After the Offer: How Do You Calculate Total Compensation?

salary-negoitiation-300x300When they get that first job offer, too many young careerists focus almost exclusively on salary – good old dollars and not-so-common sense – as their “compensation.” They fail to calculate the all-inclusive offer.

In order to negotiate the best possible compensation package, however, you must understand how salaries, benefits, perks, commissions and bonuses work all combine to form the real offer.

So today, we’re going to give you a crash course in total compensation (Yes, we know this is a long post… so be sure to bookmark this page… we want you to be more than ready when you get that great offer!).

Let’s get started!

Pay Scales and Grades

Most organizations have a pay scale used to organize and rationalize the salaries that employees are paid.

When a job is posted, it should have a “pay grade” already assigned. The pay grade represents the range of salary that could be paid for that job. Typically, the lower the pay grade, the lower the skills required to do the job. The salary paid to the person hired for the job will be somewhere in the range, depending on how qualified and experienced the employer believes the incumbent to be, based on the other factors described below.

Pay grades may be divided into steps, ranging from the bottom of the grade to the top. The grades may also be simply divided into quarters, above and below the “midpoint.” The salaries in contiguous pay grades typically overlap. Two people in different pay grades could be paid exactly the same salary, and someone at the top of one pay grade often earns more than someone at the bottom of the next higher grade.

For example, the US Federal Government pay scale has 15 Grades, and each Grade has 10 Steps. This is how some of the grades look as of January, 2015:

From the bottom…

  • Grade 1, Step 1: $18,161/yr; Step 10: $22,712 per year
  • Grade 2, Step 1: $20,419/yr; Step 10: $25,698 per year

…to the top —

  • Grade 15, Step 1: $101,630/yr; Step 10: $132,122 per year

In this pay scale, employees usually move up steps based on the number of years in the job. The longer an employee remains in a job/salary grade, the higher up he or she progresses in the pay scale. An inexperienced person (for a specific job level/pay grade) will typically start at the bottom of the scale when they begin, and move up the scale with time in the job and increased experience.

Top Performer vs. Average Performer

Someone who is considered a top performer in their job will typically be paid more than someone who is an average performer, assuming that they have both been working the same number of years and have the same number of years of experience and the same education.

College Degree vs. High School Diploma

Education can play a role, too, if the education is considered required for the job.  A PhD in chemical engineering won’t make someone a better bank teller, so it wouldn’t qualify them for a higher salary as a bank teller.  However, it would presumably make them a better chemical engineer which should qualify them for a higher salary in that job.

Internal Pay Equity

To avoid lawsuits and keep current employers happy, most smart employers try to ensure “internal pay equity” — people doing similar jobs with similar education, skills, and experience are paid roughly (or exactly) the same base salary. So, a new employee would not typically earn more than an existing employee, assuming the same performance, education, and other factors are equal.

Salaries vs. “Total Compensation”

Salaries determine only what shows up in your paycheck, after all the deductions, of course. And, sometimes, the salary is only part of what appears in that paycheck.

Although most employees don’t think of it, a salary is only one part of the “total compensation” paid by the employer. Total compensation includes other things of value to the employee that are a cost or expense to the employer.

Among the many things that can be part of an your total compensation are:

  • Commissions (more below)
  • Bonuses (more below)
  • Healthcare benefits
  • Paid vacation
  • Paid holidays
  • Paid sick time
  • 401K plan (in the USA) employer contributions
  • Pension plan employer contributions
  • Tuition reimbursement
  • Company car
  • Company stock or stock options at market or below-market price
  • Other employer-specific things like parking or public transportation allowances, etc.

Consider discussing some of these with the employer when you are negotiating your job offer. These other options can help offset a salary offer that is lower than you want.

“Variable Compensation” Plans

Some organizations don’t pay a standard monthly amount to all employees, based on their pay grade. They may or may not offer a salary, and they also pay employees when specific things happen — like sales made by the employee or goals met by the whole organization. This kind of pay is designed to encourage employees to make sales or to work together to achieve specific organizational objectives.

Salary Plus/Or Commissions

People in jobs who sell products or services are often rewarded for making those sales. This incentive to sell is usually called a “commission,” and successful sales people often generate more than half of their income based on their successful sales.

Some employers pay their sales people 100% commission. So if the employee makes no sales, they earn no income from the employer — not for the unconfident or faint of heart. More often, though, sales jobs are salary-plus-commission, so the base salary is supplemented by commissions when the employee makes sales. And the base salary is a salary-plus-commission arrangement is usually lower than the base salary of someone who doesn’t have the opportunity to earn a commission.

Be sure to ask about the timing of the commission payment — when the sale is made, after the product or service is delivered, or when the customer has paid the bill. As an employee, you may not have much impact on the timing of delivery.

Ask how much other similarly compensated employees typically earn before you accept what is offered. Also ask if the employer “caps” the commissions paid in a given period  at a specific number. If they do, ask what happens to the “excess” commission earned — is it paid at a later date (like, next pay period or end of year)?

Before you accept the job, ask for the documentation associated with commissions. You want to see a written version of “the rules” — so that you understand them and can judge how well you will be compensated. Keep the documentation, particularly if you accept the job. Ask how often the rules are changed and how participants are informed.

Salary Plus Bonus

“Bonus” is sometimes used interchangeably with “commission” which means the employee earns the bonus when a specific sale is made or a target is reached.

People involved in manufacturing may be paid a bonus if a production quality or quantity (or both) goal is reached.

Some organizations pay groups or all employees a bonus when the organization meets a specific goal. For example, a “holiday bonus” may be paid at the end of the year if total sales exceeded a specific number.

As with commissions, find out when and how a bonus is “earned” or given:

  • Based on individual or group performance?
  • Determined by whom?
  • When and how awarded?

Again, ask for the documentation of the process and the rules associated with the bonuses. Evaluate those rules and keep the documentation if you accept the job.

 

For this post, YouTern thanks our friends at Work Coach Cafe!

 

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Susan-P-Joyce-AuthorOnline job search expert Susan P. Joyce has been observing the online job search world and teaching online job search skills since 1995. Susan is a two-time layoff “graduate” who has worked in human resources at Harvard University and in a compensation consulting firm. Since 2011, Susan has been editor and publisher of WorkCoachCafe.  A veteran of the United States Marine Corps, Susan also edits and publishes Job-Hunt.org, is a Visiting Scholar at the MIT Sloan School of Management, and a columnist on HuffingtonPostAOL Jobs, and LinkedIn. Follow Susan on Twitter.

 

 

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