HR’s Guide to Total Compensation in 2024
Balancing salary structure and benefits to create a competitive offering within your budget is a constant challenge. Fine tuning your approach to total compensation will keep your business competitive.
In this article, I'll take a look at what total compensation is comprised of, how to calculate it, and why it's such an important part of your payroll practices.
What Is Total Compensation?
Total compensation refers to the complete package of pay and benefits that an employee receives from an employer.
This includes base salary and any bonuses, benefits, stock options, and other financial rewards associated with employment.
Here are the key components typically included in total compensation:
- Base salary: The core amount of money an employee earns before additional bonuses and benefits.
- Bonuses and incentives: Additional compensation based on performance, achieving targets, or other criteria. These can include annual bonuses, profit-sharing schemes, and other performance-related payments. Here are 66 employee incentive ideas.
- Employee benefits: Non-wage compensation such as health insurance, dental and vision coverage, retirement benefits, PTO, life insurance, and disability insurance.
- Equity compensation: Stock options, restricted stock units (RSUs), or other forms of equity that align the interests of the employees with the financial performance of the company.
- Perks: Extra benefits that might include things like gym memberships, company cars, childcare assistance, or subsidized meals.
The concept of total compensation helps provide a fuller picture of what employees are earning, which can look significantly different from just looking at the base salary alone.
It's an important factor for both employers and employees to consider during negotiations and when evaluating job offers.
Salary vs Total Compensation
An employee's salary usually represents the annual pay structure for their position, excluding taxes and other withholdings.
In contrast, total compensation includes all benefits provided by the employer, such as insurance, tuition assistance, commuting or home office stipends, and nontaxable items.
These benefits, along with insurance, paid time off and other perks, are often called non-cash benefits, though some, like annual bonuses or commissions, are cash-based. Employer contributions to retirement plans and life insurance are also part of total compensation.
How To Calculate Total Compensation
Calculating total compensation involves summing up all the monetary and non-monetary benefits that an employee receives.
Here's a general guide on how to calculate total compensation:
1. Base Salary
Start with the annual base salary e.g. $50,000 per annum.
2. Bonuses and Incentives
Add any annual bonuses, performance incentives, profit-sharing payouts, or commission that the employee is eligible to receive.
3. Benefits
Next, calculate the total cost of employee benefits including contributions to mandatory, non-mandatory, and fringe benefits such as:
- Health insurance
- Retirement benefits
- Life and disability insurance.
- Tuition assistance, wellness programs, etc.
4. Equity Compensation
If applicable, include the value of stock options, restricted stock units (RSUs), or other equity-based compensation. The value can be estimated based on the current or projected value of the stock.
5. Perks and Other Benefits
Calculate the value of additional perks such as company car, housing allowance, mobile phone reimbursement, gym memberships, childcare, or transportation benefits.
You can typically calculate this based on the cost to the employer or the savings to the employee.
Example Calculation
Suppose an employee has the following compensation details:
- Base Salary: $50,000 per year
- Annual Bonus: $5,000
- Employer 401(k) Match: $2,500 per year
- Health Insurance Contribution: $6,000 per year
- Perks (Gym Membership, Phone Bill): $1,200 per year
Total Compensation = Base Salary + Bonuses + Benefits + Perks
= $50,000 + $5,000 + $2,500 + $6,000 + $1,200
= $64,700 per year.
Pro tip: Compensation management software and benefits administration software can automate the process of calculating salaries, bonuses benefits, and other forms of compensation, helping ensure accuracy and consistency.
Why Is Total Compensation Important?
Total compensation is an important concept for both employers and employees because it helps frame compensation as more than just salary.
From an employer perspective, total compensation is important for:
- Attracting and retaining talent: A competitive total compensation package will help attract and retain the right talent. An orgnization can differentiate itself from competitors and shape its culture through benefits and bonuses rather than salary alone.
- Employee motivation and performance: Including performance-based bonuses and equity compensation in the total compensation package can provide extra motivation for workers.
When designing total compensation, it's crucial to understand what employee benefits liability insurance covers for full protection.
Total Compensation Management Best Practices
As noted, total compensation is an important part of your employer value proposition and will impact your culture and the type of talent you’re able to attract.
Here are some best practices to help you develop a total compensation package that works for your organization:
Align with business strategy
Align compensation strategies with overall business goals. For instance, if a goal is to encourage innovation, consider including more performance-based bonuses and stock options as part of your benefits planning to encourage and reward innovative behaviors.
Align with the market
Regularly conduct market research to ensure your total compensation package is appropriately aligned with the market.
For example, you might need to adopt a lead-the-market strategy for certain roles to attract the best talent.
Offer flexibility and customization
Offer flexibility in benefits, allowing employees to choose options best suited to their needs. For example, younger employees might prioritize tuition reimbursement over health benefits, whereas older employees might prefer enhanced retirement savings plans.
Consider life stage or career-specific enhancements to packages to cater to different needs across the workforce.
Be transparent
When it comes to compensation, it pays to be transparent. While this might not necessarily mean disclosing everything about your compensation philosophy, being transparent about pay practices can further help with recruitment, promote pay equity, and help build trust internally.
How to Conduct a Compensation Analysis
A compensation analysis, sometimes referred to as a compensation review process, is a method companies use to assess the total cost of an individual employee and compare their salaries internally and externally against industry standards.
This process helps companies stay competitive, maintain pay equity, and prevent wage bias.
How to Conduct a Compensation Analysis
Step 1: Gather Data
Collect salary and compensation data, considering factors like professional experience, education, and location. Use reliable sources such as the US Bureau of Labor Statistics and salary surveys. Conduct internal surveys to understand employee benefits preferences.
Step 2: Set Goals
Define your objectives for the compensation analysis. Are you benchmarking against industry leaders or addressing pay equity within your team? Ensure that everyone involved in the analysis aligns with these goals, as different objectives require different strategies.
Step 3: Implement and Track
Compare gathered salary data to current employee compensation. Make necessary adjustments to ensure competitiveness and fairness. Regularly update the analysis to reflect changes in the labor market and evolving company goals.
Non-taxable and Taxable Compensation
Understanding the difference between non-taxable and taxable compensation is crucial for both employers and employees to ensure compliance with tax laws and optimize financial planning.
Non-Taxable Compensation
Non-taxable compensation includes benefits and earnings that are not subject to income tax. These items do not need to be reported as income on tax returns, provided they meet specific IRS guidelines.
Examples of non-taxable compensation include:
- Health, life, and disability insurance
- Retirement plan contributions
- Tuition assistance
- Commuter benefits
- Dependent care assistance
- Adoption assistance (up to IRS limits)
- Employee discounts
- Meals and lodging
- Moving Expense Reimbursements (currently limited under US tax law).
- Flexible Spending Accounts (FSAs)
Taxable Compensation
Taxable compensation includes any earnings that are subject to income tax. Employees must report these earnings on their tax returns, and employers must withhold the appropriate taxes from these payments.
Examples of taxable compensation include:
- Salaries and wages
- Bonuses
- Commissions
- Overtime pay
- Tips
- Vacation pay
- Sick pay
- Stock options
- Severance pay
- Awards and prizes
- Expense reimbursements
Try leveraging expense management tools to help: Expense management software explained.
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FAQs
What’s the difference between salary and total compensation?
The terms “salary” and “total compensation” refer to different aspects of employee remuneration.
Salary is the fixed amount of money that an employee receives on a regular basis, typically expressed as an annual amount but paid out in weekly, bi-weekly, or monthly installments.
It does not include overtime pay, bonuses, or any other potential additional compensation.
Salary is the basic component of an employee’s earnings and is agreed upon during the hiring process.
Total compensation includes the salary plus all other forms of financial benefits that an employee receives from their employer. This broader term encompasses a variety of additional benefits and incentives.
What’s the difference between total compensation and total rewards?
While total compensation is concerned with financial rewards, total rewards take a more holistic view, incorporating every aspect of what an employer offers to attract and retain employees.
This includes everything from pay and benefits to the overall working culture and career progression and learning and development opportunities.
What percentage of total compensation should be salary?
The percentage of total compensation that should be salary can vary based on the industry, job role, and company policies. However, a common benchmark is that base salary typically comprises about 70-80% of total compensation. The remaining 20-30% usually consists of benefits, bonuses, and other non-cash compensation. This ratio ensures that employees receive a substantial portion of their compensation as a guaranteed income while also benefiting from a comprehensive benefits package.
What’s typically included in a total compensation package?
A total compensation package generally includes:
- Base Salary
- Bonuses and Incentives
- Health Insurance
- Retirement Contributions
- Paid Time Off
- Life and Disability Insurance
- Education Assistance
- Commuter benefits
- Stock options
- Flexible Spending Accounts (FSAs)
