What is total compensation? | Employment | Financial Literacy | Khan Academy

Let’s say that you've just gotten these two job offers, and your goal is to figure out which one gives you the most total compensation. So pause this video and see if you can figure out the total compensation for Job A and for Job B, and then of course we can compare them.

All right, now let's work through this together. So I could just put a line here. Let me do this in a color we can actually see.

So, total compensation for Job A is pretty straightforward because they give you a base salary and a bonus, and there's not really much in the way of benefits here. So we just add $55,000 to $1,000 bonus. You are going to get $56,000, and essentially that's all in terms of taxable pay.

Now for Job B, there's no bonus, but there are definitely some benefits. We have the health insurance here, and then you have the 7% 401(k) match, which means that if you contribute about up to 7% of your income, once again that's going to be tax deferred. You won't have to pay it now, and then later when you take it in retirement, then you will pay taxes. But then you might be making less money, and at least you've deferred those taxes.

We could talk more about the present value of money, but even more than just being able to defer the taxes, the company is matching you. So for every up to 7% for every dollar you put in, they're going to give you another dollar above and beyond this $45,000. So this is essentially worth 7% of $45,000. If you take 7% times $45,000, let's see, that's going to be equal to $3,150.

And this is tax deferred as well. You're not going to be paying taxes on it immediately, but in the future, it's going to be in your form. Okay, you might have to pay taxes on it in the future, but it still is going to be deferred.

So if we were to just add up these things— even though this right over here is tax deferred and this right over here you're not going to have to pay taxes on it— let’s just add everything up: $8,000 plus $3,150 is $11,150 plus $45,000 is going to be $56,000. Health insurance is actually a pretty expensive benefit.

You are now actually getting a total compensation package that is higher in Job B than in Job A. And if health insurance is something you need, and you don't have any other source of it, this is especially useful because you are not going to have to pay taxes on this $88,000.

If a job just gave you an $88,000 cash bonus, you would pay taxes on that. So, and then if you, on top of that, had to then use that to pay for health insurance, well then you're definitely better off with a scenario like this.