If you were offered the same job at two companies but the jobs had different salary and benefits, how would you know which position to choose?
When individuals go to college, it is generally understood that students must declare a major, which in turn effects job prospects after college graduation. What students don’t often think about at the beginning of their college career is the impact of benefits that come with those job prospects. When it comes to job benefits, it often becomes tricky to understand the true value. Job benefits can include company discounts, retirement plan benefits, vacation benefits, student debt repayment programs, and countless more. One way to help bring order to the chaos is to make a pros and cons list as well as to understand the real value of your options. Just remember… numbers can bring meaning to the madness! In order to help you consider your options as they come, we will review a hypothetical example below. Feel free to follow along and see if you can figure out which company is mathematically the better choice. The solution is at the end.
Retirement plans come in several forms, but here are two forms you might see today: defined benefit plans (i.e. pensions) and defined contribution plans (i.e. 401k). In a 401k, the employer agrees to match an employee’s retirement investment under a certain contractual agreement. In this example, the rate is clearly defined, and we can calculate out the yearly benefit for each employer contribution. Pensions are funded by the employer and are often seen in government jobs today.
Some companies help pay for their employees’ health insurance as a part of compensation. When an employer agrees to pay a percentage toward the premium, you can save a lot of money while receiving the same protection. In this example, let’s assume that you will get coverage for your whole family at $19,000 in premium per year. Calculate the yearly benefit after factoring in employer contributions.
Most companies will allow employees to opt into a group term insurance plan that will pay a sum equal to their salary if they were to pass away. The annual premium for this would usually be around $200/year at this salary.
Paid time off is not only a physical relief to an employee, but also a financial one. To calculate paid time off, take yearly salary and divide it by the number of workdays in the year, 260, and multiply by paid time off days allowed.
It’s common for companies to include extra benefits like memberships to gyms, passes to community events, community discounts, etc. Be sure to calculate the benefits of these as well. In this example, company 1 does not offer any extra benefits while company 2 offers a free gym membership at the $420/year.
After doing all these calculations, we must bring them all together to determine which company is offering the package with the most value. Simply put, (Salary + Retirement Benefit + Insurance Benefit + PTO Benefit) will give us the nominal value for each company.
Company 1 Benefit —> ($80,000 * .02) * 50% = $800 yearly benefit paid by employer
Company 2 Benefit —> ($70,000 * .03) * 50% = $1,050 yearly benefit paid by employer
Health Insurance Calculation
Company 1 Benefit —> (60% * $19,000) = $11,400 yearly benefit paid by employer
Company 2 Benefit —> (80% * $19,000) = $15,200 yearly benefit paid by employer
Life Insurance Calculation
Company 1 Benefit —> $0 yearly benefit paid by employer
Company 2 Benefit —> $200 yearly benefit paid by employer
Company 1 Benefit —> ($80,000 / 260) * 20 = $6,154 yearly benefit paid by employer
Company 2 Benefit —> ($70,000 / 260) * 25 = $6,731 yearly benefit paid by employer
Gym Membership Calculation
Company 1 Benefit —> $0 = $0 yearly benefit paid by employer
Company 2 Benefit —> $420/year = $420 yearly benefit paid by employer
Company 1 Total Yearly Benefits = ($80,000 + $800 + $11,400 + $0 + $6,154 + $0) = $98,354
Company 2 Total Yearly Benefits = ($70,000 + $1,050 + $15,200 + $200 + $6,731 + $420) = $93,601
As shown above, company 1 provides a better financial benefit than company 2, but an individual must consider their values along with the financial benefits. Is the extra time off worth getting paid just a little less in the long run? How is the culture of each company? Real life is not as black and white as this situation makes it seem, and there will be countless factors to compare from job to job. While this situation is purely hypothetical, it does at least give a great example of how much employment compensation packages can be worth.