If you’re considering a job change, salary is one important factor. But it’s also vital to look past the salary and study the total benefits package. Benefits offered by employers can vary greatly so take a look at the full picture. Here is a shortlist of the most common types of compensation.
Wages are the most straightforward portion of your compensation package (unless you work in sales, but those pay structures are beyond the scope of this article). The primary consideration beyond the actual dollar figure is whether you live in an area with a higher cost of living and/or higher taxes. It’s no secret to many of our clients that living in Minnesota versus North Dakota will jump your tax rate significantly, even if you’re on the lower end of the income spectrum.
With retirement plans, there are three key components to be concerned about: the employer contribution percentage, profit sharing, and vesting.
The employer contribution is straightforward. It’s the amount (usually a percentage) of your payment your employer will be contributing to your retirement program. The higher the percentage, the more dollars that get thrown into your retirement account. If it is a matching contribution, you will need to contribute a certain percentage to be eligible to receive the match.
Profit-sharing is a discretionary employer contribution to your tax-deferred retirement account. This is usually done as a percentage of the company’s profits. Many companies opt not to make these contributions, but some companies have a long history of sharing profits with their employees. It may be worth considering as a portion of your total compensation, with the understanding that it may not happen every year.
Vesting in a retirement plan means ownership. It’s how much of employer contributions to your retirement plan you get to keep when you leave the job. While some retirement plans provide immediate vesting, other common forms are graded vesting and cliff vesting. Immediate vesting is simple, any employer contributions to your retirement account are 100% vested after the contribution is made. Cliff vesting is relatively simple as well. No contributions may be vested until the employee provides up to three years of service, then all contributions are 100% vested. Graded is a bit more complicated than the other forms of vesting, where a certain percentage of contributions are vested every year for up to six years when the employee is finally 100% vested.
There are also secondary components to consider, including how much the plan charges, investments, and investment share classes offered. Also, keep in mind that accessing funds from a qualified retirement account requires a triggering event such as reaching a certain age.
Deferred compensation is, unfortunately, a complicated category. It can be in the form of a run-of-the-mill 457 plan (which I discussed in my article from May 2021), pensions, stock options, or something more complex. To be succinct, these plans can simply be an option for employees to defer income above and beyond what they contribute to their retirement plans, or they can be golden handcuffs to entice key employees to stay with the business for a certain number of years. As I said, these programs are complicated, so be sure to speak with your financial, tax, and legal professionals to fully grasp their characteristics.
Health insurance is expensive. In 2020, the average annual premiums were $7,470 for single coverage and $21,342 for family coverage. This is why it’s so important to know how much of the tab the employer will be picking up. It’s also important to obtain information on deductibles, coinsurance, and whether a Health Savings Account (HSA) will be involved.
People do not think about disability insurance enough and most are underinsured. You can break down disability insurance into two categories: short-term disability insurance and long-term disability insurance. If the benefits are structured properly, long-term disability insurance benefits will start when short-term disability insurance benefits stop. Long-term disability insurance typically costs 1-3% of salary and oftentimes covers around 60% of your pre-tax salary. Beware: if your employer deducts the cost of disability insurance premiums (most do), your benefits will be taxed. Furthermore, many group disability insurance policies have caps on monthly benefits and do not cover commissions or variable compensation. Consequently, this means if you are a salesperson and/or a high-income earner, you should take time to review your disability insurance options closely.
Group life insurance is generally inexpensive and typically offers a death benefit equal to one to one-and-a-half times an annual salary. Even for large policies, expenses usually only run into the tens of dollars per month. If an employer doesn’t offer coverage, many can seek out inexpensive term policies to provide the necessary coverage (and many should have additional coverage anyway). However, coverage options may be more important to you if you have certain health considerations, or your employer is using cash value life insurance as a form of deferred compensation. In either case, be sure to meet with your advisor to evaluate options.
With all this in mind, let’s go through an example to compare compensation packages. George has competing offers from two leading manufacturing companies.
|Spacely Sprockets||Cogswell’s Cogs|
|Death Benefit||1x Salary||1x Salary|
On the face, it seems like George will earn $2,000 more annually going to work for Cogswell’s. But let’s quantify those options just to make sure.
From a total compensation standpoint, the Spacely Sprockets package is more than 4% higher despite a lower base salary.
While this is a made-up scenario, it illustrates the importance of taking time to review your benefits package and consulting with your advisors before you decide on a new employer.