How Is Compensation Determined?

People often think about their yearly salary or hourly wage when talking about compensation. But compensation entails more than just that. Understanding how compensation is determined is essential—especially if you’re looking for a new job.

Learn more about what’s included in compensation, how organizations figure out what a role is worth, and how you can use that knowledge to negotiate a better package offer.

Factors That Determine Compensation

Every employer determines compensation in a slightly different way. But in general, offers are based on both internal and external factors. For example, sales execution platform Outreach bases its compensation on current peer group market data and in-house salary ranges by job and level, explained Pamela Mattsson, the company’s SVP for People and Organizational Development, in an email with The Balance.

“We look for potential in a candidate and reflect that in the package offered, while respecting internal equity of our active employee population,” she said.

Government positions may be more formulaic when it comes to compensation and tend to adhere to set salary ranges. For example, the U.S. Office of Personnel Management (OPM) publishes current information on pay programs for federal employees. For example, for law enforcement officers, the annual salary is based on geographic location, grade, and step.

Some private companies may be more transparent than others regarding compensation packages. For example, Walmart reports that its “combined hourly wage is $19.52 per hour for full- and part-time associates when accounting for regular and overtime pay, 401(k) match, health care, associate discount, paid time off and quarterly bonuses.” This doesn’t mean the gross hourly wage is $19.52, but adding the hourly wage plus overtime pay, 401(k) matching, health care, discounts, PTO, and bonuses totals $19.52.

Market Standards

When making a compensation offer to a potential new employee, employers look at “how much similar positions are paid within this company, and how much competitors are paying for similar positions,” said Christy Pruitt-Haynes, head of Performance Practice at NeuroLeadership Institute, a global neuroscience-backed consultancy, in an email with The Balance.

In other words, an employer tries to balance making a comparable or more attractive offer than another company while staying within the boundaries of how the employer compensates current employees.

Experience

Employers usually have a range of offerings they can pull together when extending candidates a role; seasoned candidates or those with relevant experience usually qualify for the range’s higher end.

If you have a solid work history to lean on, Pruitt-Haynes said to say something like, “I am confident that my five years of experience working with your unique client base will allow me to make an immediate positive impact on sales.”

These confident and clear statements can help nudge the total compensation offer upward.

Skill Sets

Another factor influencing compensation is an applicant’s skill set. Are you coming in with bonus skills, or will you need to be brought up to speed to perform in the role?

“Having sought-after skills and capabilities might warrant special exceptions for an offer,” Mattsson said.

Tout any specialized skills you possess, such as being bilingual, even if they weren’t asked for. You never know if they might make you a more attractive candidate, said Pruitt-Haynes.

Supply

Compensation is impacted by whether or not qualified candidates are vying for a role versus a candidate drought. Employers must jack up their compensation offers in so-called “job-seekers markets” or high-demand fields such as technology. But companies don’t have to worry as much about letting a few walk away if there's an abundance of applicants.

Types of Compensation

What’s in your paycheck isn’t the only dollar value you get from working.

“A complete compensation package will address immediate money, future money, benefits, work/life balance, and ongoing development,” Pruitt-Haynes said.

Here are some other types of compensation to factor in when comparing different offers.

Upfront Money

The biggest chunk of compensation is, of course, your salary (or hourly wages). You may also get a sign-on bonus in some cases.

Future Money

Some employers won’t budge on salary, but may dangle the promise of future compensation based on performance or that automatically kicks in after a set amount of time. This type of compensation may include bonuses, commissions, stock options, other ownership equity offers, and/or a 401(k) match.

Benefits

Given high health care costs, many employees seek to work for organizations that prioritize and help pay for strong health insurance coverage. Beyond basic health and dental coverage, many employers offer other benefits in 2022:

• Additional health: Life insurance, exercise and nutrition programs, flexible and health spending accounts, telemedicine, and more
• Retirement and savings: Retirement savings plans such as 401(k) or Roth 401(k) and company contribution matches
• Leave: Generous paid vacation and sick leave, mental health days, leave for new parents, and flexible leave policies
• Professional development: Opportunities to develop new skills, undergraduate or graduate tuition, stipends and/or reimbursements for coworking, or equipment for home office spaces

How To Negotiate Better Compensation

Not every candidate is expected to have the same background, same experience, or same skill set, so negotiation is common when accepting a new position, Mattsson said. Here are three key negotiation tactics to try.

Don’t Accept the Initial Offer

The number one approach is just asking. “So many individuals simply don’t ask, and this especially applies to women and minorities,” Pruitt-Haynes said. “Most hiring managers expect some negotiation and when it doesn’t happen, they aren’t likely to volunteer the top budget for the position.”

Justify Your Request

Prepare to make your case, whether coming in armed with industry research or sharing what makes you worthy of a better offer. For example, mention if similar positions pay significantly more than the current offer, or if you’ve made more money in a similar past role.

Get Creative

Sometimes, there just isn’t much wiggle room concerning salary or benefits, but other values could be squeezed out. “Professional development dollars are probably one of the most valuable things people don’t typically think to negotiate,” said Pruitt-Haynes. She said you might ask the company to pay for a certification or class to help you perform the role better, for example.

Frequently Asked Questions (FAQs)