How to Read Base Salary, Bonus and Equity in an Offer

What to take away

What an offer letter's headline number covers

An offer letter states a base salary and lists everything else as a target, a range or a share count. The bonus appears as a target percentage of base pay, and equity appears as a number of shares or units that vest over time.

Bonus metrics, vesting schedules and match formulas sit outside the letter, in documents you can request before you sign — the bonus plan, the equity grant agreement with its vesting schedule, and the 401(k) plan document or its summary plan description.

Read the grant type before you value the equity. Restricted stock units (RSUs) are shares or units delivered when they vest. Performance stock units (PSUs) depend on stated performance conditions. For stock options, the strike or exercise price is what you pay per share to exercise; for a private-company grant, ask what fair market value supports that price and whether a 409A valuation is used. The valuation is not a promise of what the shares will be worth later.

For options, check the vesting schedule, any cliff (a period before any portion vests), the post-termination exercise window and the expiration date. For an employee stock purchase plan (ESPP), check the payroll deductions, purchase dates and price formula, as well as any limits on selling or withdrawing. Do not assume that different grant types or employers use the same terms.

A target is not a payment until the metric is met and the plan's conditions are satisfied. Read the bonus plan for any threshold, target and maximum; the metrics and their weighting; and who determines results. Check how a first-year award is prorated, when it is paid, whether you must still be employed on the payment date and whether repayment or clawback terms apply. Treat a signing bonus separately from an annual bonus, and confirm its payment and repayment conditions. A guaranteed or minimum bonus is only as certain as the written amount, period and conditions.

Base salary, bonus and equity on different clocks

Pay lands on three schedules. Base salary arrives on the employer's regular payroll schedule. An annual bonus is paid after the performance year closes, on the date set by the plan.

Put an offer on one calendar:

Salary and bonus are generally taxed as wages when paid. Equity can have separate tax events at vesting, exercise and sale, depending on the grant type; do not treat the whole grant as one tax event.

For RSUs, vesting generally creates wage income reported on Form W-2; a later share sale is reported on Form 8949 and Schedule D. An ISO exercise is reported on Form 3921 and may require Form 6251 to calculate alternative minimum tax. For NSOs, the spread at exercise is generally compensation reported on Form W-2, and a later sale is reported separately.

The IRS distinguishes incentive stock options (ISOs) and employee stock purchase plan options as statutory options; options that are neither are nonstatutory stock options (NSOs). Statutory options generally do not create gross income on receipt or exercise, though an ISO exercise may trigger alternative minimum tax. For a nonstatutory option without a readily determinable fair market value at grant, exercise income generally includes the stock's fair market value less the amount paid. See IRS stock-option tax guidance.

Compensation surfaces at a set stage of the process, and our job search interview questions explain what each round is testing before money comes up.

What published pay scales measure

The Bureau of Labor Statistics publishes median annual wages by occupation, by state and by metropolitan area.

For management analysts, the handbook lists a median wage for every state, and the spread between states is wider than the movement inside one state over a few years.

Those tables report occupational wages, not the value of a specific bonus, equity grant or employer retirement contribution.

Public accounting firms hire on fixed campus bands, and the Bureau of Labor Statistics data on accountants and auditors reports occupational wages, not the offer package at a particular firm.

Read the column headings before you quote a figure, because annual mean, median and hourly measures are not interchangeable. A worker whose pay is half bonus sits nowhere near a published median.

Employer choice moves the number as much as geography does. Public accounting firms set campus bands by city and career stage, so two hires with the same title can start on different base pay.

Tax, benefits and cost of living

A salary is set where the work sits and taxed where you live. California taxes wages at graduated rates that reach the highest in the country, while Texas and Florida collect no state income tax on wages at all.

Federal and payroll taxes apply in every state, so a low-tax state keeps more of the same base.

Cost of living appears in no wage table. The Bureau of Labor Statistics publishes estimates for metropolitan areas beside its national figures, and rent is in neither.

Benefits shift the comparison again. Health premiums, commuter costs and paid leave do not appear in published wage data.

Retirement money works the same way. A 401(k) contribution leaves pay before federal income tax, and an employer match vests on its own schedule. 401(k) matches run on a formula — how much per dollar, up to what share of pay — so read the plan document rather than the headline percentage.

Where comparisons break

Employee pay against contractor billing is the worst comparison. The contractor funds equipment, health cover, software and unpaid weeks from one headline number.

An employer withholds tax for a W-2 employee and pays half of payroll tax. A contractor under 1099-NEC covers self-employment tax and files quarterly estimates. The IRS decides which label fits by weighing control and the chance of profit or loss.

Two people at one employer in one year compare cleanly once role differences are noted. Two countries do not compare until the figure is stated net of tax, benefits and cost of living.

Currency conversion handles the exchange rate and nothing else. It leaves tax, benefits and cost of living exactly where they were, so a converted figure is a starting point, not a comparison.

A converted gross figure starts a comparison. It does not finish one. State the rate and the date you used.

Common questions