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How to Evaluate the Compensation Package and Job Offer

How to Evaluate the Compensation Package and Job Offer

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Congratulations. You have landed the job. Your prospective employer has written to you, or emailed you, with an offer of employment.

The next stage seems obvious. Accept the job offer.

Before you sign on the dotted line, however, you must be fully aware of the compensation package that accompanies the job and if you should accept it.

What Is a Compensation Package?

In return for your service, your employer will provide you with a compensation package.

That compensation will not only include your basic salary, but also other employee benefits.

These benefits will depend on the role you fulfill; for instance, a pension, commission or paid holiday.

Why Are Compensation Packages Important?

A healthy compensation package can:

  • Demonstrate how well a company treats its employees. For instance, the compensation package for Job A is salary and paid holiday. Job B, the same role for a different company, provides salary, pension, health insurance and paid holiday.

  • Cover the cost of essential services, such as health insurance, that you would otherwise have to pay for from your salary or savings.

  • Help you to maintain a healthy work-life balance; for instance, by providing paid holidays.

  • Allow you to plan for the future by providing benefits such as a pension.

  • Make you feel appreciated and not just another cog in the machine; for example, paid federal holidays, gym membership and bonuses.

How to Evaluate the Compensation Package and Job Offer

Compensation packages vary depending on the employer, the industry and the role itself.

Over and above your basic salary, a compensation package could include:

US employers are not required to provide paid holiday leave to their staff, including for federal holidays such as Independence Day or Thanksgiving.

Even where a company closes for a federal holiday, there is no legal entitlement to be paid. In fact, companies do not have to legally close for federal holidays unless this is a requirement under their local or state law.

The exception to this is for US federal employees, who are legally entitled to time off with pay for all federal holidays.

However, more and more US companies do offer holiday pay to their employees. The current average is 10 days paid holiday per year, but that does not mean that every worker receives this amount.

There is no overall legal requirement for US employers to offer sickness pay to their workers unless local or state law dictates that they must.

Companies with more than 50 employees are liable, however, to offer unpaid leave to an employee who is unable to work due to sickness or where they need to take time off to care for a sick relative.

However, it is down to the discretion of the employer as to whether paid time off for sickness or to care for a sick relative is offered to their workforce unless it is a legal requirement according to local or state law.

Retirement Plan

There is no legal requirement for US employers to offer a retirement plan for their workers; however, many companies do make this provision.

This might be a private pension plan or a retirement savings plan. For instance, the 401(k) plan is a retirement savings plan where a portion of your salary is invested in the plan, pre-tax.

Bonuses and Commission

Depending on the role and employer, you may be offered bonuses and commission as part of your compensation package.

For instance, an investment banker will generally receive a bonus every time they begin a new role and an annual bonus related to their performance and company turnover.

Commission is usually paid as a percentage of sales made.

It is important to understand whether your job will pay straight commission, where your basic salary is replaced by commission earned, or a combination of basic salary and commission.

Where you receive bonuses or commission on top of your basic pay, a five-figure salary can easily be boosted to six or seven figures.

Bonuses and commission are subject to tax and may push you into a higher tax bracket, so it is a worthwhile exercise to calculate how much of your increased income (basic salary + bonus/commission) you will be left with.

Health Insurance

Whether an employer must legally offer health insurance depends on the size of their workforce.

Employers who have 50 or more full-time workers (or what is deemed to be the equivalent of full time) are legally required to provide health insurance for their employees or face a tax penalty.

Employers who have less than 50 full-time workers do not carry this legal requirement.

Stock Options

An employer may offer stock options as part of a compensation package.

What this means is that you will be able to buy shares in the company, generally at a discounted or a fixed price.

However, it is worth checking when and under what conditions you can later sell these shares.

Tuition Fees

Where your intended career path requires or would benefit from a specific course or qualification, your employer may offer to pay the related tuition fees.

This is obviously not a monetary amount that you can take away with you, but it can assist in your general career progression.

Company Car and Equipment

Your employer may offer to provide a company car and other equipment such as a mobile phone or laptop, for instance.

Again, as with tuition fees, this is not a monetary amount but it can save you the expense of buying these items out of your own pocket.

Other Benefits

Other benefits that may be included in your compensation package include:

  • Gym membership
  • In-house training program
  • Travel expenses
  • Shopping or service discounts
  • Employee savings scheme
  • On-site childcare or discounted childcare
  • Flexible working
How to Evaluate the Compensation Package and Job Offer
How to Evaluate the Compensation Package and Job Offer

Example Compensation Packages

Entry Level Accountant:

  • Basic salary: $36,000
  • Health and dental insurance
  • 401(k) retirement savings plan
  • 10 days’ paid holiday
  • Paid sick leave

Associate Investment Banker:

  • Basic salary: $140,000
  • Signing bonus: $10,000
  • 100% of basic salary end of year bonus (but a portion is deferred for three years)
  • Stock options
  • Health insurance
  • Pension plan
  • 2 weeks’ paid holiday

How to Evaluate a Compensation Package

You have a job offer but, before you sign on the dotted line, you need to know whether the related compensation package is right for you.

Here is how you might approach that dilemma:

Step 1. What Matters Most to You?

Is income important to you above all else? In that case, salary, possibly bolstered by bonuses and commission, is the criteria to make your decision by.

Perhaps the provision of health insurance and pension are equally or even more important than salary.

Health insurance allows you to provide for your family if you are sick and a pension means that you can plan for the future.

Is the possibility to work flexibly a deciding factor? You may want to work remotely or arrange your hours on-site around childcare.

Does the employer provide the kind of career progression you want?

Only you will know which factors of the compensation package are most important.

Step 2. Do You Need More Information?

Do you need a more detailed explanation of what the compensation package contains?

For instance:

  • What happens to your pension plan if you leave the company?
  • Where you are offered stock options, how soon could you sell those shares?
  • Are you paid the entire amount of each bonus or is a percentage deferred?
  • Which elements will be taxed, and which tax bracket will apply to you?

If you need to know more before you can make a decision, do not be afraid to ask for further information.

Step 3. Do All the Stated Employee Benefits Apply to You Right Now?

It is worth checking that you are eligible to receive each element of the compensation package from day one of your employment.

For instance, where you will initially work a trial period, are you allowed to work flexibly during that time?

Do you need a specific length of employment before you qualify for stock options or a company car?

Are certain benefits reliant on your performance?

Check all of this to make sure you have a true picture of the compensation package offered.

Step 4. Compare With Other Similar Jobs

It is a useful exercise to check what compensation package other companies offer for the same role.

As an example:

The job offer you receive states a basic salary of $75,000, plus a yearly bonus of 70% of your basic salary ($75,000 + $52,500 = $127,500).

When you compare this with the same role for similarly sized companies in the same industry, you find that the average is a lower basic salary of $70,000, but a higher annual bonus of 80% and an average signing bonus of $10,000 ($70,000 + $56,000 + $10,000 = $136,000 in year one).

Such a comparison may open the way for you to negotiate a better compensation package.

Step 5. What Do You Need?

What income and other benefits do you need to live?

For instance, it may be true that salary is not your key factor. Perhaps you place more importance on health insurance and a pension plan. However, that does not negate the level of income you need to support yourself and your family.

What is a ‘must have’ rather than a ‘would like to have’?

Step 6. Add It All Up

It may seem that the value of your compensation package is straightforward, but it is worth adding up the value of each element.

For instance, your basic salary is $24,000. There are no bonuses or commission to add to that and no stock options.

However, health insurance is provided.

How much is that worth to you? How much would it cost you to buy health insurance independently?

For instance:

$24,000 + a saving of $400 health insurance = $24,400.

Where you will receive a regular bonus, calculate how much that will add to your basic salary.

For instance:

$70,000 + 80% bonus = $126,000.

If a company car is provided, that is one less thing that you will have to buy for yourself.

Balanced against that saving, calculate what related costs you will be liable for.

Carrying out this exercise will reveal the true value of the compensation package offered.

Step 7. Draw Up a Comparison Chart

This approach is not about what you need or what other employers pay for a similar role.

Instead, this is your chance to compare your ideal compensation package with what is being offered.

Generally, the first items on your chart will be those factors that you flagged up in ‘what matters most to you’.

For instance:

  • Your ideal salary is $60,000. The job offer states $62,000.
  • Your ideal annual bonus is 100%. The job offer states 70%.
  • Ideally, you would be interested in stock options. The job offer does not provide stock options.
  • Your ideal paid holiday allocation is two weeks. The job offer states 10 days paid holiday.

The differences between your ideal and the actual job offer will help you to decide whether this is an acceptable opportunity or not.

It may also provide information on exactly what you are willing to negotiate with your employer.

Final Thoughts

Most people will change jobs several times in their working lifetime. It is therefore important that you can fully evaluate each compensation package and job offer that is made available to you.

An effective evaluation requires:

  • All the information needed to arrive at the true value of the compensation package
  • A knowledge of what income, benefits and circumstances you need to live
  • A comparison of the same job across several employers
  • A realization of what factors matter to you the most

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