Employee Benefits and Compensation Packages
Two job offers arrive on the same day. One pays $\$16$ an hour. The other pays $\$15$ an hour but includes health insurance and a 401(k) match. Which one is really better? To answer, you need to look past the hourly rate and count everything an employer gives you. By the end of this page you will be able to say which offer wins and why.
Ways You Get Paid
Employers pay workers in different ways. Each way shifts who carries the risk when business is slow.
| Type of pay | How it works | Typical job |
|---|---|---|
| Wage | A set amount per hour worked | Grocery cashier, lifeguard |
| Salary | A fixed amount per year, no matter the hours | Teacher, office manager |
| Commission | A percent of what you sell | Furniture or car sales |
| Tips | Money from customers, on top of base pay | Server, delivery driver |
| Bonus | Extra money for performance or a good year | Many full-time jobs |
Gross pay is what you earn before anything is taken out. For an hourly worker:
$$\text{gross pay} = \text{hourly wage} \times \text{hours worked}$$If you work more than 40 hours in a week, federal law usually requires overtime: at least $1.5$ times your regular wage for the extra hours (called "time and a half").
A commission works like any percent of a total. If a salesperson earns 5% of $\$20{,}000$ in sales, the commission is $0.05 \times 20{,}000 = \$1{,}000$.
Chloe works part time at a grocery store. She earns $\$15…
Chloe works part time at a grocery store. She earns $\$15$ per hour and works 30 hours a week for 4 weeks. Calculate her gross pay for the 4 weeks. Then explain whether she is paid a wage or a salary, and how the two differ.
Malik sells furniture and earns a commission of 3% of his sales. Last month his sales totaled $\$120{,}000…
Malik sells furniture and earns a commission of 3% of his sales. Last month his sales totaled $\$120{,}000$. Calculate his commission for the month. Then name one kind of worker who earns tips instead of commissions.
Benefits: Contributory and Non-Contributory
Benefits are things of value your employer gives you besides regular pay. Common ones are health insurance, paid time off, life insurance, and a retirement plan such as a 401(k).
Benefits come in two kinds:
Why does this matter? A contributory benefit costs you money out of every paycheck, so you must count that cost when you compare jobs. A non-contributory benefit is a pure bonus.
The employer match
Many employers add money to your 401(k) when you add your own. A typical match says: "We match 50% of your contributions, up to 6% of your salary."
Contributing at least enough to get the full match is like turning down free money if you skip it. Notice that a 401(k) is contributory: you pay in, even though the employer adds to it.
A benefit is contributory* if the employee pays part of the cost, and non-contributory* if the employer pays all of it. Classify each benefit below as contributory or…
A benefit is contributory if the employee pays part of the cost, and non-contributory if the employer pays all of it. Classify each benefit below as contributory or non-contributory:
(a) a health insurance plan where the employer pays 70% of the premium and the employee pays the rest;
(b) a life insurance policy fully paid by the employer;
(c) a 401(k) plan funded by payroll deductions from the employee;
(d) paid sick days.
Olivia earns $\$50{,}000…
Olivia earns $\$50{,}000$ a year. Her employer matches 50% of what she contributes to her 401(k), up to 6% of her salary. Olivia contributes 8% of her salary.
(a) How much does she contribute in a year?
(b) How much does her employer add?
(c) What is the total deposited in a year?
(d) Is the 401(k) a contributory or non-contributory benefit? Explain.
Total Compensation and Non-Cash Benefits
Total compensation is the full value of what a job gives you: pay plus the dollar value of benefits.
$$\text{total compensation} = \text{pay} + \text{bonus} + \text{employer match} + \text{employer-paid benefits}$$If you pay part of a benefit yourself, subtract that part, because it comes out of your pocket.
Intangible (non-cash) benefits
Some benefits have no price tag on the paycheck but still matter: flexible hours, remote work, a short commute, a friendly team, chances to learn, or a job you find meaningful. These are intangible benefits.
Choosing a job means weighing tradeoffs: giving up something to gain something else. A higher salary may come with a long commute or longer hours. You can often turn commuting into dollars (gas, parking, tolls) to compare fairly, then decide how much the non-money parts are worth to you.
Maya has two job offers. Job A: $\$18$ per hour, 35 hours a week, 52 weeks a year. No benefits. Job B: a salary of $\$30{,}000$ plus a year-end bonus of 4% of salary.…
Maya has two job offers.
-
Job A:
$\$18$per hour, 35 hours a week, 52 weeks a year. No benefits. -
Job B: a salary of
$\$30{,}000$plus a year-end bonus of 4% of salary. The employer also pays$\$2{,}000$a year toward health insurance that Maya would otherwise pay herself.
Calculate the yearly value of each offer, counting the bonus and the employer's health payment. Then name one factor other than money that might change her decision.
Daniel can accept one of two jobs. Job 1: $\$52{,}000$ a year. He must commute to downtown Chicago, which costs about $\$40$ a week in gas, parking, and tolls. He works…
Daniel can accept one of two jobs.
-
Job 1:
$\$52{,}000$a year. He must commute to downtown Chicago, which costs about$\$40$a week in gas, parking, and tolls. He works 50 weeks a year. -
Job 2:
$\$48{,}000$a year, fully remote.
(a) Calculate his yearly income after commuting costs for each job.
(b) List two intangible benefits that might make Job 2 more attractive even if the money were equal.
(c) Explain what tradeoff Daniel faces.
Aaliyah is choosing between two compensation packages. Assume she contributes enough to get the full employer match. | | Package A | Package B | |---|---|---| | Salary |…
Aaliyah is choosing between two compensation packages. Assume she contributes enough to get the full employer match.
| Package A | Package B | |
|---|---|---|
| Salary | $\$58{,}000$ |
$\$54{,}000$ |
| 401(k) match | 3% of salary | 5% of salary |
| Employer payment toward health insurance | $\$4{,}800$ |
$\$8{,}400$ |
| Health premium Aaliyah pays herself | $\$3{,}600$ |
$\$0$ |
(a) For each package, calculate the net yearly value: salary + match + employer health payment − premium she pays.
(b) Which package is worth more in money?
(c) Argue whether the higher-paying package is necessarily the better choice, using at least two non-income factors.
Pay, Risk, and Choosing a Package
Pay that depends on sales is variable. That can pay off in a good year and hurt in a bad one. To compare a salary with base pay plus commission, find the break-even point: the sales level where both pay the same.
Enrollment rules and health savings
Some benefits also depend on how you sign up. With opt-in enrollment, you are in a 401(k) only if you choose to join. With opt-out enrollment, you are signed up automatically and must act to leave. Automatic enrollment helps more workers get the match.
An employer may also offer a high-deductible health plan (HDHP). It has lower premiums but a higher deductible, which is what you pay before insurance starts to cover costs. With an HDHP you can open a health savings account (HSA). You put pre-tax money in it and use it for medical costs. It is also a contributory benefit when your employer adds money and you add your own. Employer-paid health and retirement plans are part of total compensation.
Which option is better depends on risk. Someone with fixed monthly bills (rent, a car payment) needs steady income, so a salary is safer. Someone with savings who is confident in their sales may prefer the commission for its upside.
Back to the start: the $\$15$-per-hour job with health insurance and a 401(k) match may beat the $\$16$ job once you add the employer's contributions to your pay and subtract any cost you would otherwise bear. Always compare total compensation.
Marcus is choosing between two sales jobs. Option 1: a straight salary of $\$36{,}000$. Option 2: a base pay of $\$18{,}000$ plus a commission of 8% of his sales. In a…
Marcus is choosing between two sales jobs.
-
Option 1: a straight salary of
$\$36{,}000$. -
Option 2: a base pay of
$\$18{,}000$plus a commission of 8% of his sales.
In a normal year he expects to sell $\$180{,}000$. In a recession year he expects to sell only $\$120{,}000$.
(a) Calculate his income under Option 2 in a normal year and in a recession year.
(b) Calculate the sales level at which both options pay the same.
(c) Argue which option you would recommend for someone who must pay a fixed $\$2{,}400$ in rent every month, and explain the role of risk.