Compensation

I’ve worked in consulting and tech, and here are some of the practical things that I’ve learned about compensation.

Total yearly compensation

Ultimately, you negotiate and care about your projected total yearly compensation. That is, how much money will you ultimately get from a year of services. The main components of this in my jobs have been salary, bonus, and equity.

• Salary
  • Cash that the company pays you periodically throughout the year.
  • Typically fixed for the full year, with adjustments only due to promotion and/or the company’s annual compesation planning cycle.
  • Risk/Reward: low – usually no change.
• Bonus
  • Cash that the company will give you at a given time, based on achieving certain targets.
  • The amount of cash that you receive is typically variable, typically based on:
  • Company performance
  • Your individual and/or team performance
  • Other requirements (e.g., still an employee as of X date)
  • Risk/Reward: it’s important to understand the specific bonus plan and how the bonus will be calculated to assess potential variabilty.
• Equity
  • Is compesation in the form of company shares.
  • Usually you are given a certain amount of “shares” of the company stock throughout the year.
  • Risk/Reward: If the company stock price per share goes up, you get higher benefit. If the company stock price per share goes down, you get a lower benefit.

How companies determine your compensation package

1. Companies typically aim to pay you an amount that is competitive in the market. A company tries to predict how much other companies will pay you for you to do that job with your specific skillset and then try to pay you enough so that you choose to work for them.
   • For this, a company looks at the range of what other companies are paying for that job and location.
   • Companies then consider where within that range you should fall based on your unique capabilities and skills.
2. Market salary data: Companies typically purchase salary benchmark information from external providers such as Radford. This benchmark information is specific to a job level (grade), function/title, and location. In essence the data says “for someone in this job and location, this is what others are paying.”
3. Your unique capabilities can influence where in the band the company pays you:
   • Experience on the role or similar roles
   • Unique specialties that would be great for the role and how rare they are to find
   • Performance record
   • etc.
4. The company typically uses that information to determine a total compensation target for you and then breaks it down between salary, bonus, and equity. Different companies will default to different splits among salary, bonus, and equity, but in general:
   • Smaller companies without a lot of cash (e.g., startups) tend to pay less in salary and bonus, but award larger equity grants. This is a higher risk/reward scenario since typically you need to wait a while to find out how much the equity is truly worth, which could be nothing or a lot.
   • Salary is based on your current skillset and contributions relative to the market salary data.
   • Bonus is more variable based on your results for the year, so it is used to encourage employees to reach specific goals.
   • Equity is more tied to your growth potential and ties your success to the company’s overall success for a longer period of time. Equity is typically granted in 4-year vesting periods, so you need to remain an employee for 4 years to receive the entire equity award.

Negotiating compensation

1. To negotiate a higher salary and/or bonus, focus on:
   • Is the salary band correct for your role?
     • If you have data that indicates that people with your job and location typically get paid more than what the salary band suggests, you should use that data.
     • Use online tools to find average salary bands for your role. Glassdoor may help here. However, make sure that you’re looking at comparable jobs (title, location, etc.) and companies (sector, company size, growth stage, etc.)
   • Placement within the salary band. Within the compensation band, are there
     • Focus on your unique skillsets/capabilities or performance track record to determine where in the salary band you should fall. If you’re new to a level or role, you may be in the lower part of the band. But if you’ve been performing well at that level and job, and even on a path towards promotion, then you should negotiate to be on the upper range of the band.
     • If you have specific skills that are hard to find and critical to performing the role, you can negotiate to be on the higher end of the band.
     • If you receive a job offer from another company, use that. That’s typically the strongest data point you’ll have to negotiate a higher salary, since it shows that for you specifically there’s willingness to pay more for your job and skills.
     • Early on in your career (first 5 years) you can also use your college education as a differentiator if you obtained desirable degrees from a prominent school.
2. When negotiating Equity keep in mind the following
   • Track and negotiate based on granted equity value, not vested equity value.
     • Granted equity value looks at how much you would be making if the value of the equity remained the same as when the company granted it to you. That is, if the grant was based on a stock price of $100 on the date you were granted the stock award, the granted equity value would remain the same regardless of the stock price going up or down after that.
     • Vested equity value looks at the value of the equity at the time it vests.
     • As an example of the difference, let’s look at this scenario — you were granted a 4-year equity award of $100,000 on January 1, 2020, vesting equally over the 4 years, when the stock price was $100.
       • If throughout 2020, the stock price was on average $100 as your equity vested, then that year you vested $25,000, and your granted and vested equity values are both the same, $25,000.
       • If throughout 2020, the stock price was on average $200 as your equity vested, then you vested $50,000, which is your vested equity value, but the granted equity value would still be $25,000.
       • If throughout 2020, the stock price was on average $50 as your equity vested, then you vested $12,500, which is your vested equity value, but the granted equity value would still be $25,000.
   • The reason to focus on “granted value” is two-fold:
     • The granted value is the investment that the company decided to make on you when they awarded you the grant.
     • Changes in the stock price are the risk/reward that both you and the company sign up for when accepting equity compensation. If the equity value goes up, that reward is yours to keep for taking the risk on the company. If the equity value goes down, that lower value you receive is the risk that you signed up for by accepting equity compensation.
   • For companies that are not yet public it’s very difficult to understand the true value of the stock. For public companies, you can just look at the stock price each trading day.
     • Careful with startup/pre-IPO valuations: Companies will often tell you “in our latest fund raising we raised money at $XX per share” and make you think that’s the value that they are granting to you, BUT:
       • Those valuations are often based on favorable terms that investors get (such as priority liquidity, preferred shares with extra voting rights, etc.) and not the common shares that they are granting to you. As such, you should heavily discount the value of your shares, more so if the company is far from IPO or acquisition event.
       • You are often granted stock options, which means that you need to pay a certain amount to actually get the shares after the options vest. This means that you are forced to invest a certain amount of cash in the company to get the benefit of the shares granted and will need to have liquidity (cash) to do so. This should be considered in the value of the shares.
       • If you were to leave the company before it has been acquired or gone public, you typically have a short period of time (e.g., 90 days) to turn any vested stock options into shares before they expire. This puts pressure on you to invest in a company without knowing when you may get the reward.
     • All of these are risks that you assume. There’s potentially huge rewards if the company is successful, but keep the risks in mind as well.
3. Negotiating other benefits
   • If your company has a generally weak benefits package compared to similar companies (e.g., weak retirement plan, healthcare, etc.) you can use that to negotiate higher salary to compensate.
   • The opposite is also true, a company with a great company culture and benefits package may pay less given that employees are willing to trade some monetary benefit for the other benefits.
   • Some key benefits to consider include (this is US-centric since that’s where I’ve worked):
     • Paid time off: how many days off per year does the company give you? How many holidays per year?
       • If the company has an “unlimited paid time off” policy, really inquire as to what’s the typical and acceptable range of time off to take per year. Some companies use this type of policy but pressure employees to not take time off.
     • 401(k) or other retirement plan benefits
     • Healthcare plans
     • Remote work flexibility
4. Things to avoid when negotiating salary / compensation:
   • Don’t cite “cost of living”. The vast majority of companies don’t care or factor in cost of living directly into salary calculations. They care about whether another company will pay you more and entice you to leave.
   • Avoid talking about “my friend gets paid this” or not. There are too many variables from person to person that influence compensation.

Last Updated on January 22, 2023 by Omar Eduardo