Show me the money (and some other things): 4 pillars for negotiating your compensation

Compensation = cash in your pay check. A raise = more cash in your pay check.

No.

Too many people think about comp this way, so I thought I might offer a fuller framework that I have used myself and suggested to many others over the years.?

It feels like a good time as we enter appraisal season for many business and, if various surveys are to be believed, a huge number of professionals are active in the job market. This model can be useful in either context: preparing for your annual pay review or negotiating a new package.

I call the model the 4 Pillars of Compensation (catchy, right?), and I suggest you consider each pillar in any discussion about comp.

The 4 pillars are:?

1. Salary: We all know this one. It’s the cash that appears in your bank account on pay day.
2. Short term performance incentives: Usually an annual bonus, but sometimes commissions.
3. Pension / retirement: Any retirement savings deducted from your pay before taxes are withheld. Usually a 401(k) in the U.S. or an employer-sponsored pension scheme in the UK and Europe.?
4. Long term incentives: Often equity awards or deferred cash payments.

The aim is to maximise all of these over the course of your career, recognising that your priorities will evolve along the way.

Earlier in your career, your focus ought to be on salary growth and pension savings.?

On salary, look for above inflation increases so that your salary grows in real terms.?

On pension, it’s never too early to start saving for retirement, and the tax incentives to save are limited in virtually every country. So if you miss the opportunity to save the max early on, it’s difficult to catch-up later.?

If your employer offers a pension match, talk with them about increasing it. (A ‘pension match’ means that your employer matches whatever contribution you’re making.) In many businesses, pension savings comes from a different budget pot than salaries, and it’s often easier for managers to secure an increased pension match than a salary increase. If you’re negotiating for a new role, this is usually a fairly easy negotiating point.?

If you’re not securing the maximum —?by saving at the highest allowable level and asking your employer for the highest possible match — you’re just giving money away. And some employers will match on a better than one to one basis. So, for example, they might be willing to put the equivalent of 10% of your salary into your pension if you put in 5%. So you would be a lunatic not to do so, because that’s money over and above your salary that you otherwise wouldn’t get at all.

As you reach the middle of your career, your compensation focus will likely shift. Your salary will stabilise. Raises will flatten out in percentage terms and may flatten in real terms as well. But you’ll be well established in your work. Your performance should be at its peak. Now is the time to maximise your short term incentives. Understand the criteria that drive your bonus or commission structure, and be clear about the success criteria with your management. Keep your pension contributions at the maximum allowable level and continue to try to push up your employer’s match.?

Throughout your career, look for opportunities to build equity or other forms of deferred compensation. Owning a share of the business can be a huge incentive. It’s also an excellent way to save for the future. And if you change jobs, you can often negotiate with your new employer for them to ‘make good’ the equity or deferred compensation you had in your last place. So your equity or long term stake can build even if you’re moving around.

Most equity awards will vest three years after they are awarded. Some take longer. They are designed to reward length of service and incentivise your efforts to help your company grow.?

As you get more senior, you can expect these long term incentives to become more contingent on certain elements of performance. In senior management, they might be tied to stock price or revenue growth. In middle management, they might be tied to profit targets, asset value growth, or geographical expansion. But the more they are tied to performance, the more flexible the size of reward ought to be. So if you dramatically over perform your long term targets, you should negotiate and expect an exponentially greater reward than if you merely do what was expected. This is risk / reward territory, so you should also be grown up about the possibility of receiving nothing if you don’t achieve your objectives.

Needless to say, everyone’s experience will be different based on your own journey and your employer’s practices. But as you consider your next conversation about comp —?whether in a review or a negotiation for a new role —?make sure you address each pillar.

All of this is informed by my experience working (mostly) in large organisations. But I think it’s just as relevant if you’re in a start-up or working as a contractor. You should still consider your compensation in each of the four areas.

Final point: Not everyone is motivated by money, and that's fine. I confess that there are other reasons that I get up and go to work every day. And it was actually my lack of interest in comp that got me thinking about this model. If I can keep comp simple in my mind, with the four pillars, I can focus on other things that keep me enthusiastic and motivated.