The "Big Five" components of compensation

Read about the "Big Five" components of compensation to help you understand the different areas you can negotiate on.

Base Salary

The simplest concept and the foundation of your compensation plan. Usually paid every two weeks for as long as you are an employee of the company. Relative to other compensation components, most companies have more strict policies around base salaries. Levels in your organization will typically determine what base salaries are possible. Some companies have overlapping levels (where an employee at two different levels may have the same base), while other companies have strictly separate bands. Ask your recruiter or hiring manager about salary bands as part of the interview process so you know where your offered compensation plan falls.

Annual Bonus


This is usually provided annually, and usually calculated as a percent of your base - which means if you negotiate a higher base, you automatically get a higher potential annual bonus. This is a calculation we do for you, by the way, and is why base improvements are even more beneficial than they seem.

Companies vary widely, typically a mix of individual and company performance. Individual performance is often rated on a simple scale and used as a multiplier.  The multiplier is applied to the company outcomes to produce your actual bonus - for instance, a 150% multiplier on a 90% company performance result means you receive (1.5) x (0.9) x Target Bonus.

Company performance may be a single number, but is more often a combination of elements, and in tech companies may be a mix of financial and user metrics (revenue and profitability, for instance; and DAU or MAU growth rates).

It adds up to complex formulas, but most companies try to set these so that, in most years, the actual bonus payout for most employees is somewhere within 80-120% of what you would expect to achieve with standard performance.

Signing Bonus

The amount.  Probably the simplest part of it - the dollar figure stated in the offer letter you’ve received.  Though most people look at this, dream of the new motorcycle or Louboutin heels they’re going to buy with it, and move on, there are actually two additional elements you should consider.

The clawback.  Almost all companies attach what’s called a ‘clawback’ to a signing bonus.  This means, essentially, that you don’t get to keep all that money they’ve given you if certain conditions are met.  The two most common elements of a claw-back are the time period and whether it’s pro-rated or not.  The time period is simply how long the clawback applies for, and is typically one year from the data of the payment provided.  Pro-rated simply means whether you pay back the full signing bonus, or only a proportion of it that is the same as the proportion of the year you’ve been at the company.  Let’s take a look at an example (This is Amazon’s language):


“If your employment with the Company is terminated for any reason prior to the one-year anniversary of your Start Date, you will be required to repay the unearned prorated portion of the sign-on payment.”

In plain English, this means if you leave after six months - for any reason, either your own choice or Amazon’s - you have to pay back 50% of your signing bonus (6 of 12 months).  If you leave after nine months, you pay back 3/12 or 25% of your signing bonus.

The taxes.  Signing bonuses are a form of income, and are taxable just like every other form of income.  If you’re in a 25% tax bracket, a signing bonus of $10,000 means what you actually receive will be no more than $7,500 (and often less, since the company will also withhold other required taxes).  Since all your cash income is taxed this way - we’ll leave equity out of it for now - it shouldn’t change your calculation of the signing bonus’ value.  But some people forget this, and thus expect more from their signing bonus than they actually receive.


Equity


Equity is the most variable element of your compensation.  One of the most commonly held frameworks in equity valuation - called the Efficient Capital Markets hypothesis - states that the current price of a stock reflects all known information about that stock.  Which means, essentially, if you don’t know more than the cumulative knowledge of everyone else who knows something about a particular stock, the price of that stock today is all that we can know with confidence.


Publicly-Traded Equity

For publicly-traded equity, it doesn’t get more complex than that.  As part of a multi-year offer evaluation, you should consider vesting schedules to ensure that you have an accurate understanding of when that equity will become available to you.  And if you’re working at a publicly-traded company that isn’t offering standard RSUs, you should do your research to understand what the company is offering and how to value it. For most public companies, valuing equity is fairly straightforward - their current stock price is listed publicly and updated constantly.


Privately-Held Equity

For privately-held equity - meaning a company that is not listed on a stock exchange where you would be able to buy or sell shares for cash - the calculations become a good deal more complex.  They often also involve a good deal of legal and financial expertise, because companies offer more types of equity (warrants, options, RSUs) than publicly-traded companies do.  In addition, venture capital-backed companies sometimes go through multiple dilution rounds as they raise additional financing, and the liquidation preferences of the investors may also distort the final value of your equity in some situations.

Instead of trying to pinpoint a precise dollar value, you should think of privately-held equity as a set of probabilities and ranges of outcomes.  You should orient those probabilities around the growth of the company, rather than on its exit outcomes, because as an employee you will be able to track the company’s internal growth metrics - like users, revenue, or bookings - more easily than you’ll be able to track exit scenarios like acquisitions or IPO stock pricing.

Unless you’ve joined a very late-stage privately-held company, which more closely approximates public companies than smaller startups, you should think about the equity in a private startup this way:


  • Most of the time, that equity will be worth very little.
  • Occasionally, that equity will be worth something significant, but not life-changing.
  • Very rarely, that equity will be highly valuable.

Many privately-held companies continue to delay their exit scenarios - either acquisition or IPO - which also means you should take into consideration when you will be able to translate that equity into cash.  Unlike in publicly-traded companies, you won’t be able to sell your vestings immediately, and many employees who join startups early will end up holding their equity for five or more years before they have an opportunity to sell.

No matter your situation, equity is a complex topic.  When it comes to offer negotiation, you should do your research to get the market data and fundamental analysis to allow you to do apples-to-apples comparisons across different offers and companies.


Benefits


Benefits can be difficult to understand and calculate, and as a result are historically the most under-emphasized element of a compensation package. Company plans vary widely with little standardization outside of health and retirement plans. Nevertheless, the major components to keep track of are (cite BLS): health, retirement, PTO, disability/life insurance. Other major components include transportation/commuting, professional development, cell phone or computer stipend, parental leave and child support policies, free meals, fitness/gym stipend - the list goes on.

When you receive an offer, you should make sure to ask for a benefits document. If it doesn’t provide the financial details of the benefits, ask for them. Then do the math to convert each benefit into an annual value, even if you have to approximate. You can find thousands of dollars in differences between benefits plans, so this is important to check.