Lesson 1.7 · Unit 1 · N-Q.1-3
Compensation is more than the salary
Two jobs with different salaries can pay the same, or the lower one can pay more. Health insurance, a retirement match and paid time off all have dollar values, and adding them is the only fair way to compare. This lesson prices each benefit and compares total compensation.
- Total compensation is salary plus the dollar value of benefits. Count only what the employer pays.
- An employer health premium is worth what the employer pays. If the plan costs \$7,200 a year and the employer pays 75 percent, the benefit is \$5,400.
- A retirement match is a percent of salary, up to a limit. A 100 percent match up to 4 percent of a \$54,000 salary is \( 0.04 \times 54000 = 2160 \) dollars, and it is paid only if the worker contributes.
- A match is an immediate return. A dollar contributed that earns a dollar of match has doubled before any investment gain.
- Paid time off is paid hours that are not worked. It does not add dollars to a fixed salary, but it lowers the hours and so raises the pay per hour worked.
- Hours actually worked are 2080 minus 8 times the number of paid days off (vacation, sick days and holidays).
- The effective hourly rate is total compensation divided by the hours actually worked.
- Benefits the worker would not use are worth less to that worker. Include them for a true comparison of the employers, but weigh them for your own situation.
Where students lose marks: counting the match as automatic. The employer's match is paid only on the amount the employee contributes. A worker who contributes nothing receives none of it, so the benefit is earned by choosing to save.
The problem. Job A pays \$58,000 with no benefits and no paid time off. Job B pays \$54,000. Its employer pays \$5,400 toward health insurance and matches 4 percent of salary to a retirement account, and it gives 15 vacation and sick days and 10 holidays. (a) Find Job B's total compensation. (b) Compare it with Job A. (c) Find the hours worked in a year and the effective hourly rate for each job.
Step one: name the givens. Job A: \$58,000 and nothing else. Job B: \$54,000 salary, \$5,400 health, a 4 percent match, and 25 paid days off.
Step two: the match for Job B. \( 0.04 \times 54000 = 2160 \), assuming the worker contributes at least 4 percent.
Step three: total compensation for (a). \( 54000 + 5400 + 2160 = 61{,}560 \).
Step four: compare for (b). Job B's total exceeds Job A's \$58,000 by \( 61560 - 58000 = 3560 \) dollars, even though its salary is \$4,000 lower.
Step five: hours worked in Job B for (c). Twenty-five paid days off are \( 25 \times 8 = 200 \) hours, so the hours worked are \( 2080 - 200 = 1880 \).
Step six: effective rates. Job B: \( \dfrac{61560}{1880} = 32.74 \) dollars an hour. Job A: \( \dfrac{58000}{2080} = 27.88 \).
Step seven: interpret. Job B pays about \$4.86 more per hour worked once benefits and time off are counted, an advantage that does not show up in the headline salary.
Step eight: state the answers. Job B's total compensation is \$61,560. The effective rates are \$32.74 and \$27.88 an hour. The conclusion depends on the worker using the benefits: if the worker were already covered by a parent's health plan, the \$5,400 would be worth less to her, and the two jobs would be close.
Problems 1 to 5 are routine. Problems 6 to 10 are multi-step or ask for reasoning.
- A health plan costs \$7,200 a year and the employer pays 75 percent. Find the value of
the benefit to the employee.
Show the full solution
\( 0.75 \times 7200 = 5400 \). \$5,400.00
- An employer matches 3 percent of a \$62,000 salary. Find the match, assuming the
employee contributes at least 3 percent.
Show the full solution
\( 0.03 \times 62000 = 1860 \). \$1,860.00
- Twelve paid vacation days are worth how much at \$25 an hour, 8 hours a day?
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\( 12 \times 8 \times 25 = 2400 \). Paid time off already sits inside a salary, so this is the pay for hours not worked. \$2,400.00
- A job pays \$48,000 and the employer contributes \$4,200 for health insurance and
\$1,440 to a retirement plan. Find the total compensation.
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\( 48000 + 4200 + 1440 = 53640 \). \$53,640.00
- A worker has 10 vacation days and 9 holidays, all paid. Find the hours actually worked
in a 2,080-hour year.
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The paid days off total \( 10 + 9 = 19 \), or \( 19 \times 8 = 152 \) hours, so \( 2080 - 152 = 1928 \). 1,928 hours
- For that worker on a \$47,000 salary, find the effective hourly rate per hour worked.
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\( \dfrac{47000}{1928} = 24.38 \). The simple rate on 2,080 hours is \( \dfrac{47000}{2080} = 22.60 \), so the paid time off raises the effective rate by about \$1.78. \$24.38 an hour
- An employee earning \$50,000 contributes 6 percent and her employer matches 100 percent
of contributions up to 4 percent of salary. Find the employer's match.
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The match stops at 4 percent of salary: \( 0.04 \times 50000 = 2000 \). Her own contribution is \( 0.06 \times 50000 = 3000 \). The last 2 percent of her contribution, \$1,000, earns no match. \$2,000.00
- An employer matches 50 percent of contributions up to 6 percent of salary. An employee
earning \$60,000 contributes 6 percent. Find the match and the return on what she put in.
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Her contribution is \( 0.06 \times 60000 = 3600 \). The match is 50 percent of that, \( 0.5 \times 3600 = 1800 \). The immediate return is \( \dfrac{1800}{3600} \times 100 = 50 \) percent before any investment growth. \$1,800.00; a 50 percent immediate return
- Job A offers \$61,000 with no benefits. Job B offers \$56,000 plus \$4,800 of employer
health insurance. Which has the higher total, and by how much?
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Job B's total is \( 56000 + 4800 = 60800 \). Job A's is \$61,000. Job A is higher by \( 61000 - 60800 = 200 \) dollars, which is too small a gap to decide on, so other factors (hours, commute, growth, how much the worker values the coverage) should settle it. Job A by \$200.00
- A student says, "The 401(k) match is free money, so I should contribute as much as I
can." Find the flaw in the conclusion and state what is true.
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The match is free only up to the employer's limit. On a match of 100 percent up to 4 percent of salary, contributing 4 percent captures the whole match, and contributions above 4 percent earn no match. They may still be worth making for saving and tax reasons, but they should be judged on those reasons, not as free money. Also, the match is paid only when the worker contributes, and some plans make the worker wait before the match is fully hers. The match is free only up to the limit