Thursday, August 4, 2016

Thinking About Compensation -- Cash and Otherwise

Suppose someone asks you how much you get paid. Probably the first thought that comes to mind for you is something like that your base pay is some amount of money per year or that you earn some amount per hour. You might include bonuses in your thoughts, or if you are hourly paid, you might include some overtime that you typically get. Let's just say, hypothetically, and because it's an easy number to work with, that your base pay is $100,000 per year and that you are not bonus eligible.

You're pretty happy in your job, but one evening, you get a call out of the blue from a recruiter or headhunter, if you prefer, who tells you that she would like to talk to you about a job in your field that has a budget of $110,000 per year. My question for you would be whether relative to your $100,000, is that $110,000 a good deal?

It seems obvious, doesn't it? You'd be getting a raise. But, it's not really that simple. Your current employer has a defined benefit pension plan and a 401(k) plan. They also provide you with a good health care program, four weeks of vacation per year, and some other benefits that probably don't seem like they will make a difference to you. Your potential new employer just has pretty basic health care and a garden variety 401(k) plan. They will start you at two weeks of vacation, but you work your way up to four weeks after ten years with the new company.

What should you do?

To people who often read my blog, the analysis is pretty simple, but to the average person, it's not. They often don't understand the value of these various benefits. And, that's why they tend to look at pay alone and perhaps the amount of vacation time that they are getting and whether or not their work schedule or work site (office versus home) will have any flexibility. That's work in 2016.

Suppose you are the employer and you happen to be the employer that offers good benefits, but doesn't pay quite as much as some of the employers against whom you compete for talent. I have an idea for you. Suppose you created a tool, or model if you prefer, to help prospective employees to compare what they are currently receiving with what you are offering them. It sounds like you've already made the commitment that you're not going to win on pay alone, so you have to find a way to make them understand the value.

Let them input all these various components side-by-side and see which one is the winner, especially if the pay you are offering is sufficient for them to live on. If you want to get even more sophisticated, you could tax-effect it.

Interestingly, the same concept works in executive compensation.

A company recently asked me to benchmark their executive retirement benefits (of course, those benefits are pay related). So, if their plans are 50th percentile, but their pay is only 40th percentile, then in reality, their plans fall short (50th percentile applies to 40th percentile gets you to somewhere less than 50th percentile retirement value), and conversely if you pay above the 50th percentile and provide 50th percentile retirement benefits.

It's surprising to me how often looking at things this way is a revelation. Perhaps you need that revelation.

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