What it means
The components fall into four groups: fixed pay, variable pay, benefits and long term incentives. Fixed pay is the salary, variable pay is the annual bonus or commission, benefits cover pension, healthcare and similar items, and long term incentives are usually shares that vest over several years.
The mix says a lot about how a role is expected to behave. A high fixed proportion suits jobs where steady judgement matters most, while a heavy variable element is used where individual output is measurable and the employer wants risk shared.
Listed companies must publish a remuneration report showing what directors received and how it was decided, and shareholders vote on it. That disclosure is why the ratio between chief executive remuneration and the median employee's pay has become a standard governance measure.
For the employer, remuneration costs more than the amounts the employee ever sees. Employer payroll taxes, pension contributions and insurance commonly add somewhere between 15% and 30% on top of salary, which is the gap between an offer letter and a budget line.
Accounting rules require the cost of share based remuneration to be recognised even though no cash moves. The fair value of an award at the grant date is spread across the vesting period as an expense, so reported profit reflects the real cost of paying people in equity.
In practice
Real-world examples.
Example
A sales representative earns a base of $60,000 plus 4% commission on the $1,200,000 of business she closes, which is $48,000, for total cash remuneration of $108,000. Because two thirds of her earnings depend on results, her employer designs the commission plan carefully to avoid rewarding discounting.
Example
A charity discloses in its annual report that its trustees receive no remuneration and are repaid only genuine travel expenses. The disclosure is required even when the figure is nil, because donors and regulators want to see it stated.
Example
A listed group applies a clawback clause after restating two years of results, recovering a $400,000 bonus already paid to its former chief executive. The clause existed precisely so that variable remuneration could be recovered when the performance it rewarded turned out not to be real.
Formula
Calculation
Total remuneration = base salary + variable pay + employer pension contribution + value of benefits + annualised value of share awards
A finance manager has a base salary of $140,000 with an annual bonus target of 20%, which is 20% x $140,000 = $28,000. Her employer contributes 8% of salary to her pension, which is 8% x $140,000 = $11,200, and provides health cover and other benefits valued at $9,600.
She also holds a share award worth $120,000 at grant that vests evenly over four years, giving an annualised value of $120,000 / 4 = $30,000.
Total remuneration is $140,000 + $28,000 + $11,200 + $9,600 + $30,000 = $218,800, which is roughly 56% more than the base salary on its own. The employer's cost is higher still, because payroll taxes sit on top of the cash elements.Case study
Seen in the real world.
The following is an illustrative and entirely fictional example. A candidate weighing two offers from invented employers nearly took the wrong one on the strength of the salary line. Offer A, from a large established firm, was a base of $150,000 with a 10% bonus worth $15,000 and a 4% pension contribution of $6,000, giving total remuneration of $171,000.
Offer B, from the fictional Coppergate Analytics, looked worse at first glance with a base of $132,000. But it carried a 25% bonus target worth $33,000, a 10% pension contribution of $13,200, and a share award of $60,000 vesting over three years, an annualised $20,000. Adding those gives $132,000 + $33,000 + $13,200 + $20,000 = $198,200, some $27,200 more than the apparently better paid job.
The candidate took Offer B with her eyes open. The extra $27,200 was not guaranteed in the way the salary was, since the bonus depended on company performance and the shares could be worth less than $60,000 by the time they vested, and understanding that trade off was the whole point of comparing remuneration rather than salary.
Watch out
Common mistakes.
- Comparing job offers on base salary alone, which can easily miss $30,000 or more of pension, bonus and share value each year.
- Treating an equity award as if it were cash of the same amount, when it is contingent on vesting, on staying, and on the share price holding up.
- Budgeting headcount at salary cost, forgetting the employer payroll taxes, pension and insurance that add a meaningful percentage on top.
Questions
People also ask.
Is remuneration the same as compensation?
They mean much the same thing, with remuneration the more common term in the United Kingdom and Commonwealth and compensation more usual in the United States.
Does remuneration include expenses reimbursed to an employee?
No, repaying a genuine business expense is not reward for work, and it should be recorded and disclosed separately from pay.
Why do companies pay in shares rather than cash?
It conserves cash, ties the employee's outcome to the shareholders' outcome, and spreads the reward over a vesting period that encourages people to stay.
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