Understanding Annual Compensation

Read this blog to figure out some differences between base salary and annual compensation. Remember that annual compensation is always more than your base salary.

Ready to start looking for a new job? You have your resume, cracked the interviews, and now is the time to negotiate the next offer. You think you have a number in mind. But do you understand the numbers on your current payslip to be able to ask for the right compensation? Do you know the difference between base salary and annual compensation?

Understanding your earnings seems simple—you get your pay check every fortnight and complete the tax forms at the end of the year. However, it can be tricky when comparing base salary to annual compensation to decide upon a job offer—to determine whether your new offer is really better than the current job.

Base Salary Versus Annual Compensation

The terms base salary and annual compensation are often used interchangeably to refer to the money you make for a job. However, they have slightly different meanings.

Base salary refers to the minimum compensation that you earn on a job. It is usually expressed on a yearly basis such as $60,000 per year. Sometimes, it can also be expressed as a monthly figure such as $5,000 per month.

Annual compensation is not necessarily a baseline or minimum figure you can expect to make. Instead, your annual compensation is the amount of money that you actually make throughout the course of the year.

Overtime Pay

If you are paid a base salary of $60,000 per annum, and get extra $45 per hour for overtime, then your annual compensation might be substantially higher depending on the overtime you work. For example, if you work 100 hours of overtime in a year, you get $4,500 over and above the base salary of $60,000. Typically overtime rate is at least 1.5 times the regular rate. You can read more here.

Medical Benefits

Annual compensation can also include medical benefits your employer offers. For example, your employer might pay medical premiums, amounting to (say) an additional $10,000 per year, on your behalf to cover your expenses for health insurance. So, if you bring home $60,000 per year in salary, and including cost of medical benefits, your actual annual compensation becomes $70,000 per year. As reported in 2016 by US Census Bureau, the percentage of people with health insurance coverage for all or part of 2015 was 90.9%.

401k

If you choose to contribute to 401k, you will be entitled to a corresponding match from your employer depending on what policy the employer has. For example, if you decide to save 3% to 401k and your employer matches the 3%. How would it work? For 3% of $60,000 salary, that is $1800, your employer will deposit another $1800 in your 401k account. As a result, your annual compensation increases by $1800. As per 2016 report of Plan Sponsor Council of America, the average company contribution to 401(k) plans is 3.8 percent, and the average contribution in combination 401(k)/profit sharing plans is 5.4 percent.

Vacation Time

Getting paid vacations does not directly affect your annual compensation, but it definitely protects your earnings throughout the year. Well, because life happens! You or your family may fall sick, you may want to take personal time off, you may travel with friends and family, may be you need maternity/paternity leave, or may be you need dedicated time to study for technical certifications. If there is no vacation policy in place, you might end up not taking time off for such activities. Hence, do discuss vacation policies of the company to understand the offer better.

Commission and Incentives

If you are in sales, you would be entitled to commissions based upon the business you bring to your company. For high-achieving sales folks, there might be no limit on the amount they earn by way of commissions and bonuses.

Certain companies also offer performance-based incentive plan for non-sales positions. Be sure to check for it, while discussing the offer.

Relocation Expenses

Several companies pay for relocation of home & family – both for new hires and existing employees. Following costs may be included – Movers & Packers, Temporary lodging, Travel & Ticketing – including international airfare, Home buying and selling services, Lease break coverage, Job search assistance for spouse, Child care, Elder care, etc. As per WRC, relocation expenses in 2014 ranged from $24,000 to $85,000.

Signing Bonus

Some companies offer signing bonuses to bridge the gap between salary expectations and offer on table. Its common that fresh graduates are offered a joining bonus to help him/her settle down. There is a wide range of bonuses being offered depending on the level of the position (from <$1000 to $50,000+).

Work Permit Cost

If you are an alien working in the USA, there are costs related to applying and maintaining work permits for you and your family members. In addition to an employee’s direct work permit cost, there are other requirements and fees fulfilled by a company to remain a valid sponsor of work permits.

Conclusion

So even for the same base salary, the annual compensation could be much higher, especially for the first year for new hires. Apart from above, there is a plethora of considerations that increase your annual compensation and must only be negotiated during job offer discussions.

We would be discussing a lot more in the future. Leave your thoughts in comments. And please subscribe to stay tuned.

Disclaimer: This blog is for educational purposes only. The information provided here is intended to help you understand general issues and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company’s benefits representative for rules specific to your situation.

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