Archive for August, 2013

The Components of a Compensation Package

August 23, 2013

I’m truly blown away by how many different models of cars there are to choose from these days.  It would be one thing if all the cars were so drastically different from on another, but as each model year comes and goes, it seems as though car designs and their respective accoutrements become more and more homogenized.

Such is the case with job offers and their respective compensation packages.  Or so it would seem.  Putting aside those crazy years before the internet bubble burst, when offers were accompanied by decadent enticements like sign-on bonuses, trips, cars, personal shoppers, and clones to do your job for you, the perception from many candidates is that one offer is just like the next, only with some numerical differences in the base salary and variable.  It’s as if we’ve been conditioned to look at offers in a myopic fashion.

But lately, I’ve seen some nuanced differences amongst my hiring clients.  First, let’s break down the different components of a package.  On the cash side of the equation, there’s the base salary.  In a commissioned sales role, it’s quite typical for the base to be roughly 50% of the on target earnings (OTE).  For marketing, product marketing, product management, and pre-sales engineering roles, I’ve seen the base represent 70% – 90% of the OTE.  And for post-sales consulting/implementation roles, it usually falls in the 80% – 90% range.  There certainly are exceptions, but these ranges have been fairly consistent over the recent years.

The variable cash compensation is either a bonus or commission.  The bonus is usually comprised of management by objectives (MBOs), in which the hiring manager and new employee agree on milestones to achieve that align with and support the greater organization or company goals.  In addition, there may be a smaller component of the bonus that is based on company performance.  In a pure sales role, the variable is usually all commission, but will depend on the level of the position and its associated responsibilities.

Beyond base and variable, I’ve seen some companies offer profit-sharing, delivered as cash payments quarterly or year-end lump sum.  Sometimes, they’re funneled into an employee’s 401K.  Beyond that, there are the miscellaneous odds and ends not covered in a job offer, such as spiffs and contests.  And while these trinkets are generally short money, they can add up over the course of a year.  And yes, once in a while, I still see the perfunctory Christmas bonus – or to be politically correct, holiday bonus paid out, although that’s become rather antiquated.

Next comes equity, nearly always in the form of stock options, restricted stock units (RSUs) and employee stock purchase plans.  Without going into too much granular detail, stock options are a grant of a specific number of shares that vest over a period of time (usually four years).  Once the options vest, the employee may exercise their options and purchase them at the price that was established at the time the options were granted – usually when the employee first joined the company or as additional options are granted down the road.  A restricted stock unit (RSU) is a grant valued in terms of company stock, and similarly to stock options, they are not issued at the time of the grant. RSUs do not involve having the employee purchase the shares.  After the employee satisfies the vesting requirement, the company distributes shares or the cash equivalent of the number of shares used to value the unit.

In most cases, job offers that include company stock involve stock options.  The number of stock options in the offer doesn’t mean anything on its own.  What matters is what that number represents as a percentage of all the company stock, known as outstanding shares.

Finally, there are benefits.  Granted, most companies offer a reasonable assortment of benefits, including a health plan, dental (although I’m seeing fewer smaller companies offering dental as the value of the plans can be questionable), life insurance, short term disability, long term disability, accidental death and dismemberment, vacation, holidays, birthdays off, tuition reimbursement, health savings account (HSA), flexibility to work from home, etc.

The mix of base salary, variable, equity, and benefits varies widely.  Traditionally, it has varied based on the nature of the position and the company’s priorities, but lately, I’ve seen these components vary based more on the finalist candidate’s preferences.  Some people, who are more risk averse, don’t care as much about equity and want the perceived security of a higher base.  I say perceived because negotiating for a high base could pay off short term, but potentially come back to haunt the employee down the road should the company have to make difficult decisions on cost cutting.  Base salaries are a fixed cost and usually represent the most expensive part of a company’s budget.  So for an employee to have a higher base salary compared to others in the same peer group, that person could potentially be targeted for headcount reduction.

Other people prefer to have greater variable, offering the chance to overachieve on goals and make even more money.  Such a leveraged plan is more typical of a pure sales role.  This type of plan is for people who want to have greater upside in their cash compensation plan and with that, better control their earnings destiny.  I advise salespeople that they shouldn’t be so concerned about base salary if they are confident of their selling ability.  After all, in sales, it’s not about meeting your quota.  It’s about exceeding it and getting into accelerators.

The equity piece comes into play as a more significant factor with earlier stage companies.  By far, the equity allotment in an earl-stage company will have a material impact on one’s livelihood down the road, assuming the company enjoys strong growth and has a successful exit event (i.e., acquisition or IPO).  One of the main reasons to join a small, early-stage company is to have a chance at this high reward.  Yes, it’s a lottery ticket.  But if you don’t play, you can’t win.

Finally, I’m seeing some differences with benefits offerings.  Lately, I’ve seen several companies offer 100% heath care coverage, meaning they will pay 100% of the employee’s monthly healthcare premium.  Over the course of a year, this has material value as it can save an employee thousands of dollars from monthly paycheck deductions.  In addition, I’m seeing more and more companies offer unlimited vacation.  All they ask for is the courtesy of advance notice.  This benefit sends a clear message to the employee base.  Essentially, it says, “We want to treat you as mature, responsible adults and as long as you get your job done well, we’ll be flexible and not micromanage you.”  Interestingly, according to recent studies, most people under this plan don’t end up taking more than 2 – 3 weeks off anyway.

As a candidate, it’s important for you to prioritize what’s really important to you.  Many candidates are more than willing to take a cut in their base salary for an opportunity to join an exciting, innovative company whose culture they can truly thrive in and have a chance to hit it big with a successful exit event down the road.  Other candidates prefer to shore up their base salary as they have a higher cost base in their personal lives (e.g., mortgage, child care, college savings, car payments, etc.).

For hiring companies, the mix of base, variable, equity, and benefits gives you the opportunity to truly differentiate yourself from other competing hiring companies.  Not only can you come up with creative offerings, but also offer flexibility in the mix of the offerings to better suit the preference of the candidates you wish to hire.  Unlike cars, hiring packages do not have to be alike.

Action items:

1.  As a candidate, be careful not to think too myopically about the compensation package offered to you.  Take into account longer term facets, such as equity, benefits, company culture, and career advancement paths.  I’ve seen far too many candidates make regrettable career decisions based solely on base salary combined with pie-in-the-sky variable packages that turn out to be unattainable.  And even if the cash compensation is strong, how sustainable is such a role if many of the other attributes are sorely lacking?

2.  Add up the benefits and assign dollar values to them.  You’d be surprised how much material impact they can have.

3.  What are you really looking for in your next career move?  Make a priority list and use that as your North Star in assessing opportunities and offers.