About a year or so into being a financial planner, I was given an opportunity to speak to the Women’s Community within the Boulder Chamber of Commerce. I had a fifteen-minute block, alongside an investment adviser from Boulder and a disability insurance saleswoman, who had their own fifteen-minute blocks. The investment adviser gave some good, if perhaps a bit off-base advice about how to start a business. He recommended esoteric leadership books and taking out a HELOC to get your business off the ground. The disability insurance saleswoman told her own story of getting into a serious accident and then parlayed that into the importance of disability insurance. Good story, but somewhat on the nose. Then my turn came up. I spent the next fifteen minutes talking about compensation overall, and in particular, hiring. The highlight of the talk was when the subject of how much to pay someone came up: “If you’re planning on paying people minimum wage to work for you full time, without benefits, in Boulder Colorado, let me put this simply: Fuck you.” It got quite the reaction out of the crowd, but at a time when the minimum wage was still $8.31 and the fair market rent was higher than 99% of the real estate markets in the United States, it seemed pretty obvious.
I share this anecdote not for shock value, but to give a bit of context. While my doctoral studies in personal financial planning have revolved around compensation, compensation has always been a fascinating subject to me. Most important to me is getting out of the numbers, thinking about what the compensation actually means, and refocusing on the ultimate outcome. From the perspective that money is permission, and benefits are really just there to provide what people would or should otherwise buy for themselves, compensation is a meaningful element in the structure of people’s lives. So today, we’re talking about compensation both from a personal compensation standpoint and from a decision-maker’s standpoint, and hopefully, whether you’re interested in one, the other, or both, it will help you think about this often taboo topic.
Start with Cash
My uncle regularly likes to remind me that “cash is King.” While I actually disagree with this in literal principle (physical cash is a germ-ridden filthy lucre), it is where almost everyone is going to start their consideration around compensation. For the potential employee, the question is “Am I worth this? Do I have the skills? Does this pay enough for my desired quality of life or goals?” A curious anchoring bias also takes place here, one that cuts deeply against people who have had tougher career starts when it comes to compensation. We seldom are willing to take a step back in pay, even when benefits or the work-to-pay ratio could be substantially improved. Many would rather keep a position that had poor benefits and made them really work hard for their money than take a small step down in salary for much-improved benefits and work-life balance.
Yet, both employees and employers should consider cash compensation carefully on its own. For an employer, to start, one has to acknowledge that the salary is always going to be about 8% higher than the sticker price; more specifically, 7.65% up to a ceiling of over $160,000 (which encompasses the vast majority of jobs out there). Thus, a job paying $100k is really paying $107,650, all down to payroll taxes. This doesn’t include things like unemployment insurance premiums or other state-mandated payroll taxes or fees. This also drags up the issue of retirement plans, which are typically going to range from 2%-6% for most businesses, though some enterprises find themselves spending up to 20% on their employee’s retirement benefits based on structure and regulatory requirements.
As a basic rule of thumb for the hiring manager, I recommend thinking of all positions as costing 15% above the sticker price of payroll, plus an extra $1k per month if benefits are offered (more on this later.) For employees, the key question to ask is what the total compensation for the position is. Everyone is as susceptible as anyone else to the siren song of anchoring on salary or hourly rate alone, yet it’s meaningful to consider the cost of the benefits on offer and whether they’re necessary. And yes, before you write them off, medical, life, disability, vision, and dental insurance are all necessary. As the saying goes: “Fuck around, find out.” Don’t forgo a position with strong benefits solely for a +1 somewhere on the salary or hourly scale; it’s far more expensive to pay for yourself and it’s absolutely necessary.
For both hiring managers and employees, it’s absolutely essential to benchmark the value of a position. The world is full of businesses offering wages equal to what the manager was paid 20 years ago for the same or more work, and those same managers always look baffled as to why no one is applying. “No one wants to work!” Goes the cry of the managerial class. “No one wants to work for YOU.” Goes the response of the working class. The first thing one needs to do for any salary decision is benchmark the position both in the industry and in the locality. For example, a benchmarking study for financial planners nationally recently suggested that entry-level financial planners’ median salary was about $63,000 (without consideration of benefits, variable compensation, or anything else.) This is perfectly fine in most localities in the United States, but if the hiring manager takes the national median in a city like San Francisco, they’ll find that they’re unable to hire, since the local rate for that work in San Francisco is $85,000.
Further, both potential employees and hiring managers need to look outside of the industry for comparable positions, particularly when not hiring an industry-specific role like a financial planner, but something more general like an HR professional. Tools such as the Bureau of Labor Statistics can give you a huge dataset to work from, but if you’re looking to fine-tune your research, resources such as Glassdoor.com and Salary.com can provide real-world feedback more specific to your companies or competitors of interest, which can help you form a more informed opinion of what a fair compensation package is.
A final note for hiring managers: It’s tempting to post salaries or hourly ranges close to the mean or median of a particular professional spot. But remember, a median is the “middle” with half of the people making more and half making less, and a mean can be heavily biased in favor of too many low-wage earners or a handful of over-compensated wage earners. Be mindful too of what your salary says about your culture and hiring philosophy: offering in the middle of the range is “adequate.” Offering well to the right tail of the distribution to the higher side is “enticing,” and remember that staff turnover has its own invisible costs, that might be far more affordable if you work to retain employees.
The Cost and Value of Benefits
My position on jobs offering no benefits is pretty plain: Those jobs are temporary at best. Ultimately, any job that does not offer things like a retirement plan or medical insurance is simply passing those costs onto its employees. “We’re not going to pay for these necessities, so it’s up to you.” Ironically, employers taking this approach never seem to make up the difference in salary or hourly wages, and thus, are perpetually gobsmacked by the turnstile of employees who come and go.
We mentioned earlier the rule of thumb that employers expecting to offer benefits should assume a 15% premium above wages plus $1,000. Where does that come from? Half of the 15% is simply the payroll tax, which does drop down after a certain point, but often only at the manager or executive level of compensation, or otherwise in niche specialized technical roles like software development or medical doctors. Otherwise, the payroll tax likely weighs on every dollar that is paid. There is also a nominal premium for unemployment insurance that typically goes away after a few thousand dollars of salary, so the costs there are small but fall off much like the social security element of payroll tax. The remaining balance is simply an indicator of the matching costs of a retirement plan.
Of all the benefits you can possibly offer with a moderately moral lilt to them, a retirement plan might be the most important. This might be surprising to any employee or manager reading this, but here is why: The research is very clear. People, particularly young people, tend to save only that which they are incentivized to save. While there are plenty of exceptions to this rule in those who take financial responsibility and saving seriously, the average American will not save for retirement unless their employer offers a retirement plan that has a matching element to incentivize them to participate. Even then, only about half of employees will opt into a retirement plan, though only about one in twenty will opt out if you default them into participating. So herein is the moral element to this: If you do not take the step of offering a retirement plan and making it an effective savings vehicle for your employees, there is a solid chance that far down the road of their lives, they will have under-saved for their own retirement. To personalize that for a moment, think of your own parents or grandparents, and the heartache and worry that might come from a conversation they one day must have with you as their children or grandchildren about how they cannot make ends meet in retirement. Do you then not feel some responsibility for positively influencing the outcome of their lives? At a cost of a mere 2%, you can provide a retirement plan to any employee or ensure you’re incentivized to save as the employee. And of course, the more you can offer or obtain, the better for everyone.
Then there is the $1,000 per month “premium.” This is a more simple measure: Medical, vision, dental, disability, and life insurance. The average cost of all of these benefits in the United States is $7,238/year all-in. You might be scratching your head and saying “That’s only $603.16 a month, where’s the other $396.84 coming from?” That’s a great question, and simply, it’s that Medical insurance in particular has an extremely variable cost. As little as two hundred dollars or so for young adults, upward of over a thousand dollars a month for those in their early sixties. Most employers will not have a large number of employees over the age of sixty, so in working down to a more average expectation, a thousand dollars per month provides a conservative baseline estimate to consider, which may be overstating the budget for a position.
Soft Dollar Benefits
Finally, there are more cultural and soft dollar benefits of a company. For example, flexible work hours, vacations, sick leave, paid time off policies, and so on. These are more or less valuable based on who you are and what you value; more is obviously “better” for the employee, but whether it’s a meaningful part of the compensation package is a bit more subjective both for the employee or employer. In a business with strong recurring revenue streams like a subscription-based service, offering flexible work and leave policies is likely a low-to-no-cost benefit to offer. In a company like a factory where every hand missing means products are not being built and shipped, vacation and leave are more significant expenses that have to be considered. These are all meaningful in light of both a management decision about what to offer (“Does this benefit cost us anything, really?”) and about what to look for (“I want to travel a lot, so a company with good vacation policies is important to me!”)
Put it all together: What is a position worth?
Let’s use two examples to follow the math for a moment. Let’s say you’re hiring for or looking for a $50k position and a $100k position. Both positions you’re considering have the full stack of benefits. So, in the case of the $50k position, you can expect that the full compensation package is about $69,500 when all taxes and benefits are considered. In turn, you can expect the $100k position’s full compensation package to be $127,000. These are certainly varied based on the actual presence of benefits, whether the employer covers all or only part of the costs of insurance, and how much match is available for the retirement plan. That said, these serve as good benchmarks for an employer and an employee to consider. “Does the compensation for this position match my expectations? Am I going to [overpay/be overpaid] or [underpay/be underpaid]?” If the total compensation exceeds the estimates, then it’s a strong offer. If it’s well below the estimates, then there needs to be a serious soft dollar and cultural benefits to offset it. A good example is non-profits, in which often roles are under-compensated, but employees are “paid” in the warm fuzzies of helping to make the world a better place.
Ultimately, what you offer as a manager of a business, or what you seek as an employee of a business, is a personal decision. But never fail to do the homework, and be sure to get paid what you are worth and to pay what people are worth, or everyone will always be looking for the next better opportunity.