When we talk about compensation to each other we often get tangled in our terminology. What's the difference between a salary and being on salary? If the market pays "x" for my job, is that before or after bonus or commission? How does the cost of benefits figure into my compensation? What is equity, and how do I get some of it? What's the difference between an ESOP and a stock option? All these are fair questions aimed at answering the big question: when it all adds up, do the numbers add up to fair treatment? We'll get into some of these questions later on, but for now let's start with identifying the basic elements of typical employee compensation and what we call it.
The wages that you bring home every two weeks, whether earned by the hour or by the pay period, comprise your base pay. If you punch a time card, this is your hourly rate multiplied by the number of hours you work. If you work over 40 hours in a pay week, that rate is (1.5 x hourly rate) x hours worked over 40. If you want to annualize your hourly rate, multiply it by 2080, which is 40 hours per week x 52 weeks per year.
If you are a salaried employee, your base pay is your annualized salary ÷ 26 (the number of bi-weekly pay periods in a year). Salaried employees are not paid by the hour; neither do they receive overtime.
Bonuses, commissions, or spot awards (sometimes called "spiffs") make up your variable pay. The amount of variable compensation that a position is paid (notice I didn't say a person, but a position as jobs are priced based upon duties and not who performs them) is usually expressed as a percentage of base pay, with simpler jobs typically earning 5% or less in some form of group incentive like a bonus pool or profit sharing plan, and more difficult staff and low-to-mid-level managerial positions earning up to 30% of base in potential bonus. Typically 5% -20% of base pay is indicative of almost all bonus plans in most companies.
The sum of your base pay + variable pay = your Total Cash Compensation or TCC for short. This is the number we use when pricing jobs on the market and comparing individual employees' compensation to the market. TCC does not include any of the forms of compensation listed below.
Your group benefits are an important part of your total package. Typically, our company pays 70% of the cost of your benefits, and that cost is approximately 28% of our total payroll. So, if you're considering leaving the company for, say, life as an independent contractor or consultant, take your total W-2 wages from last year x 140% (your TCC plus the total cost of your benefits) and that's what you'll need to earn to be able to support yourself with the same standard of living after buying your own benefits.
Another fairly common form of compensation is equity in the company. This is an ownership stake in your employer and is most commonly granted to employees in a group plan such as an ESOP. Management employees may also receive stock options or stock grants as their decisions guide the health of the business and the theory is that you want them to treat the business as if it were their own.
When you total all forms of compensation together, TCC + benefits + equity (if applicable) = Total Rewards. This, other than job satisfaction or the occasional headache, is everything you get in return for working for someone else.
I hope you find this helpful, and as always please feel free to post questions for everyone's benefit. Remember, we want this to be a community conversation and disagreement is okay, although lavish praise is always appreciated. :-) Our next topic will be in the next week or so on the subject of Determining Base Pay. In that, we'll discuss how jobs are priced and what elements of a job make it more or less valuable on the market.