The term Total Compensation gets thrown around in the tech industry quite, but it took me a while to internalize what it really means. This article is meant to define the term, both in general and how it's used at Levels.fyi. A proper understanding of Total Compensation is the first step to getting paid what you're worth.
Defining Total Compensation
Simply put, Total Compensation is the sum of all the different ways you are paid monetarily. This includes, but is not limited to:
- Base salary
- Equity (stock) compensation
Let's break this down into pieces. Throughout the rest of the article, I'll take as an example the Levels.fyi estimate for an L4 (Software Engineer III) at Google.
Your base salary is the most recognizable piece of your Total Compensation. This is the amount of money you receive just for being employed, regardless of the performance of the company or your performance. For our hypothetical engineer at Google, this would be around $150,000/yr, meaning each year, they are guaranteed that much each year.
Many large companies offer a performance-based bonus on a yearly basis. A bonus has a target amount, but may vary based on factors like seniority and your performance that year. Typically, the target bonus is a percentage of the base salary, say 15%. That means you'd expect to get about $22,500 each year, but the actual amount may be higher or lower. Unlike the base salary, this amount is not fixed each year.
Furthermore, the bonus may be pro-rated. Usually a bonus is given out once a year, say July for example. Then, if you join in January and only have worked half a year before your first bonus, the actual amount you receive may be half of what you would have received if you worked at the company since the previous July.
This is where the compensation starts getting tricky. Often, a large percentage of your Total Compensation is paid using either stock, in some form or another. In a public company like Google, you may be granted, as part of your offer, $300,000 worth of Restricted Stock Units (RSUs).
The RSUs then vest over time. A typical schedule may be a four year vesting schedule, monthly, with a one year cliff. This means you have to work at the company for a full year, and then you get 25% of your RSUs. Then, every month for the next three years, you get a little over 2% of your total RSUs, totaling to the remaining 75% over those three years. The consequence is that if you leave the company before the one year cliff, you get no RSUs.
When you receive your RSUs, you get shares in the company. The price of each share is dependent on how the stock market is doing, and in particular, how your company is doing in the stock market. This means the value of the RSUs you get will change over time, if you choose to hold on to them after receiving them. Thus, even though you got $300,000 worth of RSUs in four years, the actual amount of you have when you're ready to sell those shares (say to buy a house) may be quite different.
Levels.fyi displays your total stock compensation divided by the number of years it takes for the grant to fully vest. This way, you see an approximate amount of yearly compensation. For the hypothetical Google example, this would be $75,000/yr.
For private companies, the situation is even trickier. Due to tax reasons I won't go into, it's typical to get some sort of stock options, which let you buy shares later for a much lower price. The fundamental problem is that shares of a private company usually are not sellable, so until the company gets bought by a private company or goes public, you can't do much with those shares. For this reason, you should think carefully about how you value the equity compensation you receive at a private company. You're betting on the fact that, when the company is bought or goes public, your stock will be worth significantly more than what you are able to buy it for.
Regardless of the company, the goal of equity compensation is to align your incentives with the company's. If the company does better, you get more money because the stock is worth more.
Finally, we come to the long tail of compensation: benefits. This includes health benefits, like health, dental and vision insurance. But there are also benefits like pre-tax commuter benefits, that let you reduce your tax burden on train or bus fare you would have already been paying for. Another common one is 401k matching, where you get money in your retirement fund if you first put in money yourself.
Ultimately, these benefits offset some of the expenses you have, which is as good as money in your pocket. However, these benefits are often usage-based. For example, you don't get the commuter benefits if you don't take public transportation. For this reason, the actual compensation varies greatly from person to person, and is hard to compare across the company.
Levels.fyi doesn't track benefits as part of the Total Compensation data.
Putting it all together
Adding all these different forms of compensation give you your Total Compensation. So when you hear an engineer at a big tech company is making $250,000/yr, that's not their salary. It's a combination of their salary, along with equity compensation and bonus (as I mentioned above, benefits are often not included).
Comparing compensation packages
One of the mistakes I made earlier in my career was to compare my LinkedIn base salary with the base salary of a startup. The startup matched my base salary, which made me very happy, but I didn't realize the money I was leaving on the table in the form of stock. After all, for a public company the stock is as good as money.
Meanwhile, at the startup, I had no access to the money represented by the stock, so at least at the time, it was as if I got nothing. That said, I still probably would have made the same decision for non-monetary reasons, but I wish I had gone in making a well-informed decision.
Depending on your particular needs, you should absolutely consider benefits when comparing compensation packages as well. If you use a particular benefit, a company may need to offer a lot more money in other forms to make up for not offering that benefit. And of course, non-monetary considerations are always something you have to consider personally. But no matter what you decide, do it knowing all the facts.
The term Total Compensation captures all the different ways you are financially compensated by your employer: base salary, bonus, equity, benefits, etc. Because of the variability of some of these forms of compensation, it can be hard to know ahead of time what compensation package is truly paying you. However, with an understanding of how each part works, you can ask the right questions when receiving an offer and make an informed decision based on what you value most.
About The Author
Avik is a software engineer who has worked at both small and large tech companies. He is passionate about making hiring better and publishes the Hiring For Tech newsletter.