and non-tax deferred.
Depending on his state and federal tax situation, he could easily be in a combined 50% tax bracket.
So even though Ahmer is contributing $94,000 to the VEIP, he still has $47,000 in taxes to pay on that amount, even if he can’t access the cash flow!
Strategies to manage cash flow issues as MD
The good news is the cash flow issues is easily solved, especially if you’ve prepared ahead of time. Here are steps to help manage:
1. Determine cash flow shortfall
It’s hard to know exactly when you’ll receive a Managing Director promotion, but most people usually have a pretty good idea of when they might make it.
When you’re within 1-2 years of an MD promotion, you need to start thinking through these major cash flow implications.
To do this, fill out the following form to get an idea of your current cash flow.
Hopefully, you already have a surplus, because if you don’t, it will only get more challenging from here.
After you’ve assessed where you are, we need to calculate the impacts of your MD promotion and your anticipated shortfall.
To this, fill out the following form, with info carried over from the first form.
This is your anticipated shortfall in your first year as a Managing Director.
2. Cover Shortfall
Now you know the anticipated shortfall from the first step, you need to get ahead of it. There are a couple of options to cover your anticipated shortfall:
A. Save up money beforehand
Let’s be honest, if you’re already an Accenture Senior Manager, you should have a good amount of money saved.
You’ll want to keep your six-month emergency fund on hand, but any extra cash can be allocated to cover your cash flow deficit as an MD.
If you’re short, start saving enough to cover the cash flow shortfall.
B. Sell Accenture stock previously accumulated
If you’ve participated in the Accenture ESPP, you should have a decent amount of stock sitting in your Morgan Stanley account.
Optimize your stock sales by only selling stock that qualifies for long term capital gains first.
3. Plan for the future shortfall
Although your cash flow situation will improve in your second year as a Managing Director since you have access to the VEIP purchases, your monthly cash flow shortfalls still need to be managed.
Since your VEIP purchases from the previous year become available on January 5th, you can begin to access these shares.
However, just as with all share sales, you should try to avoid selling stock you’ve owned less than one year so that you can avoid short term capital gains.
If your cash flow situation is still tight, it might mean you need to sell stock each month after you’ve reached your one-year ownership window.
You’ll be in the same situation your third year as you still won’t have received your VEIP RSU grant, but you should have lots of equity built up with annual equity awards and VEIP purchases.
At this point, your cash flow issues should be less complicated, but you’ll need to think more and more about managing your taxes.