Compensation

Compensation is important in any job. And with trading, it is not only important, but it can also be a little complicated.

Base Salary

Base Salary is defined as pay that you will receive on a regular basis for as long as you are employed. For example, if you are offered a base salary of $240,000 per year, you would receive a gross payment (meaning before taxes) of $20,000 each month or $10,000 twice each month, or $9231 every two weeks, or $4615 every week.

Base salaries are great because you know that you will receive that pay on a regular basis, no matter what, unless and until you cease working for that company. As a result, base salaries are also helpful when you seek to apply for a mortgage or other loan, or when you are planning future expenses such as your child’s higher education expenses or the next vacation. So, whenever you can land a job with a base salary, particularly a high one, you should value that offer very highly. Base salaries are particularly valuable to traders who have irregular returns and who therefore cannot rely upon commissions for regular pay.

Base salaries, particular high ones, are typically reserved for traders who 1) have a very strong and relevant educational background; 2) have highly relative experience in trading the instruments and styles of the hiring company; 3) are well-known to the decision makers at a company; and 4) have proven themselves through exceptional returns over time. If you do not fit into at least one of these categories, it is unlikely that you will be offered a high base salary, especially because there will be others applying for the same job who do fit into one or more of these categories.

There are few disadvantages to a base salary, unless for example, a high base salary comes at the expense of a lower commission. If that is the case and if you are a highly competent trader who would otherwise garner a high commission, then a base salary might be less important to you.

Commission

Commission is defined as pay that you will receive purely as a result of income that you generate to the company. In the case of trading, it is tied directly to the profits that you generate each week, month, quarter, or year. Example: if you generate 10% profit one month on a $1M account, you just made your company $100,000. If your commission is 20%, then you just made $20,000. Not bad.

Commissions vary remarkably and can be as low as 5% to as high as 75% for certain small funds or prop trading firms. A common commission paid by the large hedge funds and financial institutions is 8- 12%, no matter what the trader’s returns are. The reason these commissions are somewhat limited is because the lion’s share of the trading profits in these institutions usually go to the investors who provide the source of the capital that you are trading.

Commission rate is decided in advance, prior to you accepting the job. It is often negotiable. But be careful not to be too greedy when you are negotiating, even if you are an excellent trader, because, once again, the investors usually receive the majority of the profit.

Commissions can be individually-based, department-based, or company-wide. If you are a strong trader with solid consistent returns, you will definitely prefer individually-based commissions, and you will receive a higher rate by doing so. If you are a weaker trader or an inconsistent trader, then you may fare better with department-based of company-wide commissions, because even though your commission might be limited in your good months, it will also be higher in your bad months.

Jobs with higher base salaries tend to pay lower commissions, and vice-versa. They tend to. And there are many exceptions. Some jobs only pay base salaries with no commissions and others pay only commissions with no base salaries.

Bonuses

Bonuses are additional payments, above and beyond your base salary and commission payments. They can be paid monthly, quarterly, semi-annually, or yearly. Not all jobs pay bonuses, and those that do often do so commensurately with their corporate profits. And, just like raises, bonuses can be based on individual performance all the way up to company performance. Bonuses are often exaggerated when the company has a good year and can be eliminated when the company had a bad year, even if your performance was stellar. So, it is best not to count on a bonus as an important part of your income. In other words, don't buy that sports car with the expectation that your bonus will cover your payments – it just might not; and it might not come at all.

If you are a contract employees (meaning that you signed a written agreement regarding your employment), your bonuses might be guaranteed in your contract; but read your contract carefully because there is almost always a clause that lets the company out of a bonus if they are having a bad year – or for any reason at all. If you are a non-contract employee (“at-will” meaning there is no contract), then there is even greater leeway for a company to decide whether or not to pay you a bonus.

Raises

You may receive a raise in either your base salary or your commission, regardless of whether you are a contract employee or an at-will employee. Most companies give raises to most employees most years, in one form or another. But this is not a given. If the company has a particularly weak year financially, most employees will not receive a raise. Conversely, in good years, the company will often give everyone a more generous raise.

Take-Aways and Tips

• The very best traders tend to prefer commission-based compensation over salary-based compensation, because the make more and because they are able to control their pay.
• Weak traders tend to prefer compensation that is more salary-based, because they will receive more regular pay than they would in a commission-based job.
• Ask the following questions during your interview:
• Will I receive a base salary? How much? How often will I be paid?
• Will I receive a commission? What percentage?
• If any is commission paid, is it Individual, group, or company wide, and what are the parameters that determine my share of the commission?
• If commission is individual and based on total profit generated, how is my account size determined, and how can I get it increased?
• How and when are raises decided and paid?
• How and when are bonuses decided and paid?