How to compare total compensation packages
A higher salary might not actually mean more money in your pocket. Here’s everything you need to look at.
If you’re looking for a new job and get an offer with a salary that is $10,000 more than what you currently make, it may seem like a no-brainer to chase the cash.
Not so fast!
Considering total compensation—the worth of your benefits package, the costs associated with a certain job and other factors—may show the lesser-paying job to be the better value.
Before you dive into the math, find out if you can get a total compensation statement, which would show you how the costs break down for yourself and the employer, says James Knox, president of benefits consulting firm XLK International, an HR consultancy in Flowood, Mississippi. Employers should provide this information to employees, and may provide an estimate of the value of benefits to qualified applicants who are being considered for positions.
Learn about your insurance
If the position you’re considering offers health insurance, find out what premiums, deductibles, and co-pays you’re responsible for, and what’s covered. Look at your own health costs for the past year or two to get an estimate of what you had to pay and what was paid for through insurance to get an estimate of how the new plan may compare.
If you’re covered by a high-deductible health plan or a consumer-driven health plan—or would consider one at your new firm—find out whether the employers contribute on your behalf to health reimbursement accounts or health savings accounts, and in what amounts, Knox says. Keep in mind that funds in HRAs revert back to employers when you change jobs, while HSA funds belong to you.
Think about retirement
Be sure to include any employer contributions to retirement plans and any other insurance product the employer pays for, such as long-term disability or life insurance, Knox says.
For example, if a company offers a 401k package with a company match, it can really add up for you over time. For example, based on the accounts Fidelity manages this match averages about 4.3% annually, or $3,540 in salary per year.
Look at unique benefits
Other benefits you can take advantage of every year, such as a pair of glasses up to a certain amount, are easier to estimate than a value that you may never collect on, such as life insurance. In the latter case, use the employer contribution—if any—as an estimate in your calculations.
Paid time off should be included in any calculations of the benefits you get as well. Calculating its value is fairly straightforward, says Crystal Stranger, president of 1st Tax in Honolulu. Take the annual salary of the job and divide it by 240—the standard number of work days in a year. That gives you the daily rate for the job. Multiply the number of days of paid time off by the daily rate to determine the value of your PTO.
Subtract out lifestyle costs
If you’re comparing the compensation of two possible jobs in order to decide which one to take, you’ll also need to include lifestyle costs associated with those jobs, Stranger says.
For example, if one job requires a longer commute, your transportation costs will go up and the time spent commuting will lower your average hourly rate.
Different clothing requirements can also make a difference. And if one company offers a subsidized cafeteria, include that as well. “Even free coffee is a perk that can add up substantially over time,” Stranger says.
Here’s an example courtesy of Stranger that shows a higher salary doesn’t necessarily mean a better payoff in the long run:
Job 1: $60,000 salary, professional attire, with 2-hour RT commute, 10 days off and free coffee
- Paid Days Off: $2,500
- Insurance Value: $300/mo = $3,600
- Retirement: 50% matching first 5% of contribution = $1,500
- Free Coffee Savings = $480 (assuming $2 a day value)
- Total: $68,080
- Hourly Rate: $28.36
Job 2: $55,000 salary; casual attire; with 30-minute RT commute, 14 days off
- Paid Days Off: $3,438
- Insurance Value: $300/mo = $3,600
- Retirement: No match
- Clothes/Dry Cleaning Savings = $2,000 annually
- Commute Cost Savings: $100/mo = $1,200
- Total: $65,238
- Hourly Rate: $31.98
“These examples don't factor in tax rates, which would make the second job that much more beneficial with regards to hourly wage,” Stranger says, "but it still shows clearly how small differences can make a big impact on what you actually earn."