How to Understand Your Compensation: The Ultimate Guide to Breaking Down Your Salary
Have you ever wondered how to understand your compensation? Or wanted to know how your salary is determined?
You’re not alone. Whether you’re happily employed, seeking new opportunities, or deciding between job offers, most people want to know one thing:
How much does it pay?
Understanding your compensation involves more than just the salary number. This guide breaks down the essential factors that determine what you earn and why.
What Goes Into Determining Your Salary?
Salaries are influenced by multiple factors within any organization. These include:
- Budget constraints: A company’s financial health and budget constraints significantly impact salary levels, even if market rates are higher.
- Cost of labor: Geographic location plays a crucial role. Do you live in a major urban center, like San Francisco or New York? Typically, you can expect a higher salary than you’d get in a rural area with a lower cost of living.
- Economic conditions: Economic shifts can prompt salary adjustments, both up and down. This is true across industries.
- Experience and education: Higher education levels and specialized skills can elevate the salary range for candidates. The more experience you have, the higher a salary you can expect.
- Market data: Companies rely heavily on salary surveys and benchmarking data to ensure they are competitive in the job market for similar roles and experience levels (more on salary surveys and benchmarking below).
- Role complexity and responsibilities: The complexity of the job, level of responsibility, and expected impact on the company’s success are critical factors. Positions with higher responsibilities typically come with higher salaries.
- Internal equity: Companies strive for pay equity within similar roles to avoid disparities and ensure fairness. This is known as internal pay equity and can greatly drive salaries within an organization.
Companies often use the salary of current employees in similar roles at their company as a baseline to determine a salary range for open positions, says staffing and recruitment expert Caitlin Wehniainen: “Companies rarely stray far from the salary of someone currently in the role, since this could create pay inequality within teams.”
HR Expert: These 6 Factors Determine Salary
Senior HR Director Daniel Space, better known as Dan From HR, says employers consider six key factors when determining salary:
- Location: Where the job is located, not just where the company is headquartered.
- Job family: A group of jobs involving similar work, training, skills, knowledge, and expertise. Job families help organizations categorize their workforce — think: groups like marketing, IT, HR, or finance.
- Job level: These range from associate or senior associate to manager or director.
- Company: Different companies have different salary standards. This can depend on the industry as well as the size or type of organization. For example, is it a small employer, startup, or Fortune 500 company?
- Industry: Don’t underestimate this one. A non-profit will not be able to match the salary of a globally successful for-profit company.
- Industry-to-job-family alignment: Certain industries pay premium salaries for critical job families. Tech firms value engineers highly and will offer competitive salaries for good engineering talent. Meanwhile, pharma companies or consumer goods firms will pay more for marketing and brand talent.
“By understanding companies’ terminology, process, and mindset, candidates can enter salary conversations far more informed and confident,” says Space.
Understanding Compensation Benchmark Reports
Compensation benchmarking involves comparing industry salaries to ensure competitive offers. Employers do their homework and then offer salaries that reflect market value and comply with applicable laws. Sources of real-time salary and benchmark data include the Bureau of Labor Statistics, salary surveys, peer networking, and specialized recruiters and staffing firms.
Salary vs. Total Compensation Package: What’s the Difference?
It’s crucial to understand the difference between your salary and the total compensation package:
- Salary: The base amount offered for you to do the job. Salaries are typically paid biweekly.
- Total compensation package: Salary, bonus, PTO, holidays, medical insurance, tuition reimbursement, long term and short term disability, life insurance, expected working hours in the week, remote or onsite work expectations, and more.
“Understanding total compensation is essential for making informed career decisions,” explains Max Williams, CFO at Herobot.app.
“Understanding total compensation is crucial as it provides a holistic view of the value an employer offers, helping professionals make informed decisions about job offers,” says Max Williams, Herobot Founder/CFO.
Salary: Only One Piece of the Puzzle
When assessing a job offer, never let the salary be the sole factor. The total compensation package—which includes benefits like healthcare, remote work options, unlimited PTO, profit sharing, and bonuses—plays a crucial role. “Inquire about salary reviews, promotion policies, and professional development opportunities to get a sense of long-term growth and satisfaction within the company”, advises Cassie Fields of AutoLeap.
You should never let the annual salary number be the sole/determining factor in whether you take the job. The total compensation package is more important.
Some companies cover the full cost of healthcare for their employees and sometimes their dependents—a significant financial benefit. Additionally, perks like remote work options, unlimited PTO, profit sharing, and bonus structures are critical elements that should influence your decision.
It’s also important to inquire about the frequency and criteria for salary reviews, promotion policies, and professional development opportunities. Understanding these factors can provide a clearer picture of the long-term benefits and potential earnings growth within an organization. Moreover, the company’s approach to work-life balance and job satisfaction can significantly impact your overall career happiness and longevity with the company.
Does Past Salary Influence Your Compensation?
Many mistakenly believe that past salaries dictate future earnings. In truth, companies typically prioritize market rates and candidate value over historical earnings. Recruiter Margaret Buj emphasizes, “Negotiate your salary upfront; once inside a company, significant increases become more challenging.”
Other Factors That Influence Your Compensation
Budget cycles and financial planning periods also affect salary offers. For instance, hiring just before a new fiscal year might result in a higher offer due to newly available budget allocations. Additionally, the strategic urgency of filling a position can lead to higher offers; if a company is in a critical phase of a project or expansion, they may be willing to pay more to secure the right talent quickly.
Employers also often consider the total cost of employment, which includes not just the salary but also the cost of benefits, taxes, and other overheads associated with hiring an employee. They also look at salary compression, where new hires might be offered salaries close to or higher than existing employees in similar roles, which can impact internal pay equity and employee morale.
Conclusion
It’s clear there is no one-size-fits-all method to determining salary. Several factors go into it, and most of these are beyond your control. That’s why salary should only be one part of the process when determining if you should stay at your current job, search for a new job, or accept an existing or future job offer.
“From my experience as an entrepreneur, I’ve seen that the happiest and most productive employees are those who feel valued, both financially and personally,” says Tommy Mello. “When evaluating a job offer, look beyond the numbers and consider how the role aligns with your personal and professional goals.”
Ready to understand your compensation and land your dream job? Get started on Lensa.com today.
