Understanding Compensation

Employers vary enormously in terms of how they structure their compensation packages. Understanding compensation from an employer’s perspective can give you an advantage when the time comes to accepting a job offer.

The role of compensation

Employees are an important company asset and payroll is typically a company’s largest expense. Compensation therefore plays a vital role in the success of any organisation. Companies aim to determine and maintain pay level guidelines that attract, retain and motivate employees.

Compensation programs within large and mid-sized companies are usually well defined and structured - every position has a Job Grade (job level) with a defined salary range and benefits package. Compensation programs within smaller companies tend to be more informal or even, non-existent.

Cash compensation

Compensation packages vary by company and job level.

Entry-level positions often offer a base salary only. Mid-level to management level positions typically offer a base salary and a performance-based bonus such as a short-term incentive and/or long-term incentive. Executive-level positions offer the most lucrative compensation packages that often include base salary, both a short-term and long-term incentive, and other perks.

  • Base Salary

A fixed compensation paid on a regular basis in exchange for an employee performing routine job functions, often expressed in an annual sum i.e., annual base salary.

  • Short-term Incentives

Rewards to an employee for achieving certain goals over a short period, such as a year or less. Short-term incentives typically entail a cash reward paid out on an annual basis. Rewards can include a cash bonus or commissions (for revenue-generating positions such as sales). These incentives are measured based on an employee’s own performance, a department’s performance and/or the company’s performance.

  • Long-term Incentives

Rewards to an employee based on company performance over a longer period of time, typically two to five years. These incentives can be paid in various ways such as cash bonuses, stock options, restricted stock, ownership or shares within a private company. These incentives are typically measured based on an employee’s long-term contribution to the long-term success of the department and/or company and are usually paid out to mid-level management and executive-level positions.

Non-cash compensation

In addition to the cash compensation components of an offer package, companies, especially large and mid-size companies, may offer non-cash components as well. The most common are health care benefits, pension plans, and holiday, vacation and sick pay. Some employers offer other benefits such as a car allowance, gym membership, professional membership reimbursement, child care assistance, and numerous other benefits and perks designed to attract, motivate and retain talent.

Suggested activity

When you are presented with an offer and you know it falls short of market expectations, consider negotiating on non-cash compensation components if the employer is unable to move on the cash components.