Getting Paid: All You Need To Know About Total Compensation
When we say total compensation, we mean everything you could possibly receive from the company you work for that's beneficial. If you saw it on your offer letter or on an internal HR page, it probably falls under this definition. Since there are a lot of ways a company can reward you, we'll break it down into a few key pieces (inspired by WorldAtWork's Total Rewards model):
Assets: these are the rewards that have specific dollar-values or can be converted into dollars that can be used for anything you want. This is the most versatile type of compensation because once you receive them, it can't be taken away. 🏦
Lifestyle: these are the core benefits that your job provides that you'll probably use/think about in your daily life. These often include the set of customary benefits that most companies tend to provide. 🙌
Perks: these are the icing-on-the-cake benefits that, depending on your situation, could be very useful/necessary. They're the most variable company-to-company, yet tend to get the most press coverage. 📰
In this article, we'll be diving into these types of compensation one-by-one so you'll know the key considerations when thinking about each one! If you want help evaluating an offer or want to make the most of your first job, this is the article for you! 😁 This will give you a good foundation if you're negotiating an offer as well, though if you want specific tips, definitely check out our guide to negotiation!
Assets-based compensation has the least "strings-attached"; the value doesn't come with a prescribed purchase, situation, or goal! You'll want to add these explicitly to your budget because they're what you'll use to pay for your cost of living. 💸
This is the compensation everyone is familiar with and includes the money that you'll receive in your bank or in the form of a paycheck 🧾. Cash compensation is super fundamental to your total compensation, and comes in 2 flavors:
Base: This is either your annual salary or your hourly rate depending on what kind of employee you are. Your base pay is not the same thing as your pay period, which is how frequently you actually get paid. For example, if your annual salary is $50K and your pay periods are monthly (12 pay periods in a year), then you'll receive $50K / 12 = ~$4.2K each month in gross income*.
Bonus: There are many different ways companies can work in extra cash that's outside of one's base pay. Some bonuses are one-time (e.g. a signing bonus, which is just a lump-sum you get for accepting a job), while others are recurring (e.g. annual 2-3% of your base salary based on job performance). Check out Indeed's Bonus FAQ for an overview of the different types of bonuses out there.
* Note: we'll talk about how much money you actually take home in the "Anatomy of a Pay-Stub" section.
Equity compensation is essentially getting paid in stocks. When it comes to stocks, just like any other investment, you should consider (a) what type of stock reward you're getting, (b) how you'll make money, and (c) what the risk vs. return profile is. Here are some key considerations when it comes to equity compensation as opposed to cash:
When/How Will the Stocks Become Yours? Just like you won't get a year's worth of salary on your first day, so too will you have to wait before you gain ownership of any equity compensation. Some equity programs have a vesting schedule (i.e. set intervals where you're granted a set amount of shares). Others have a stock purchase program that gives you windows of time to buy (usually discounted) stock.
When/How Will You Be Able to Sell? Stocks are currently not a widely accepted form of currency, so in order to realize their value, you'll have to sell! When you're allowed to sell will vary based on your company. If you're in a private company, you won't be able to officially sell your shares until the company goes public/gets acquired. Even public companies may restrict you from accessing stocks that you own (e.g. until retirement).
How Much Will Your Equity Be Worth When You Sell? This is going into 🔮territory, but different types of companies/equity programs will be easier/harder to estimate the value of the equity you'll be receiving. For public company stock, you will at least have a baseline for how much their stock is worth currently (e.g. looking up their stock ticker on Google Finance).
Even though private company valuations are essentially speculation, there are standard procedures private companies have to do anyway that forces them to come up with semi-sensible numbers for themselves. Two common numbers you'll see for private companies are the 409A valuation (agreed price a company assigns to employee shares that is recognized by the IRS) and preferred stock price (the price per share agreed upon in the last round of funding).
When/How Will I Be Taxed? This is often where we see the most major differences between the various kinds of equity compensation. As we saw before, there is a difference between when you own a stock, and when you sell it, and both of these are potentially taxable events depending on the equity program. It's also key to understand if the tax will be ordinary income vs. capital gains (capital gains are at a much lower rate than ordinary income tax). For example, if your private company offers RSUs, you're usually taxed when they vest, and the tax is calculated based on the 409A valuation as ordinary income tax. Thereafter, you'll be taxed when you sell as capital gains tax. The devils in the details here, so be sure to do your research on your specific equity program so you don't have any surprises come tax-day!
Lifestyle benefits are privileges directly tied to the company and are for a pre-determined set of circumstances and situations. They're less flexible than Asset-based compensation, but still, provide high-value items that'll be key to the way you live your life. 💪
The U.S. has had predominately employer-sponsored health insurance since ~the 1930's, and around 49% of Americans receive insurance through their jobs according to eHealth. This benefit indirectly affects your budget (depending on how high your out-of-pocket expenses or premiums are), but will mostly show-up as a set of doctors you can see.
There are 4 common types of insurance that are typically offered*:
Dental 🦷: anything mouth related, from annual cleanings to oral surgeries (e.g. wisdom teeth removal).
Vision 👁: anything eye-related, including annual vision exams, glasses/contacts, surgeries, etc.
Medical 🩺: basically everything not covered in Dental/Vision, which is typically regular physician visits, hospital care, etc.
Life 💀: the typical use-case for life insurance is if you have dependents (e.g. young kids) that you want to make sure are financially secure if anything were to happen to you.
You should think carefully about the extent of care you want in each of these categories because often you'll be given options for more/less expensive plans*. Some plans qualify for tax-advantaged savings accounts (e.g. HSA), while others have greater coverage/wider networks of doctors. Check out our health insurance article for more details on choosing plans and tax-advantaged savings accounts.
* Note: we'll see how costs like health insurance can factor into your take-home pay in the "Anatomy of a Pay-Stub" section.
One of our favorite categories at Young, Not Broke 😉! We will continue to repeat this until you're all sick of it: starting early = $$$. Employers help you save for retirement with 401(k)'s (corporate) or 403(b)'s (non-profit). Your retirement contributions are in your direct control (i.e. you decide how much), but factors around your account (e.g. which brokerage, choice of investments, etc.) are usually restricted compared to what you'd be able to find in a personal investment account.
There are 2 key considerations when it comes to employer-sponsored retirement accounts:
Employer-Match: Most employer matches are capped at a certain value, and are based on how much you choose to contribute. The formulas each company has to calculate the match differs, but usually involve a maximum as well as a % match per dollar. Let's say your employer matches $0.50 for every $1 you contribute up to 10% of your salary. If you make $50K, that's $5,000 of their money they're contributing to your retirement account. However, to get that match you need to contribute $10,000.
Roth vs. Traditional: Some companies offer both a Roth 401(k) (post-tax) as well a a Traditional 401(k) (pre-tax). That is, one that gives you a tax break when you contribute vs. one that gives you a tax break when you withdraw. When you'd pick one vs. the other is largely the same reasons you'd go with a Roth vs. Traditional IRA. Check out our most recent Q&A post on Roth vs. Traditional IRA for a general discussion on pre-tax vs. post-tax.
* Note: we'll see how retirement contributions factor into your take-home pay in the "Anatomy of a Pay-Stub" section.
Since 401(k)'s/403(b)'s are through your employer, the investment choices you're given largely depend on what your employer decided to offer you. It also means you can't control the fees on the account/investments as much. If having money in your 401(k) comes with high fees, you might not want to invest over the employer match and instead go with an IRA.
Though Gen-Z could be the next generation of workaholics, it's still very important to think about how much paid time off (PTO) you'll be granted per-year. This is one of the key factors of work-life balance, which can significantly reduce job burnout.
There are 2 broad categories of PTO*:
Sick-Leave: This can include everything from doctors appointments and procedures to parental leave and grief recovery. When life happens, you want to know how much of a buffer you'll have to get through it! 🤲
Vacation: Sometimes you just want to take a break to rest and recharge; that's where vacation time comes in! If you have destinations on your bucket list, you'll want to keep an eye on your vacation days. ✈️
* Note: these are general definitions; what actually falls under sick-leave vs. vacation will depend on your companies' HR policies.
One way you can quantify the value of your PTO is by taking your average daily pay and multiplying that by the number of days off you get. For example, if you make $50K a year and get 30 days of PTO, you're essentially getting paid $50K / 365 days in a year * 30 days of PTO = ~$4,200 a year for free 🙂
This category of compensation has the most variation, but knowing what's out there can help you seek out the specific benefits/programs that matter the most to you!
Work Needs 💼
Many companies will have programs or stipends in place to help cover the cost of goods/services that directly impact your work. Some common reimbursements include:
Office Supplies: Now more than ever, people are working from home, and having a comfortable WFH set-up at home can make a big difference to your productivity. For office supplies directly tied to your work (e.g. external keyboards/mouse), companies will usually offer an allowance to cover some/all of the costs of office supplies.
Relocation: According to moving.com, average costs of moving can range from ~$1K to ~$5K, and can be incredibly time consuming (e.g. packing, traveling, etc.). Some companies will offer reimbursement or provide full-service relocation for their employees if they're coming in from other locations.
Commuter Benefits: Unless you live right next to your office or work remotely, you'll likely have to commute to the office. Commutes can have a sizable impact on our happiness, and so many companies are starting to reimburse transit costs (e.g. gas, bus passes) or provide shuttle services.
Though there may not be as many of these perks in our COVID world nowadays, some of the most valuable perks come in the form of direct services your company provides. These are usually tied to a physical location, and usually supplement/replace services you could buy for yourself.
One of the most common service perks is catered meals. Whether it be a snack closet or Taco Tuesdays, getting fed is one of the biggest perks you can get in an office. Total food costs can be hundreds of dollars a month, so having meals can substantially free up your budget. Depending on the size of your company, you could also expect health services (e.g. gym membership, which could save you ~$800 a year), family services (e.g. child-care), and more!
At this point, it's probably no surprise that the world is constantly changing and evolving. An article in Nature, one of the foremost peer-reviewed journals, charts the exponential growth of technology, from the rise of computing power to the decreasing costs of 3D printing. The jobs of today may not be the jobs of tomorrow, so having a growth mindset and continuing to learn even post-grad is key. 💪
The good news is, if you want to continue to grow in your career, your company can probably help cover the costs. Here are some of the common learning activities that companies will tend to reimburse:
Masters or PhD programs
Conferences or Seminars in your field
Anatomy of a Pay-stub
Now that we know what goes into Total Compensation, let's make things more concrete by showing how all of this shows up in your pay-stub. A pay-stub outlines the details of a particular payment (if you've read our healthcare article, this is like the EOB to your healthcare bill), and will be issued for every pay-period (i.e. payday). You can usually view your pay stub in the HR software your company uses (e.g. Workday).
Though pay-stubs can come in a variety of formats, they're ultimately illustrating the following equation:
Understanding how to calculate your take-home pay is key to creating an accurate budget, so we'll step through each piece one-by-one:
Gross income: This is the specified amount you make based on your offer letter. Going back to our example in the "Cash" section, let's say our monthly gross income was ~$4.2K, which corresponds to a $50K annual salary.
Required Deductions: These are all the fees that get taken out of your paycheck that is largely outside of your control. The most common source is taxes, and can take the form of payroll taxes (flat-rate taxes for federal/state services) or income tax withholding (you actually can adjust this; check out our W-4/W-9 tax form article for more details). For example, the employee contribution to Social Security is 6.2%, which shaves off ~$260 from our gross income in payroll taxers. We could also be withholding $300 for federal income taxes, bringing our total required deductions up to ~$560.
Optional Deductions: These are the fees for services that you can usually opt-out of. These can include premiums for your health plan, 401(k) contributions, gym memberships, etc. For example, say you commit to contributing $5K to your 401(k) for the year and your medical plan has a $200 monthly premium. That means each month, you'll have $5K / 12 + $200 = ~$620 in optional deductions.
Take-Home Pay: This is the money that actually lands in your checking account, and is all that's left of your gross income after you take out all the deductions. For our example, that'd be $4200 - $560 - $620 = $3,020.
Hopefully, this article shows you that total compensation is a lot more than just the money landing in your checking account! From equity to perks, understanding how much your job is really worth will help you decide when a company is a good fit, maximize your benefits while you're working, or help determine when it might be time to find other opportunities. ✌️
Figure out how to access your most recent pay-stub, and see what required vs. optional deductions are involved. Are you putting too much into certain optional deductions (e.g. expensive health plan)? Does your federal withholding seem higher than your expected tax bill?
Take inventory of all the benefits that your company is providing, and make a plan for how you're going to utilize them! Don't leave free money on the table!
If you have equity compensation, take some time to dive into the details. Ask HR the 4 questions in the Equity section of the article, and look-up broad terms in the Holloway Guide.
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Disclaimer: The content on Young, Not Broke is for informational and educational purposes only and should not be construed as professional financial advice. Should you need such advice, consult a licensed financial or tax advisor.