Income and Compensation

In order to be self-sufficient in our economy, everyone needs some type of income – money to pay the bills and other living expenses, but that income comes in many shapes and forms.

When you have a job, the total compensation from your employer consists of more than just the paycheck you get.  Different employers offer many different compensation packages.  Finding the right balance between them all is often a careful point of negotiation when accepting a job offer, but the first step is knowing what they are!

Direct Compensation

Direct compensation is what you get from your employer for doing your job—how you are being paid. This is directly laid out in your employment contract, collective bargaining agreement, or other terms of your job.

Salary and Wages

When people think of their “income,” salary or wages is usually the first number that comes to mind.  It is the actual cash that your employer pays you per year. When considering different job offers, this is the easiest number to consider for income and compensation because it is easy to compare “apples to apples” between jobs.  $45,000 or $47,500?  Which is greater?

Your salary or wages is also called your gross pay.  Gross means that it has not been adjusted to reflect taxes, withholdings, retirement contributions, or other non-cash perks.  It is the amount you start with when you calculate the number of hours you’ve worked and how much you get paid for those hours.

Hourly Wages

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Hourly wages are the most basic form of compensation.  You are paid a specific amount for every hour that you work. Most people’s first jobs will be hourly, but many high-end professionals and independent contractors also charge by the hour.  Part-time employees, whose scheduled work hours differ week to week, are almost always paid by the hour.

If you do work as a contractor, it means that you are self-employed, but you contract out your time and energies to work for someone else (either a person or company). Companies like Uber and Deliveroo, who offer a lot of flexibility to their workers, employ most of their workers as “contractors”. Contractors are typically paid a specific amount per hour of work, plus expenses (since a contractor typically has to buy their own work materials and get paid back for them later). Contractors are not typically eligible for any compensation other than this hourly rate.

If you work as an hourly employee, that means that you have a specific agreement with your employer. Employees typically have much less flexible schedules than contractors.  They are scheduled to work for a specific amount of time every week and are compensated based on the total number of hours they actually work. Hourly employees may be entitled to other perks and forms of compensation, depending on their employment agreement. This could include free food for someone who works at a restaurant, getting to see movies for free for someone who works at a movie theater, or a holiday bonus.  Hourly employees who end up working more than their scheduled hours are often paid “overtime” as compensation.

Salary

A worker who is paid a salary is not paid per hour but instead is paid a set amount every pay period based on a set number of hours worked per week, month, or year. Salaried workers are almost exclusively full-time employees.

Even though salaried workers are not paid per hour, their contracts usually state that they are expected to work at least 30-35 hours per week. If they need to work more than this as part of their normal job duties, they are not paid overtime.

Salaried workers are more likely to receive other types of compensation in addition to their base salary including things like paid holidays, mileage reimbursement, and paid sick time.

Insurance

In addition to salary and wages, most employers offer group insurance as well. Group insurance is offered to all employees of a company who get a “group deal” for insurance at a fixed cost each year. Because many employees take advantage of this insurance program, the insurance company is able to offer lower premium rates than you would typically get if you had to purchase insurance as an individual. 

The cost of the group insurance is shared between the employee and the employer.  The employee’s share is deducted from their gross pay, while the employer’s share is paid directly by the employer.

Health Insurance

If you work for a large company, you will almost certainly have group health insurance included as part of your employment package. As an employee, you can usually add your family members and children to your insurance coverage. Since buying health insurance on your own can cost twice as much, (or more) health insurance is a major form of compensation to consider when comparing job offers.

Life Insurance

Many employers will also include life insurance as part of the employment package. Life insurance has two functions:

  1. If you pass away before the maturity date on the policy, your survivors are given a lump-sum of cash as a form of compensation for your lost income.
  2. If you live beyond the maturity date, most life insurance policies also have a “maturity payout” which is a lump-sum of cash that can be added to your retirement savings.

Retirement Account Contributions

Many employers will also offer to help with retirement savings through programs such as 401k, 403b, or a pension plan.

Direct Contributions To Savings

The most common method employers use to help you save for retirement is by paying directly into your retirement account, like a 401(k), usually matching your own contribution. This means that for every dollar you save yourself, your employer will also contribute an extra dollar, doubling your savings rate. This form of employer contribution is very popular both with employers and employees, since it gives employees direct control of their retirement accounts.  Employers also benefit through reduced employee turnover, tax deductions, or tax credits. 

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These retirement options are often the most over-looked part of an employment package for younger workers

By maximizing your retirement savings early, (meaning you save the maximum eligible amount per year) you can effectively double the amount you’ve saved because your employer contributes the same amount. Since your retirement savings is being invested, you will also be earning returns on your investment through the growth of stock, payments of dividends, earning interest on bonds, etc., you’re getting an even bigger bonus.

For more information on employer-sponsored retirement savings programs, like the 401(k), check out our article on retirement.

Pension Schemes

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Employers might also offer a direct pension program.  After retiring from a company with a pension program, you receive a check each month for the rest of your life. The amount you receive is typically based on how long you worked with the company and how much you earned over your lifetime.

Even if you leave one company and start working somewhere else, you will still be able to collect a pension from the first one based on how long you worked there. Pensions are less common in recent years, as many employers favor direct-contribution plans instead.

Indirect Compensation

Indirect compensation are other forms of “payment” you receive that do not necessarily have a known dollar amount. These are often considered “perks” of your job. 

Equity Compensation

Equity compensation means the company provides a way for its employees to own company stock and benefit from some of the company’s profits. This can be through direct stock compensation, (receiving shares of stock in the company) stock options, (giving employees the right to buy company stock at a later date at a fixed price) or even through profit sharing, (splitting the company profits with employees).

Forms of equity compensation are most popular with employees in management roles.  They act as a form of motivation to encourage employees to help the company grow, since the better the company does, the more valuable the equity compensation becomes. Because start-up companies haven’t yet experienced substantial success, employees are often offered direct stock compensation. Once the company grows, the value of your shares of stock increases, sometimes dramatically. 

Vacation Time

Vacation time, how much of it you receive and how often you are eligible for it, is a key piece of indirect compensation. Vacation days, sick days, and personal days all vary greatly from company to company, but having those paid days off can be a major source of compensation.

Flex Time

A new form of compensation to reward employees and attract new talent in recent years has been the introduction of flexible working hours and conditions. Typically, in the past, businesses had set hours of operation, so you were expected to work from 8:00 a.m. to 5:00 p.m. with a one-hour lunch break.  An example of flex time would be a company  allowing employees to work from 8:00 a.m. to 6:00 p.m. four days a week instead of working 9:00 a.m. to 5:00 p.m. five days a week.  This provides employees with regular 3-day weekends. In another flex time option, companies may allow employees to work from home occasionally or flex their hours by starting and ending their work day later.

How much flexibility your job allows can be a major form of compensation offered by your employer.

Family Perks

Some companies offer perk packages specifically targeting employees with families. Typical perks include maternity/paternity leave, bonuses to accommodate child daycare, extra time off for child sick days, and sometimes a company-provided day care on site in the building.  Family perks are an important form of compensation companies offer to attract candidates who may be starting a family in the future or who currently have young children and need to consider how to balance their family-work commitments.

Other Sources of Income

Throughout your life, the majority of your income will come through your employment, but there are additional sources of income you should consider. 

Investment Income

Investment income are earnings you get from dividends, interest, selling stock, and other investment-related activities. Investment income becomes very important after you retire.  If you have been saving money in a retirement account, and have benefited from employer contributions, your investment income can be a very large amount by the time you retire.

You could also receive investment income through selling a house, investing in start-up businesses that provide you with profit-sharing or equity in the business, or using bonds or certificates of deposit that provided interest income when they mature.

Social Security

Social security provides retirement benefits and disability income for employees who have paid into the social security system and have reached a certain retirement age. Everyone who pays into social security is eligible for its benefits.  Social security can often be the most reliable form of income, but it usually not the largest. 

Combining social security income with other retirement income will help you live a comfortable life in your retirement years.

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1 of 5) Which of the following is a form of Indirect Compensation?
2 of 5) What is one benefit of having matching contributions to your 401(k) as part of your compensation package?
3 of 5) Which of the following forms of indirect compensation has historically been a part of most start-ups?
4 of 5) Which of the following is an important part of retirement income?
5 of 5) A part-time worker will most likely be…

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Challenge Questions

  1. What is the difference between a wage and a salary?
  2. What is the minimum wage in your state?
  3. What are the advantages and disadvantages of being on a salary and a wage?
  4. Would you prefer to be paid a wage or a salary?
  5. Other than pay, are there any other benefits that employees could potential get from working at a company?