Total Compensation: Complete Guide 2024
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.
- 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.
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.
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 and add the employer’s contribution 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.
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 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.
Join The People Managing People Community
For further support on managing compensation in your organization, join our supportive community of HR and business leaders sharing knowledge and best practices to help you grow in your career and make greater impact in your organization.
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.