What's in a Software Engineer's Compensation Package?
Job offers can be confusing.
A software engineer’s salary package includes many different bits and pieces of information, so it’s completely understandable.
They throw a bunch of numbers and jargon at you: ESPP, RSUs, vesting, target bonuses, and many other things.
If you’re anything like me, I just want the recruiter to tell me how much is going to be in my bank account at the end of the month so I can decide how much I can spend on Starbucks frappes.
Sadly, your compensation is not as simple as that, but it’s important for evaluating and comparing offers.
Let’s begin with the simplest component of your compensation package: your base salary.
1. Base Salary
This number is what most employees use to budget their day-to-day living expenses.
It is considered the “base” salary because other components of the salary package depend on this number. It’s the base.
Simply put, your base salary is essentially what will be going into your paycheck every month or every two weeks.
Suppose your base salary is $120K. Your paycheck will be either $10K monthly or $5K biweekly, depending on your employer’s pay period.
That’s essentially it! So simple.
2. Target Bonus
Your bonus is simply a certain amount of money that will be given to you once or twice a year, depending on the employer’s bonus policy.
It will always come in the form of a percentage usually between 10% and 20%. This is a percentage of your base salary. That means a higher base salary will yield a higher bonus at the end of the year.
Using Bonuses as Incentive
That being said, you only receive a bonus when you meet or exceed performance expectations. At the end of the day, this is all up to your manager. This means that bonuses aren’t guaranteed, but rather act as incentives for you to put effort into your work.
Suppose your base salary is $120K and you are given a 10% target bonus. This means that if you perform decently, you should get that extra $12K as a bonus. This can come as $12K once a year or $6K every 6 months. Either way, this money is just a nice cherry on top of the original salary. You could use it for a nice vacation with the family, buy some nice gifts, or invest in that nice retirement you’ll have.
Based on your performance, there’s a chance you can make more or even less than your target bonus.
All of this is under the assumption that the company is performing well. If the company is declining rapidly, that bonus may also be declining. If the company ends up having a great year, your bonus check could be huge!
3. RSUs (Restricted Stock Units)
There’s a good chance your compensation package will include RSUs.
This means that your company is giving you shares of your company stock, which you do not have to pay for.
Generally, your company will offer you
n number of shares at some pricepoint over the course of
Suppose you are offered 1,000 RSUs, which means that you will get 1,000 company shares upon hire. If the share price at the time is $100, it doesn’t mean that you automatically get $100K… as great as that sounds.
This can be explained by the “Restricted” in Restricted Stock Units. The restriction lies in the vesting period.
What is Vesting?
If you read closely, you’ll notice that you are given the
n number of shares over time.
This vesting period is the amount of time you have to wait as an employee before you can claim that stock.
Suppose you receive your shares over the course of 5 years, which would be 20% of the total number of shares each year. Every year you work there, 20% of your RSU shares are vested. You have full ownership. You can do whatever you’d like with them (sell them, short them, let them sit, etc.).
One of the great things about RSUs is that the price will always be what’s in your contract.
When you join the company, the RSUs might be worth $100. By the time you vest, the price of those shares could have skyrocketed. This also provides incentive for employees to work hard towards profitability.
Just remember that these RSU shares are considered income tax, so if you decide to sell above your original purchase price in the contract, you will need to pay additional taxes.
Lastly, If you leave the company, you will lose all your unvested shares. So keep that in mind when you decide to transition jobs.
Using RSUs as Incentive
These RSU shares can be used as incentives as well, just like those target bonuses.
One common way for RSUs to be used as incentives is for entire divisions or executive-level employees. These employees may be offered 10,000 RSUs, for example, if they reach a certain level of profitability that year.
Similarly, a company may offer individual employees 50,000 RSUs if they stay at the company for at least 5 years. If they leave before that, they will lose all those shares.
RSUs can get a little confusing; but at the end of the day, it’s free shares in a company that you will help grow in the upcoming years.
4. ESPP (Employee Stock Purchase Plan)
Just like RSUs, at the end of the day, you will own shares of your company stock with the ESPP.
This plan allows you to purchase publicly-traded company stock at a 10% to 15% discount from its market price. So unlike the RSUs, you will pay for these stocks using your own money.
If you decide to opt into this plan, you will pay for these discounted stocks through regular payroll deductions. Essentially, your monthly or biweekly paycheck will be a little smaller, but you will be contributing to your company’s ESPP through those deductions.
Every 6 months, your company will use the money deducted so far (ESPP contributions) to buy you company stocks discounted between 10% and 15%.
The method a company uses to determine the price that you buy their stock depends on company policy. But generally, they will take either the stock price at the beginning of the 6 months or at the end of the 6 months, whichever is lower. The company will then discount 10% to 15% from that price.
At this point, you will own the stock, allowing you to do whatever you please with it.
Using ESPP as Incentive
The great thing about the ESPP is that you are guaranteed at least 10% to 15% in capital gains.
If the stock price is rising, you will make amazing returns every period.
If the stock price is falling, you will make at least 10% to 15% in returns every 6 months if you sell right away.
Many employees max out their contributions to get those returns every 6 months.
When you buy company stock in this way (especially with your own money), it provides you with ownership in the company. This tends to create more loyal employees that are willing to work harder to make the company profitable.
I hope your compensation package makes just a little bit more sense in your head.
Be sure to keep reading up on this to solidify your understanding of the topic.
Keep pushing through to get that offer! There’s always someone who can use your talents 🙂