Why Don’t You Understand Your Compensation?

dollar_hookIndeed, most people don’t understand their compensation. That’s amazing, since after all, compensation is the main purpose for having a job. Don’t misunderstand me: most people know their salary, but salary is only a part of total compensation. There’s a lot more that you should know about this subject so that when you’re in the compensation negotiation stage of your interview, you’ll be equipped with the ammo necessary to win. There are two major parts to compensation: the money you make (income) and the money you save (assets). The two parts are analogous to a checking account and a savings account, respectively, at the bank.

The Money You Make

The money you make typically falls into a range based on historical data. But how does your potential employer determine what you should be paid?

In large companies, the process is complex and involved, and certain people in the human resources department work full-time—and exclusively—on determinations of pay ranges. They gather information from a wide variety of external and internal sources to ensure that the company stays competitive. The overall, company-wide compensation policy is determined by a compensation committee, which is a team made up of members of the board of directors.
In small companies, of which there are about 7 million with 25 employees or fewer in the United States, compensation packages are derived simplistically and by whatever the market bears.

In both cases, though, whether a large or small company, two components make up the bottom line: (1) market pricing, or the going rate, and (2) job content evaluation, which is a correlation with other, similar, internal jobs. On top of salary there might be other sources of income in the form of bonuses such as cash payouts, profit sharing, commissions, stock purchases, and stock options. Job candidates are advised to research compensation via a variety of Web-based sources before negotiations start. If relocation is involved, it’s always advisable to think of the cliché “It’s not the money you make but the money you keep.” The cost of living varies widely of course in different parts of the country.

The Money You Save

By means of tax-sheltered plans, many employers encourage their employees to save a portion of their income for retirement. Some employers contribute to such savings by matching employees’ contributions at various percentage ratios. Tax-sheltered plans fall into two categories: before-tax (pretax) savings and after-tax (posttax) savings, as defined by the Internal Revenue Code. For example, the 401(k), which went into effect on January 1, 1980, is a before-tax plan. Some employers also give employees the option to contribute very favorably with after-tax dollars. In that case, too, employers sometimes contribute, and employees become vested, which means that an employee is entitled to the employer’s contribution at a progressive rate within a stipulated period of time. In some cases, vesting could begin immediately. Delayed full vesting has the purpose of incentivizing employees to stay with the company.

In addition, both an executive and a rank-and-file employee may be offered a deferred compensation plan, a stock bonus plan, a stock options plan, a stock purchase plan, and/or an employee stock ownership plan.

Additional Types of Compensation

Beyond the benefit that employees see in their paychecks, employers offer additional benefits. Some of them are mandated by federal or state laws, and others involve voluntary participation. In either case, employees may or may not have to contribute. Examples are workers’ compensation, disability income, unemployment insurance, and accident insurance. There are many others. And some employers offer a variety of insurance plans at reduced premium rates. Some such plans are medical insurance, dependent care plans, long-term-care plans, life insurance, and accidental death insurance. At times an employer might pay for an employee’s relocation and offer other kinds of perquisites.

The best thing a candidate can do in order to achieve a successful compensation negotiation is to learn about this complex subject, perform due diligence, and above all, acquire the skills of the art of compensation negotiation. Working on this subject with a career coach and role playing in mock negotiations most often make up severalfold for the fee paid for such coaching.