What Does Total Compensation Really Mean? by@rickchen

What Does Total Compensation Really Mean?

tldt arrow
Read on Terminal Reader

Too Long; Didn't Read

Total compensation is the fairest way to compare compensation across companies and roles. Some companies compensate heavily in variable elements like bonuses and stock. It can be difficult to compare the two without a total compensation calculation. To get a good idea of your current total compensation, read this article and use Blind’s total compensation tool to get a clear picture for yourself. Check on the Blind app with others in your position to. get a realistic idea of what you might expect from a job offer.
featured image - What Does Total Compensation Really Mean?
Rick Chen HackerNoon profile picture

@rickchen

Rick Chen

Rick Chen is the senior director, head of public relations...

About @rickchen
LEARN MORE ABOUT @RICKCHEN'S EXPERTISE AND PLACE ON THE INTERNET.
react to story with heart

It is common to think of compensation purely as salary – the money you get paid for the basic work that you do. But many people get compensated with more than just salary. For those in sales, there are commissions; for many service workers, there are tips. There are bonuses for workers of all kinds, whether performance-related or not. Some people in the government sector may get pension contributions in addition to salary. All of these are part of what makes up total compensation.

Increasingly stock is a part of compensation, especially for those working in newer fields like tech, biotech, fintech, and more. These components add up to what we refer to as total compensation or TC. Going even further and add the wide range of benefits possible in current jobs is possible. These are very hard to quantify and can be very variable, so they often are omitted.

Why care about total compensation?

Total compensation is the fairest way to compare compensation across companies and roles. Some companies compensate heavily in variable elements like bonuses and stock. Others focus on core salary. It can be difficult to compare the two without a total compensation calculation. To get a good idea of your current total compensation, read this article and use Blind’s total compensation tool to get a clear picture for yourself.

If you are seriously comparing two positions to decide which is better for you, total compensation is a crucial part of the mix along with the actual work being performed, the team and organization and their culture, and intangibles like working conditions or specific elements in the benefits package. If you can quantify those as well, so much the better, but the intangible factors are valued differently by everyone, so are harder to compare.

How does Salary fit into total compensation?

Salary is the one common component of compensation for everyone. All compensated work involves payment, and that comes as a salary, whether that is hourly or annual.

Some job positions also get paid overtime which can make a total compensation calculation a little awkward. Still, even so, salary represents the standard pay that goes into your regular paycheck. It is the easiest portion of total compensation to predict and understand. For most people, it is also the most significant component.

It can be a little harder for hourly employees to predict because sometimes their actual hours vary, and even the rate may vary if they get overtime.

To add it to your total compensation, just add the annual salary figure if paid annually, or multiply your hourly rate by hours worked in a year to get the equivalent for hourly pay. For example, if paid $40 per hour, working 40 hours a week and full time all year, you multiply $40 by 40 (hours per week) and again by 52 (weeks per year) to get $83200.

How do Commission or Tips fit into total compensation?

Commissions are typically paid to salespeople or people working in sales support roles. They are a form of payment that is intended to reward performance directly. Sell more, get paid more.

Other direct pay for performance compensation can be in the form of tips. For those people where a commission or tips are part of their compensation, it can be a substantial portion, higher than salary in some cases.

Tips and commissions are a less predictable part of total compensation because they are reliant on external factors. The usual way to calculate them is to estimate the lowest realistic number you will get and add that to your total compensation. For some people, however, it is easier to leave it off. Be wary of people quoting a total compensation in a job offer that assumes a maximum commission or tips. Check on the Blind app with others in your position to get a realistic idea of what you might expect.

How does a Bonus fit into total compensation?

Bonuses are another form of compensation. They are typically only paid at relatively rare intervals – annually, twice a year, or quarterly. There can also be one-off bonuses to reward extraordinary work.

Often bonuses are linked to the overall health of the company and are higher when the company is doing well and lower when it is not. Many companies use performance bonuses linked to meeting specific goals and objectives for the individual, team, or organization. These are specified in offer letters and contracts and are reasonably easy to predict.

Other companies only give out bonuses at specific points, like the end of the year, and they can be highly variable and unpredictable.

Another form of bonus is a one-off bonus, like a signing bonus.

If bonuses are listed in your written job offer or contract and clearly specified, for example, a 100% performance bonus at 15% of your annual salary, then the right way to include them in a total compensation calculation is to take a realistic assessment of what level of performance bonus you will get and add that to your total compensation. In job offers, recruiters will always include the full 100%, and this is often accurate. Most companies want and expect you to perform at 100% and will pay you at that rate.

But bad things can happen, even if you perform at your best, and companies can rescind bonuses or cut them. Again, check on Blind to see what bonus level is really paid out.

All other bonuses that are one-off and cannot be predicted should not be included in your total compensation calculation.

How does Stock fit into your total compensation?

Stock compensation is one of the most complex components of total compensation. It is notoriously difficult to value stocks of private companies in particular. In large, solid, public corporations, stock compensation can be substantial and relatively predictable. In small startups and private companies, it can be highly variable, from worthless to even higher than in a public company.

Stocks are also much more complex to understand from a tax perspective, and employees can take different actions that change their tax liabilities substantially.

Most stock grants are tied to the length of service at the company, and the employee gains them by vesting. Vesting begins after a period of time with the company, usually a year. This is called a cliff. The stock grant then continues for the term of the stock grant with additional stock grants given either monthly or annually.

The different kinds of stock compensation include the following:

  • RSUs – Restricted Stock Units – once you have vested, you own them. RSUs are usually actual tradeable shares in the company that you can sell as soon as you own them,  apart from some closed trading periods depending on the employee role and existing laws. These are the commonest stock grant in publicly traded companies.

  • ISOs – Incentive Stock Options – the commonest stock grant in startups. These grants are technically not stocks but options to buy the company’s stock at a price set when the options are granted. This is called the strike price. For the employee to be compensated, first, the employee has to pay for the stock option at the strike price, and then they have to be able to sell the stocks to someone else. These stocks are how early startup employees can become wealthy if the company has an IPO. Unfortunately, it is more likely they never become sellable. And if they aren’t sellable, they are valueless.

  • NSOs – Non-qualified Stock Options – these stock options are similar to ISOs in the way they are granted and can be exercised. However, they are not qualified as a capital gain vehicle by the IRS, so they are treated very differently for tax purposes. In other respects, they are the same and must be purchased and sold for the employee to gain compensation.

  • ESPP – Employee Stock Purchase Plan – some companies operate an ESPP in addition to other stock plans, and others only offer an ESPP. An ESPP can technically be offered by any company but is usually only offered by companies where the stock can already be traded. Typically, employees can use a portion of their salary up to a given limit to buy shares in the company every quarter at a discounted rate. Since these shares are publicly traded, they can generally be sold immediately.

Calculating stock grants as part of TC can be very complicated. For RSUs, it is relatively straightforward. The shares are given to the employee at a predictable rate and have a publicly traded value. For total compensation purposes, they are usually valued at the company’s current stock price. Still, it is important to understand that their real value is only what they can be sold for at a later date, which cannot be predicted.

ESPP shares should not be counted as part of total compensation. While there is a component of value that can be calculated by looking at the ESPP discount rate, the reality is that each employee has a choice about how much to participate in ESPP and whether to sell immediately or hold the shares. These variables make it difficult to include in a TC calculation.

ISOs and NSOs are the most complicated form of compensation to count. For the purposes of total compensation, they can be considered equivalent because TC does not take taxation into account. How to value these shares depends on several factors. If the company has had a 409a certification done, then the 409a value of the shares should be used because this is an independent 3rd party assessment of the share value. It can be inaccurate based on current revenue trajectory, recent investment, and other factors. If no 409a certification is available, you have to look at recent investments and the price paid per share. Then you also have to consider the strike price and subtract that from the value. In a job offer, a good recruiter will give you some idea of all these numbers, perhaps even a range. Otherwise, you have to do it yourself. In addition, you also have to factor in that for many startups, there will never be a point where the stock can be sold, so it will have little or no value.

How do Benefits fit into total compensation?

Some people consider benefits as another form of compensation. They will sometimes be included in a total compensation calculation. But benefits are difficult or impossible to quantify in dollar terms and highly variable in terms of usage. In the US, even comparing healthcare plans can be impossible, with every possible variation open to change.

Occasionally recruiters will include time off in total compensation calculations, but this is really only an issue for hourly workers who do get paid vacation. Even there, just count the paid time off as working time when calculating salary. It gets paid to you precisely like salary and should be treated as part of salary.

People’s usage of benefits is also highly variable and dependent on circumstance, so we typically do not include them in a total compensation calculation. However, the value of healthcare, retirement plans, reimbursements, vacation and other time off, and other more unusual benefits can be considerable and should be considered when evaluating a job offer.

In particular, if there are benefits that are particularly important to your personal circumstances, then you absolutely should consider them when thinking about compensation but as a separate factor from compensation.

Total compensation range and variation

Typically there are only a few times when people discuss total compensation. The most important is during a job offer for a new position. Recruiters will often quote TC figures, and using them is a valuable way to compare multiple job offers if you are lucky enough to get them. The other time is when people compare jobs as a way to help negotiate a raise.

In both cases, it is important to understand that while TC is given as a single figure, this figure is usually the maximum TC possible. The actual compensation for that year may vary greatly depending on several factors.

Salary typically doesn’t vary, although, in unusual circumstances, such as to avoid layoffs, employees may be asked to accept a pay cut. Bonuses can go both lower and, rarely, higher. If a company is doing poorly financially, it will often cut all bonuses by a set amount, anywhere from a few percentage points to cutting them altogether. In addition, bonuses are often performance related, and whether the company, your team, or you perform worse than the set goal, bonuses will be adjusted accordingly.

Stocks are almost certain not to perform as anticipated in any TC calculation. By definition, the value of the stock changes constantly and can go up and down. Recruiters and employees often use the most optimistic of the realistic range of possibilities. The stock can be worth anywhere from nothing to even higher than the optimistic projection.

The value of Blind for total compensation

Blind is an anonymous social media app focused on work. It is available for iOS, Android, and the web. Because it is truly anonymous, it has become one of the few places where salary is discussed honestly.

Blind requires users to identify only their employer and nothing else, so it has become even more helpful for specific discussions around expected compensation for different roles at different levels. That makes it the best place to ask questions about what you should be getting paid, making it an excellent tool during compensation negotiations, whether for a new or existing position. You can also get excellent specifics about the intangible issues around bonuses and stocks that affect a specific company. It can’t hurt to use Blind to get a better deal.


Also published on Teamblind’s blog


Rick Chen HackerNoon profile picture
by Rick Chen @rickchen.Rick Chen is the senior director, head of public relations at Blind. He writes about tech culture and the workplace.
Read My Stories

RELATED STORIES

L O A D I N G
. . . comments & more!
Hackernoon hq - po box 2206, edwards, colorado 81632, usa