I'm in the middle of trying to find my next job, and a decision is between taking a full time position with a company or contracting.
First of all, it is better to think about all of this in terms of compensation packages, rather than salary. Salary is just a portion (although a large portion) of overall compensation, but if you look at hourly rates or annual salaries alone you're missing a lot of the value to a good package and may make a suboptimal decision.
- Hourly vs. Salary - The best approximation for turning an hourly rate into the annual salary version is to multiply it by 40 (hours per week) and 50 (weeks per year). This also makes the numbers nice and round, so $50/hr is $100k/yr, $75/hr is $150k/yr, etc.
- Paid vs. Unpaid Overtime - In many contracting positions the overtime is not only paid but paid at overtime rates (1.5 to 2 times the normal hourly rate). Full time positions in my field at least are almost always considered exempt, which means there is no overtime pay. Sometimes the companies will use what they call 'comp time', where you compensate for extra hours one week with paid time off hour for hour. How realistic this is and how it affects performance reviews varies by company, group, and manager.
- Paid Time Off - How many holidays per year, how many additional vacation days, sick days, personal days, yadda yadda. It is important here to know (as best as possible) whether there is a corporate culture that frowns on people actually taking their vacation (and maybe holds it against them during performance reviews/raise/promotion discussions), or there are restrictions on when the vacation can be taken.
Another thing often overlooked is the expiration policy: Do you need to use them every year, or within a year after or you lose them? - Bonus - This could be a regular annual bonus based on performance (either personal or company), profit sharing, etc. To really take this into account correctly take an educated guess at the chance of having each potential level of bonus per year (if it could happen more than once per year, add the chance for it happening once and the chance of it happening twice) and multiply by that amount. You can then figure out the expected value of your bonus per year and add it to the salary. Or just pull an expected average out of your hat.
- Hiring Bonus - In candidate-oriented hiring markets (which is where tech is in right now), it is pretty standard for companies to offer up front hiring bonuses as part of the compensation package. This can be a one time lump sum, or even a guaranteed multiple installment event (such as a certain sum once per year for the first N years). Normally you have to stay at the company for at least a year (for a simple one time hiring bonus upon hire) or you must repay it to the company when you leave.
I believe the right way to think about it is as a depreciated bonus based on average tenure, which in the tech industry is about two and a half years. So add 2/5ths of the hiring bonus to the gross annual salary. The math for more complicated hiring bonus structures is more interesting, be sure to account for the fact that you may have vested one but not another in a particular time period, so it may be a more straightforward addition to the salary. - Stock Options - If you think of them like my wife does all stock options have a value of 0, and in fact might be a little negative because they give you some hope and distract you from things that actually exist.
It is very difficult to assign real value to options, if you really want to go there I'd start with the Black-Scholes model and see where that leads you. I think it is safer to underestimate their value than over, and it depends on the type of company you're getting them from, how mature they are, what their industry upside is, etc. Be conservative, think of them as potentially having value on the order of magnitude of your expected annual bonus and I think you'll be in good shape.
Courtesy my brother, a website that has a lot of very good detail about the different kinds of stock options and their implications. - Retirement Accounts - I'm not going to go into pension schemes since I don't have any experience with them. If the company offers 401(k) matching and you're smart enough to take advantage of it, add the maximum matching funds to the annual salary. And make sure to contribute at least enough to the 401(k) plan if you take the job to get that free money, for crying out loud.
- Benefits - For bigger companies this is a very large portion of the overall package, and is normally kept totally opaque. For line items you can often see how much you would pay for health insurance from a particular insurer vs. what your company is charging you. The difference is your real benefit from the compensation package (although the cost to the employer is usually much less). Very hard to calculate correctly, you can back-of-the-envelope it as somewhere between 10% of annual salary for crappy benefits to 33% for top tier.
- Frills - These are almost-benefits. Large companies especially can get discounts for their employees on tons of stuff, the bigger the company and the richer the employees the easier it is to negotiate, so they'll often do so to give their employees little perks here and there that they might find valuable. Company stores, Prime Card (which is essentially an outsourced employee discount system some large companies use), health club memberships, etc.
If you really find some of them valuable you can add the money they actually save you to the salary, but be sure to not add frills that you won't use or you only think you might use, stick with the ones that impact behaviors you already have. - Relocation - If you relocate for the job, there are a number of pieces of this process that the company can pay for. In the very simple case they hand you a check to pay for some of the expenses, for top executives they may buy them a house to live in, pay for weekly travel to and from their current residence, or even more elaborate. Secret underground lair, anyone?
More realistic for non-C level management, they can pay for the move, closing costs on one or both sides, arrange for local real estate agents to help you find a new house or apartment, pay for temporary housing while you are looking and getting situated in the area, etc. - Work/Life Balance - This is a catch-all basket for all the personal valuations on different aspects of the specifics of the job. My suggestion: Start with a perfect job as the offered salary, for each thing about the job that you consider a negative, assign it a dollar value and subtract from the salary.
- 5/4 for Microsoft Contracting - This item is specific to contracting to Microsoft. Due to some litigation a number of years ago, Microsoft requires that anyone who has been a contractor to them for a year must take at least a 100 day break before contracting to them again. This affects the bottom line of a contract with Microsoft, you have to take two things into account.
First, the hourly salary conversion to annual changes substantially. Take the annual salary you converted to (from hourly) and divide by five (for five quarters), then multiple by four (for the year worked). You're getting that rate per year because you cannot work more than one solid year back to back.
Second, if you continue to contract there you have essentially an enforced 3 month vacation. If this isn't so much time it would drive you nuts, or you love to travel extensively to Europe (as an example) and the money you earn during the 12 months means you can afford to not work for three month, it can be a very positive thing. If you're trying to build long term savings, this can really shoot you in the foot.
This was just a braindump of the kinds of things I've been thinking about a lot over the past few weeks. I've been asked multiple times to give someone "a number" at which apparently I would shut down my brain and agree without further thought. Hopefully this makes it clear why I don't think it is anywhere near that simple, and why I need to get details about entire compensation packages before I can even begin to realistically compare them.
