Understanding base salary and all-in compensation

Hide Outline
Show Outline
all-in and base salary after college

I love helping others understand their job offer letters.


Because students usually undercount their all-in compensation. It’s incredibly satisfying to show someone that their all-in offer is actually $85k when they thought it was $70k.

In this article, we’re going deep into compensation by unpacking the biggest misconceptions and understanding the concept of all-in compensation.

Before moving on, I want to highlight an important belief from my last article on evaluating new opportunities:   

“I always prioritize the skills I would build over moderate compensation differences. I believe the best route to long-term compensation and self-confidence is to focus intensely on skill development early in my career.”

Compensation is not the be-all and end-all. There are many other considerations that are equally as or more important.

With that disclaimer out of the way, let’s start by defining all-in compensation, which is the central idea to this article and understanding your offer.

I use the following definition:

All-in Compensation = All Monetary Forms of Compensation + Estimated Values for Non-Monetary Perks

The goal of calculating all-in compensation is to capture all the value a prospective employer is offering you.

Why does this include non-monetary perks? Because a perk like catered breakfast and lunch can easily save you over $5,000 per year (more on this later).

But before we get to the details of all-in compensation, we need to first bust 3 big misconceptions.

Misconception #1: It’s all about base salary

When calculating compensation packages and comparing to other opportunities, I’ve noticed students tend to compare base salaries and ignore the other aspects of compensation.

This is a huge oversight because base salary only represents a portion of your compensation.

In some industries, base salary is the same or less than the performance bonus! This is very common in finance, where investment banking analyst positions offer ~$85k base along with the potential for another $85k in bonus.

As you become more senior across industries, most of your compensation shifts towards stocks and away from base.

Jeff Weiner, CEO of LinkedIn, is estimated to have a base salary of $815k but a total compensation package north of $80M according to this article.

Jeff and many other executives hardly look at their base salary, which is a drop in the bucket relative to total compensation.

While finance positions and executive compensation are extreme examples, you will usually find between 10-50% of your all-in compensation from sources other than the base.

Don’t over-index on base and forget the rest of the compensation package.

Misconception #2: Who cares about working hours?

There’s a common saying that investment bankers make less than McDonald’s restaurant workers... on an hourly basis. While this is an exaggeration, it’s not far from the truth.

Let’s say an investment banking analyst makes $85k base + $45k bonus from middle-tier performance relative to peers. This totals to $130k annual base + bonus compensation. Not bad for a new college graduate!

But investment bankers are notorious for working very long hours. It’s common to average 80 hour work weeks.

Some quick math to calculate the hourly wage of investment banking:

80 hours per week * 50 working weeks a year = 4,000 working hours a year

$130k compensation / 4,000 working hours = $32.50 per hour

Meanwhile, according to the LinkedIn Salary tool, McDonald’s restaurant managers make ~$55k annually.

Assuming a 40 hour work week, that equates to $27.50 per hour.

So with these assumptions, investment banking still pays more than McDonald’s, but only by a margin of ~20% on an hourly basis.

What’s the point of this?

Make a mental note of the expected working hours when comparing multiple opportunities. It can make a huge difference.

Misconception #3: Counting performance bonus as guaranteed

Offer letters are usually very transparent about the max dollar value of performance bonuses but vague about the likelihood of receiving  this max bonus.

Never assume that you will capture 100% of the performance bonus written in your offer letter.

In some jobs, employers will stack rank you against your peers and only give 100% bonus to the top 10% of performers.

In other jobs, employers will give all competent employees 100% of the bonus described in the offer.

Instead of assuming and later being burned, ask the hiring manager, recruiter, or new employees for the average performance bonus given to new hires.

Try to understand the distribution of how they give bonuses. What percentage of previous hires received 100% of the bonus? What about 0%?

Collect this information and assume you will receive an average performance bonus. Never assume you will receive the top-tier bonus, despite how confident you are in your abilities.

What is in all-in compensation?

With those misconceptions out of the way, let’s break down the all-in compensation equation.

All-in Compensation = All Monetary Forms of Compensation + Estimated Values for Non-Monetary Perks

Monetary Compensation

Monetary compensation is a function of base salary, performance bonus, signing bonus, stock RSUs, and 401(k) match. I’ve explained each component below.

Base Salary: The most obvious and one of the most important components of compensation.  You will receive portions of your base salary every payroll cycle, which help you pay rent, bills, etc.

Performance Bonus: This is usually represented as a percentage of your base salary. Some companies use an equation to account for overall company performance along with your performance when calculating your bonus.

Signing Bonus: This is a one-time lump sum of cash that can range between $0 to $100k+. (Facebook is known to give top performing software engineering interns a $100k cash signing bonus.) This bonus is sometimes not given to you upon signing the offer but instead on your first payroll cycle around week two after starting work.

Stock RSUs: Many public companies give restricted stock units (RSUs), which is used to retain employees through a vesting schedule. This one gets a little tricky, but I’ll explain it in-depth below.

A company might give you 400 shares of stock at a current market price of $100, which equates to $40k in value at current price. This is usually vested over four years with a one year cliff.

What does this mean?

  1. You must stick around for at least 1 year to receive any part of this
  2. On your 1 year anniversary, you will receive $10k (25%) of your stock because you’ve vested 1 of 4 years
  3. After that, stock is usually given on a quarterly cadence. Therefore, each quarter you will receive $2.5k (1/16th of the $40k)
  4. By the end of year 4, you will have received the full $40k in stock assuming the market price of the share does not change (highly unlikely)

So how does this retain employees?

Usually, by the time your stock fully vests, you will have been promoted. When you get promoted, many companies refresh your stock package and create a new vesting schedule. If you’re a strong performer, you will receive new stock packages and vesting schedules before vesting the first package.

The stock granted in your offer letter is represented as a # of shares at the current market price. For example, when I joined LinkedIn in 2017, I received Microsoft stock at a price of $70 (LinkedIn is owned by Microsoft). Today, Microsoft stock is trading at $106, which means my total stock package is worth 50% more than when I joined.

If you’re working at a big company with a strong stock, I consider the stock package “as good as cash.”

However, you should not make this assumption if you

  1. Work at a public company with a very volatile stock price (e.g., Snapchat)
  2. Work at a startup or private company where the value of a stock is not concrete or liquid (e.g., Lyft, Uber, Quora, etc.)

401(k) Match: For the US readers, this is your retirement account. All savings in this account can (and should) be invested in the stock market, and grows tax-free. I wrote an entire article on how to start investing, and a 401(k) is an important aspect of building a solid financial foundation for your future.

You are legally allowed to contribute up to $18k from your pre-tax income into this account. Some companies match a portion of this, thereby giving you free additional compensation.

According to Investopedia, the most common employer match is 50 cents on the dollar of up to 6% of your base salary.

This means if your base salary is $80k, your employer will give you up to $4.8k in your 401(k) account. But to receive this free cash, you have to first invest twice that amount, or $9.6k. So by investing $9.6k of your pre-tax base salary, your 401(k) account balance will actually be $14.5k ($9.6k + $4.8k).

You should 100% factor in the 401(k) match program into your total compensation.

Non-Monetary Compensation

This is far less standardized than monetary compensation but includes big perks like free food, health and wellness stipends, free gym membership, health/dental/eye insurance, etc.

Free Food & Snacks: Free food is an expensive and amazing perk worth counting. Given that I work at LinkedIn in San Francisco, I estimate the value of free breakfast, lunch, and snacks at $20 per day (food in San Francisco is expensive). This perk alone saves me ~$5,000 in post-tax disposable income.

Wellness Stipend and/or Gym Membership: Some companies have a wellness stipend. LinkedIn gives all employees a $2,000 pre-tax bonus for use on health and wellness purchases such as massages, fitness classes, gym memberships, sports, etc. Aside from this, many companies offer free or discounted gym membership, which is worth roughly $500 a year.

Health/Dental/Vision Insurance: Depending on your situation, this could be the most important “perk” to evaluate. For college graduates in the US, you are allowed to stay under your parent’s insurance plan until the age of 26. Because of this, I won’t go too in-depth on this topic. However, keep in mind some companies offer far better insurance than others. This could mean you get better quality care and coverage at a significantly lower cost. It’s worth investing a few hours of research if you will not be on your parent’s insurance plan.

Wrapping up

For those of you with job offers, take another look at your offer letter and see if you can find hidden pockets of compensation.

If you don’t yet have an offer, just remember that all-in compensation is very different from base salary. You can always revisit this article when you have an offer.

When it comes to comparing and negotiating two offers, recruiters may try to focus the conversation on base salary. But a smart negotiation tactic is to anchor on the all-in number -- after all, that truly is how much value the company is giving you.

Lastly, some of you may be surprised by the figures in this article. All these numbers are based off real offer letters from entry-level jobs.

It is 100% possible to graduate with a 6-figure all-in job offer. A big part of 2 by 22’s mission is to help you realize this and achieve financial security early in your career.

All the content in this blog is tested advice that works for these jobs. But it’s up to you to run with it and make it happen in your life.

Leave a reply

Comments functionality coming soon.