Compensation
*Check out our most recent analysis of 2012 offers to consultants: Compensation Study: Transitioning out of Consulting
Money isn’t everything, and yet somehow compensation is. What’s the deal with that?
When leaving consulting, the components that make up your overall compensation package will change. Here, we’re focusing on the changes that take place when going from consulting to corporate.
Consulting versus Corporate
The key difference in corporate compensation is the Long Term Incentive Programs (LTIP), which are primarily reserved for the Director-level and above. While consulting is usually an all-cash proposition, corporations use LTIPs to attract and retain executive level talent:
- Consulting: Base + Bonus + Profit Sharing / Retirement Contributions
- Corporate: Base + Bonus + Equity and / or Cash (LTIP)
There is a significant amount of variation among companies in each of the components that make up this package, and some companies offer additional incentives such as a car program (~$15k per year) and a pension plan (yes, they still exist!). Assume that the average compensation package you will receive in corporate will be approximately equal to your current compensation package in consulting. Generally speaking:
- 25% of people will manage an overall increase in compensation
- 50% of people will manage a lateral move (within 10% of their current compensation)
- 25% of people will take a step back. The step back depends on a few things – timing (are you desperate), tenure (too junior or too heavy), and reason for departure (if you were asked to leave the firm, you will not fetch top dollar for competitive positions).
Base salary:
Aside from promotions, which result in more sizeable raises, your corporate base salary will inch up annually anywhere from 0-8%, with 3-4% being average. Given this, you ought to place an appropriate level of importance on securing an offer with a high base salary. All future raises will be on top of this amount, your target bonus is tied to it, and at some companies your annual equity grants will vary depending upon where you are in the compensation “band” for each position.
That said, a note of caution: Look at the entire package. A company might deliberately set its base salary in the 25-50% range of the market, knowing that its bonus and equity payouts are 150% of the market. Don’t get so hung up on the base that you lose sight of the total package – this happens all of the time. Demonstrate your “nose for value” by appreciating the entire offer.
Bonus:
While base salary is easy to understand, annual bonuses are frequently misunderstood or are not evaluated carefully enough.
You’ve received an offer that includes 35% target bonus. Ask, “What is the historical pay out for high potential people in this type of role?” Some companies can be downright deceptive with this, and will excite you with a 35% target bonus but neglect to tell you that it hasn’t paid out a single dollar in the past 3 years. Other times, a company might undersell its 20% target bonus, which has paid out at 2X each of the past 2 years and at target the year before. When evaluating offers, this information can go a long way in determining which offer is “better.” Personally, we would rather have a 20% target that usually exceeds expectations than a 35% target that we’ll never receive.
Equity: the murkiest detail of all, for all.
Most public companies have shifted their equity packages back to restricted share grants (RSUs) from options, or offer a combination of shares and options.
- Shares are easier to value, and always have value. Companies frequently offer to “buy out” a portion (occasionally all) of someone’s unvested or soon-to-vest equity as part of an offer via cash or an in-kind stock grant above and beyond the annual stock grant.
- Options provide more upside when the stock is on a real tear. If the stock doesn’t budge or goes down, however, they feel (and are) worthless. While they may have value according to Black-Scholes, until they vest and are in the money, you’re no better off for having them. And when you consider looking outside of a company, you usually will not get as much money from your next company when it seeks to compensate you for the equity you left “on the table.”
Vesting Examples:
Step Vest (most common): You receive an offer with a $200k base, 30% target bonus, and $75k in restricted stock units that vests over 4 years in equal parts. The share price is $75 at the time. For the shares you receive:
$75,000 in shares / $75 a share = 1,000 shares vested over 4 years
| Year | You Vest | Shares Vesting |
| 1 | +250 | 250 |
| 2 | +250 | 500 |
| 3 | +250 | 750 |
| 4 | +250 | 1,000 |
In your second year, you will receive a comparable grant (number of shares may vary, though the granted dollar amount will likely be consistent). So by the end of your second year, you are vesting the second 250 shares of your first grant and the first 250 shares of your second annual grant. By year 4, you are vesting approximately 1,000 shares each anniversary, and are stockpiling a fair bit of equity, regardless of whether you choose to sell it.
| Year | Grant 1 | Grant 2 | Grant 3 | Grant 4 | Grant 5 | Grant 6 | Grant 7 | Total Shares Vesting |
| 1 | +250 | 250 | ||||||
| 2 | +250 | +250 | 500 | |||||
| 3 | +250 | +250 | +250 | 750 | ||||
| 4 | +250 | +250 | +250 | +250 | 1,000 | |||
| 5 | +250 | +250 | +250 | +250 | 1,000 | |||
| 6 | +250 | +250 | +250 | +250 | 1,000 | |||
| 7 | +250 | +250 | +250 | +250 | 1,000 | |||
| 8 | +250 | +250 | +250 | Etc. |
*Keep in mind that if / when you start rising through the company, your equity grants will increase proportionally (10-20% or higher as you progress). We have reflected this in the example below.
| Year | Grant 1 | Grant 2 | Grant 3 | Grant 4 | Grant 5 | Grant 6 | Grant 7 | Total Shares Vesting |
| 1 | +250 | 250 | ||||||
| 2 | +250 | +250 | 500 | |||||
| 3 *Promotion | +250 | +250 | +350 | 850 | ||||
| 4 | +250 | +250 | +350 | +350 | 1,200 | |||
| 5 | +250 | +350 | +350 | +350 | 1,300 | |||
| 6 *Promotion | +350 | +350 | +350 | +450 | 1,500 | |||
| 7 | +350 | +350 | +450 | +450 | 1,600 | |||
| 8 | +350 | +450 | +450 | Etc. |
Cliff Vest: You receive an annual grant of 30K shares that vests at the end of 3 or 4 years (varies from company to company, and can be up to 5 years). You receive the total amount at the end.
Common Pitfalls
When deciding on an offer, or between two offers, consultants tend to be overly optimistic about the job they want, meaning the one your “gut” is excited about.
- Bonus: You convince yourself that the company will find money for you because of the value you will add, or that the other offer with the historically high bonus payout is only worth face value.
- Equity: If it’s a turnaround situation where the stock is tanking, or a startup that has not yet taken off, you convince yourself that you and your new team will be able to make it worth it. You have to assess your appetite for risk, and think through the possibility of no reward.
In short, remember to sharpen your pencil and stay logical, not emotional, with decisions re: compensation.
For more:
2012 Compensation Study | our analysis of offers made to consultants recruited in 2012, including a look at the actual compensation packages themselves.
Retire Before 40 | how Bain alum John Wilen retired at the age of 38.