You’ve seen the blog posts about calculating your true hourly wage, haven’t you? They take a hypothetical $100,000 annual salary and start adjusting it for how long your commute is, how much gas you burn getting to work, cost of work clothes, the extra hours you work outside of normal hours and other costs associated with your job. By the time you finish you find $100K is barely equal to minimum wage. This is a prime example of making the data fit the story you want to tell. I think I can do much better.
So, let me take a shot at this. Let’s take some hypothetical worker making $100,000 a year, me maybe in the middle of my earning years. $100,000/2080 hours worked per year equals $48.08. 2080 hours comes from multiplying 52 weeks times 40 hours per week. It isn’t exact but its close enough for my purposes. So Pat, as we will call our imaginary earner made $48.08 in 2020. We are assuming the pandemic did not disrupt Pat at all.
This is where the normal writer would start to deduct all the indirect and hidden costs of having a job to show you poor Pat didn’t really make $48.08 per hour in 2020, instead Pat made much less. But nobody ever called me normal so lets look at the other side of the coin. Maybe Pat made more than his how much more Pat made instead. Pat works where I did so I know the inside numbers. First every paycheck Pat get his employer, Megacorp, pays 6.2% into Social Security. If Pat were self employed he’d have to make that payment. Pat’s pay just went up from $100,000 a year to $106,200 per year. Pat’s employer also pays 1.45% into Medicare so that brings Pat’s pay up to $107,650.
Next, there is the little item of health insurance. Megacorp opens its corporate wallet to pay $14,563 per year to pay for Pat’s family’s coverage. Pat’s salary is now up to $122,303 per year. Megacorp doesn’t offer all that much in terms of life insurance but they do insure each employee for two years coverage regardless of their health, that is worth $432 per year increasing Pat’s salary to $122,735. Like almost all companies, Mega trains their employees, that makes money for the company but it also keeps Pat’s skills marketable. That’s a direct benefit to Pat worth $1,096 per year. Pat is up to $123,831. Since Pat works where I did I also know Pat has two kids in college right now and Mega provides $1,500 per enrolled college student for employees children. That’s another $3,000 bringing Pat to $126,831.
While this might be rare, when I had Pat’s job I also was provided a company car and free gas, insurance and maintenance. Cars cost $0.56 per mile to own and operate, according to the Internal Revenue Service, and at the average US driver’s mileage of 13,500 miles per year this is worth $7,560 per year to Pat. Pat is now up to $134,391 in annual compensation! My imaginary friend is ambitious and pitched getting an MBA online to his boss last year. His supervisor came back with the news that the company would be happy to cover that through their tuition reimbursement program. That is a big win so Pat enrolled in a nearby university’s distance learning program and obtained his MBA in less than a year for a total cost of $12,474. The company reimbursed 100% of that as soon as Pat graduated which upped the effective total annual salary to $146,865.
Then there is free coffee at work, that’s about $0.27 per cup at three cups a day. $0.27 times three times 250 work days per year equals another $202.50 a year. Plus, lets say four lunch meetings a year where work buys the food at $12 per meal for a total of $48. Add those two and we are up to $146,865. And I saved one of the best for last, Megacorp has a 6% match in their 401K program. That’s $6,000 a year in free money to Pat. Add that to the compensation and that brings Pat up to $152,865 per year. But wait, there’s more. Mega is slightly unusual in that every single employee gets a bonus and a stock award every year the company is profitable. Pat’s bonus was 4%, or $4,000. Pat’s stock award was worth $8,000. That’s an additional $12,000 in annual income which brings the total to $164,865!
Now what about those hours? 2080 hours per year is based on 52 weeks at 40 hours a week. But Pat gets 11 paid holidays and four weeks of vacation which amounts to another 20 days off. Eleven paid holidays at eight hours a day is 88 hours not worked and the 20 days of vacation are worth another 160 hours. Therefore the total hours worked is actually 88 plus 160 hours less than 2080. The math is 2080-88-160 = 1,832 hours actually worked. If you divide that into the $164,865 it turns out Pat’s true hourly rate is $88.99 per hour. That is nearly twice the The $48.08 per hour we thought Pat was making!
What is my point to all this? I have two, actually. One is that it is pretty easy to slant things in the direction of the story you are trying to tell (or sell). I was/am a lobbyist some of the time, for entertainment purposes, so I’m used to seeing people sell things by only telling half the truth. But the other is that 9 to 5 employees often have no idea how much money their employers are spending behind the scenes in ways that directly benefit them. My wife and I will receive nearly $75,000 a year in Social Security when we claim in five years half of which is due to the fact that my employer contributed a lot of money in my name. My million dollar plus 401K got that big, in part, because of the generous 401K match funded by Megacorp.
If you think I was reaching too far and exaggerating the add on benefits of a corporate job you are wrong, I’m being conservative. I received bonuses and stock awards way more generous than Pat did in my examples. I also received closer to $15,000 a year in training when I was at Pat’s level. I didn’t just get four company meals a year I got closer to 100 of them a year. Plus, I got to keep a lot of frequent flyer meals and hotel points. I also got to go on some vendor sponsored trips worth thousands of dollars.
But I was a fast mover being groomed for senior management, Pat, in the example, is much more typical of the middle managers I worked with, and even at that the example is conservative. If you take a balanced look at the corporate 9 to 5, at a six figure level, I think you’ll find the extra incentives that come with the job do adequately offset the extra costs that come along with having the job. And yes, I picked Pat based on the SNL character because that way I could totally avoid any gender issues with my protagonist.
What do you think? Do most company jobs provide a lot of benefits that employees overlook?
Was my experience at Megacorp a unicorn of the job world, are benefits much worse at other companies, or are they much better?
Am I low balling the value of a job because I left out things that my company did not provide but other companies do? Things like onsite daycare, free breakfast and lunch, free health and fitness centers, free snacks and exotic coffee services to name a few.
As always, if you don’t see a comment section click on the title at the top of the post!
I agree… and I didn’t even work at Megacorp. I did the “real hourly wage” calculation for my government job and started laughing because it was insanely high. Not because we received free food or a corporate car, but because we have great health insurance, a pension, and a billion vacation days.
Heck yeah, I didn’t even think about that. The pension alone is worth a fortune! Plus great insurance and vacation days, that’s a great point, thanks!
Interesting thought process. Another takeaway is that (per your numbers) Pat brought at least $88.99/hr of value to the company. His (her?) contribution/skillset contributed at least that much value to the product (or service) they were selling.
If Pat were costing the company $88.99/hr, but were only contributing $50/hr of value-added, he (she?) wouldn’t be around long. (Similarly, a person making a proposed $15/hour minimum wage, but only contributing $10/hr value-added shouldn’t be around very long.)
> Yes, the company I retired from similarly showed us (what they referred to as) the total compensation package.
> Major items such as onsite daycare, health & fitness centers, etc. I would’ve added into the numbers. But, things like snacks and coffee, I would not include.
My wife and I have been retired for a decade. But, when we were working we crunched those numbers in a similar manner and were satisfied with our total compensation package.
I was coming up with everything I could think of to make a point so I did reach a little on some of those items. In my case I never was compensated equal to the tens of millions I made for my employers but neither did I have to invest the hundreds of millions of dollars they spent building my designs or pursuing policies I recommended. I felt very fairly treated and I think they felt I was a good investment. Thanks for commenting.
hey steve. i got a lot out of a handful of employers. the best was paying for about $10,000/year tuition at the fancy school in town to finish my undergrad degree. i have a lawyer friend who was telling me 10 years ago he brought in something like $140k. but that was just revenue minus all the stuff you mention. it may have been the equivalent of $70k after expenses.
i’ll keep working as long as the fitness center stays open. what else would i do all day?
You are a great example of doing it right, Freddy. There is plenty of grief that comes with a job but there is also often more benefits than most people notice.
Depending on how much you value travel (for some it’s more of an obligation), I would include that as well. Cost of flights, meals, experiences, etc. It will be interesting to see how much companies scale back on travel/conferences post-pandemic.
I couldn’t agree more. I didn’t include that but there were years when I traveled for more than 200 days a year and lots of that was to fun locations where it felt more like a vacation with fine accommodations and incredible meals. Excellent point iF!
I love the way you do the math and it’s makes plenty of sense coming from the engineer that you are. Ya, I have the company car, expense reimbursement for phone and internet and travel when we once did.
I can certainly tell you it’s quite noticeable when they go away. Same for medical insurance. COBRA does not come cheap while you prepare yourself for signing up for Obama care. I value and appreciate all of my benefits, that I am trading my time for.
At the end of the day, it’s not what you make, it’s what you keep in the form of take home pay. The bi-monthly deposit into the checking account is what gets measured to cover a chosen lifestyle. I work with $10/hr at 24 hours a day. That way, when I buy something, I still ask myself if it’s worth an hour of my working life to procure it. Old habit from Vicki Robin and Joe Dominguez
You are wise Francis, I can’t believe I forgot to include the cell phone and state of the art ultra notebook work provided and did not limit personal use on! And Cobra is expensive, I stayed on it for 18 months after I retired and then had to pay even more, over $16,000 for me and my spouses coverage after that. Thanks for commenting!
Funny enough, today one of the managers sent me an NPV analysis of our R&D staffing, essentially matching our resource allocation against revenue projections for the various projects we’re working on. When I looked at the average salary figure for our chemists, I almost objected that it was way too high. Then I started thinking about our health insurance, life/disability coverage, bonuses, PTO etc etc and realized that the figure was probably conservative. The company is paying roughly $18,000 a year in health insurance premiums alone, for me, so I can’t omit that benefit. Thanks for sharing your take, because it cuts against the grain of what people normally argue, but it’s totally valid.
Adam, I remember from my corporate days we used an “overhead” factor for each employee’s true cost at salary times 1.4. That was kind of an industry standard back in the paleozoic era.
We still apply a 1.5x multiplier, as well, which I didn’t mention. When you take into account all the costs for training, travel, etc.. it’s probably a fair estimate.
Agreed, the jobs I had a decade or more ago were very rich in benefits, and I am so so so appreciative of what I received, and provided much loyalty and hard work in return. I do get it!!!
On the other hand — I haven’t seen these types of benefits in many, many years. At least 7 at a minimum, if not more.
No free coffee where I am now, no matching 401K funds, absolutely no free lunches (but there is a canteen where we can pick up snacks and little meals for a minimum charge). They do provide a little mini frig for us to put our lunches in. I don’t even get mileage reimbursed when I make trips for the company, in the company’s name. there is absolutely no training available – I pay for everything myself. But I’m still grateful, because…
Last job I had with a government contractor working on healthcare quality issues was bought out by a large hedge fund company. We had no money for office supplies, I had to buy my own paper and pens, use my printer and printer ink. I was provided a laptop though, since I worked from home. They didn’t have any office rent, no utilities, and they didn’t even reimburse for my internet or phone, which were a primary part of my job, goodness knows no tuition reimbursement. During my exit interview they asked me “how could you leave such a great company?” I told them I was out of money for printer ink. (The pay was $57K per year, by the way).
I’m so thankful my current job has office supplies available, they do make payroll taxes and they pay a small %age of my healthcare premium, and I’m taking it all as a wonderful gift. In appreciation I have worked every single day for the last 6 weeks (Saturdays and Sundays only about 5 hours per day, but M-Th I’m working 9s and 10s easily and usually just 8 on a Friday). Most of my tenure where I am now for past 4 years were those kind of hours. When someone complained about my current salary (it is over 6 figures)… I just said – hey, divide it by the hours, I think I make what the average person makes here.
Just saying — oh the good ole days have been over for awhile for a lot of people.
Thanks Lisa, I wonder if that’s a sign of the times? Most of my career was when the oil industry was booming. Our one plant even had a private jet for the twenty or so of us that actually travelled for work, which even then was a crazy waste of money, but a lot of fun. We had all kinds of company parties and cook outs, and our expense accounts were never questioned. That had ramped down a lot the last few years I worked. I had my own mini-fridge full of diet Mt. Dews, because only coffee was free, not sodas. And the company cars were eliminated at the very end also. I’m guessing perks tend to be the highest when you are in a very profitable sector, like oil and chemicals used to be and like Silicon Valley is now. You are some kind of tough working those hours, I’m glad you are making bank, you certainly deserve it.
Yesssss!
I also don’t work every minute of every hour, let’s face it.
And in many jobs, the higher up you get, the easier it gets in some ways/the less *hard work* there is to put in.
Essie, I agree. The stress was a little higher when I was running everything as opposed to just being an engineer watching one part of the facility but the work was not as hard and didn’t take as many hours. I was a little different though, most people in my job worked very long hours, I just wasn’t willing to do that. I left at 5PM unless something critical was happening.
You’re so right about this. I’m union and my company pays around 6k on-top of my salary a year for my supplemental union dues (healthcare/pension/etc.) Plus I get a new company truck, gas, parking, and bridge tolls paid. I never take what I have for granted. I’m sure they write it off and claim depreciation on the truck, but I’ll take it! Plus, they look for work to keep me working. Something I don’t have to worry about and hear is the worst part about working for yourself.
I agree Noel, our plant was union and we had trouble getting our best hourly guys to accept management jobs because the pay wasn’t enough better to justify the lack of job security and the unpaid overtime and the rest of the hassles that went with salaried jobs. One thing I did admire about our company is that they would promote hourly union employees all the way up to senior management VP jobs, they cared more about talent than they did about college degrees. That’s rare in this world. I’m glad you like your job, I did too and it really adds to the quality of life if work is enjoyable.
This was a neat way of looking at things. It would be interesting to then take the $89 per hour that Pat makes and adjust for all the additional hours such as commuting, etc. and see how close you get to the base $44 per hour rate.
When I did budgeting at my last job we usually added in a 30-40% gross up for taxes, insurance, 401(k), and bonuses. This was a bit of a swag, though because lower paid employees actually had a higher percentage when factoring in the fixed health insurance costs.
Seems like a missed opportunity for employers when presenting an offer to their new hires to highlight some of the extra $$ benefits the employees are getting. I remember when I changed jobs I calculated the 401(k) match and bonus but didn’t consider health insurance
I thought about doing that dragon, but, you know, I’m retired, my site isn’t monetized at all and, well, I’m too lazy to do that! I also forgot to include the state of the art mega portable computer equipment and the state of the art super smart phone and unlimited everything phone plans that I got for free. Its going to hurt when I have to start paying my own cell phone bills for the first time in my life. Right now my consulting clients do that, but in another month I’ll be retired from that too. And my one line cell bill runs over $150 a month!
I’m early 50s and read one of your posts on some friends dying early. I’m still working and doing well, saving, investing, etc. Today I paged Dr Google and he/she said that the average lifespan was 79 years. Pretty much 25 years left or 33 percent of my life left on planet earth. Got me thinking about the Blue Ridge Mountains in western NC (my happy place). Peace
Early 50’s is a good time to start confronting your mortality. I retired a few weeks after my 60th birthday. That was five years ago and I have never regretted it. Unless your work feels like a mission, even if it is fairly enjoyable, I’m not sure the smart move isn’t to reinvent yourself as soon as you are financially independent and to see what you can make out of that final chapter of life. Thank Glincoln.
Thanks Steve. Enjoy your site and many others as I journey to FIRE.
Good run-through of the numbers. I’d never done that myself, and found myself a little surprised how close the benefits/extras that the employer pays can come to negating the cost of working.
I had just read a post that covered the hidden costs of work and it just struck me I had never seen the opposite view considered. I get most of my posting ideas from reading other blogs. Thanks fi.
I’ve been considering trying to quit my job and calculating what I would need to replace my salary. All I was thinking of how much I would need to generate to replace my salary plus a margin for taking the risk. I did not think of healthcare costs, 401k matching, HSA contributions, social security contributions, etc.
Maybe I should rethink and regroup at a later time..
My wife and I retired 10 years ago. Like you, we thought we had everything covered. But, with still a decade to go before Medicare-eligibility, we somehow overlooked the cost of healthcare. Even our retiree-medical insurance from our previous employer was quite expensive.
Then we heard about the Affordable Care Act that was being proposed. And we started coming across articles like this:
https://money.usnews.com/money/blogs/on-retirement/2013/11/11/the-obamacare-trick-early-retirees-should-know
So, we used that method to access very affordable (deeply subsidized) ACA health insurance for the next 5 years (2014-2018).
And it wasn’t just us doing this. A few years later we read that others with good net worths were using the same method to obtain affordable health insurance:
https://www.cnbc.com/amp/2016/01/27/theyre-millionaires-and-they-get-obamacare-subsidies.html
(Now we’re on Medicare and past that issue.)
So, depending on your circumstances (and what “buckets” of investments you have), it can be done. It just takes figuring out how to work around all the rules.
Maybe you can rethink and regroup sooner than you think?
Brian, In my case I’ve made six figures in each of my retired years due to my one day a week consulting. That kind of knocked me out of ACA eligibility but it also made more than enough to pay for expensive health insurance.
Maybe David, it is good to consider all the costs but there are ways to reduce health care costs I could not utilize because my hobby consulting made too much money. So you might still be good.
Decisions, decisions….
Steveark,
Good run down from a perspective that I’d imagine isn’t often shared. I think it’s fair to expect most write-ups on the Personal Finance side of things are going to side with the “little guy”, the worker. The Personal part.
I’d imagine there’s a lot of corporate/business writers that explain how expensive labor really is, though it’s naturally targeted to corporate/small business owners rather than individuals on the Personal Finance side.
And it’s probably. A. Whole. Lot. Drier. 🙂
Having been on both sides of this equation, and now straddling it (as an owner-employee), I don’t think the typical worker has a grasp for all the hidden costs that go into employment. I’d imagine the “total cost” for employing the typical ~$100K/worker is probably closer to $200K once you factor in the less direct benefits to the employee (you didn’t really focus on, which makes sense for this piece) but real costs for the employer. That training number, for example, definitely seems low.
On the other hand, I think a lot of these elements are a sort of synergistic relationship. For example, a company car for a lot of workers isn’t necessarily a strict “benefit” to the worker, but instead something that helps them do their job better. The sort of vehicle you want an employee to be seen driving when arriving on site with a client, perhaps—establishing that image. Or maybe a vehicle with specific functions to complete a task (construction, for example). Similarly, while a worker benefits from training and it has real value they can carry forward, the company presumably earns a larger profit from the training than the cost. Coffee keeps workers alert and in the office instead of sneaking off for a break to grab a cup somewhere else. A lot of these sorts of things are incentives to keep workers happy and productive.
I think the employer side of FICA taxes is probably the most overlooked item along with healthcare costs. Jenni switching to part-time work triggered the loss of her employer healthcare. We’re projecting our annual budget to grow about 15% just for us to cover that cost of an ACA plan—about $6K/year.
Overall, I think this is a great perspective to keep in mind when evaluating things like switching from a W2 job to 1099, from being an employee to starting your own business, and of course—when quitting.
One things for sure—if people are able to turn a $100K/salary into a minimum wage job by accounting for commuting, food, and direct-work-related expenses—there’s a deep problem that needs fixing!
Great points Chris, I really tried but to go overboard but 200% might be pretty close in my case. As a 1099 contractor in my part time side gig its been painfully obvious all the things I missed when I switched. I did negotiate a generous expense account with my clients at least. And you are correct in pointing out how many perks benefit the employer by increasing the employee’s productivity. Great comment!
Great post, Steveark! You do raise a great point about all the extras that people usually do not factor into compensation. Also, that it is easy to slant a narrative in one direction or the other. I’ve never had the kind of benefits you had, but I had a stock sharing plan with a match, courses paid for, free coffee, pensions, health benefits and more. I do think a lot of younger people are unappreciative of that. I am grateful for the benefits I have now, but I still think the amount of effort and time you have to put in to get those benefits are almost not worth it. For example, my current hourly wage is over $34 per hour before tax. My job is part-time and I work from home. If I compare all the benefits of my previous full-time job in comparison to the higher paying part-time job I have now, I still get paid much more. Plus, I’d rather have the benefits paid out and be more in control of managing the money myself. You do raise a great point though about the benefits and a more realistic calculation. Thanks for sharing!
Graham, it’s true, benefits are generally not worth their actual cost because you would have rather had the money, given the option. And they certainly aren’t the main reason to choose a 9 to 5 over autonomy. In fact I think it’s a small part of the decision process, but it is a part and worth considering. The real question is which way of working leaves you the happiest, and that’s the complicated one.