What Is Compensation and How Is It Determined?

Staff and boss discussing compensation.

A Guide to Understanding Compensation & Salary

Did you know that your compensation isn’t as simple as your base salary? In fact, your income in the combination of several things — usually, called a compensation package — that add up to put more money in your pocket over time. But what exactly is in a compensation package? How is it calculated? And is any of it up for negotiation? That’s what we’re here to tell you in this guide, which will answer all your questions and help you score more money!

What Is a Compensation Package?

When considering a new position, or re-evaluating your current contract, it’s in your best interest to negotiate for a higher salary. However, when considering your compensation — everything the company is giving you in exchange for the work you provide — there are many other factors that play into your bottom line that go beyond just salary, experts say.

Here are just a few of them:

Share incentive plan or stock options: Some organisations might offer share incentive plan or stock options. These are different ways that you, as an employee, can profit from the success of the organisation and earn additional income. If your organisation is doing well, and you are offered shares, you could see a huge return on investment in the long run.

Bonuses: Companies often find their best hires from internal referrals, so it’s in their best interest to incentivise employees to tap their networks for top talent — and that can mean hefty paychecks for employees who are successful in doing so. Or, a company might offer a bonus for loyalty, having met a performance goal or as a holiday perk, and these add up over time.

Lifestyle perks: Discounts and reimbursements on things like mobile plans and gym memberships are other hidden factors that impact your bottom line. If you work for a company that you frequent as a consumer, corporate discounts could be another factor in your decision. If your company gives you £40 a month toward a mobile plan, that is £480 a year!

What Is a Compensation Package?

How Companies Calculate Compensation

Companies often create compensation packages that reflect their company’s values and those of the employment marketplace. This consistency helps to eliminate confusion and can minimise emotional reactions to pay decisions. Companies often consider:

Market factors: They look at company size, growth stage, location, industry and employer competition, and decide how these factors influence their attractiveness as an employer.

Employee value proposition: Many companies consider their compensation package as a powerful way to bring their employee value proposition to life — i.e. as a way to drive a differentiated employee experience, and create a certain kind of company culture and work environment.

Growth opportunities: Some companies may be able to justify paying at the lower end of a pay range simply because of brand name recognition and long-term value to an individual’s career path. Smaller companies, for example, may offer rapid career growth opportunities.

More generally, salary is determined by factors like title, skill set, level, location and more. Companies often approach individual compensation plans based on the candidate, too.

How Companies Calculate Compensation

How to Negotiate a Better Compensation Package

The first step to any negotiation is knowing how much you should be paid. You can use Glassdoor's salary tool to learn how much you should be paid based on real salary postings in your field and geographic area. Because salary is such a big component of any compensation package, we suggest you start here. If this tool reveals your salary offer is too low, you’ll know you need to negotiate a higher rate.

Then, turn to the other parts of your compensation offer — is there anything there that you feel could or should be more generous? These are all points you can negotiate after an offer.

For example, bonuses and stock pay might be something you can negotiate. While you don’t have to, you might be willing to accept a lower base pay if your employer would be willing to give you a higher bonus or stock option structure — something to consider!

Once you have the points you’d like to negotiate, practise your pitch at least once before the actual negotiation. How? Find someone to listen to your proposal for a salary increase, so you can feel the cadence of your speaking points out loud in a conversational setting. Much of a successful negotiation boils down to feeling comfortable and well-practised.

Learn More!

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