Employee compensation is the combination of wages and benefits you provide each employee in exchange for their work. While a compensation package can include things like salary, benefits, commissions and stock options, the right blend of compensation for each employee will depend on several factors. Offering fair and competitive employee compensation is crucial for attracting and retaining top talent, so it is important that you understand the various types of compensation packages available.
5 types of compensation packages to consider
There are five primary compensation packages you can offer employees. You don’t necessarily need to limit employee compensation to one or another of these options; you can choose a combination of them. According to Amy Roy, vice president of talent at the employer of record company Atlas, standard employee compensation packages “are usually made up of cash, equity and non-cash components (e.g., insurance, other types of benefits and perks).”
The right compensation type for each employee depends on factors such as their job description and seniority level.
Here are five types of compensation packages to consider:
1. Base pay package
A base pay package is a standard amount of money an employee receives in exchange for working a set number of hours (typically 40 hours per week). Employees who receive a base pay package are paid an hourly wage or a salary. Most employees work for base pay, but their role determines whether they are salaried or hourly.
“An employee working on a project or with defined tasks will usually prefer a base salary package,” Jeremy Jarry, founder and CEO of stock-option consultancy B3GIN, told us. “Hourly-type packages are often for entry-level positions or low-paying jobs.”
2. Commission package
A commission package is compensation given based on employee performance. Some commission packages include a low base-pay salary and high commissions, whereas others offer only commissions. A commission package incentivizes employees to perform well, since their paycheck is tied to their performance.
“Often, these compensation packages are given to individuals working in sales,” Jarry said. “They will receive a percentage on the turnover they generate or a flat dollar amount if they hit a sales target.”
3. Equity package
Employers can create equity compensation packages by offering employees a base salary plus stock options.
“Stock options are a financial instrument that gives its beneficiary the possibility to purchase a certain number of shares in a company at a fixed price,” Jarry said, adding that types of stock options include incentive stock options, nonqualified stock options, and restricted stock units.
Equity packages are typically offered to employees in leadership positions or for hard-to-recruit profiles. However, Jarry said giving every employee access to stock options can create a culture of sharing and inclusion, as well as align the interests of investors, founders and employees.
“Equity will vary by organization and may be used as a larger component if cash is tight (e.g., at a startup) and as a method to incentivize employee retention,” Roy said.
As reported by Carta, employers typically reserve between 13 percent and 20 percent of equity for their employee option pool.
4. Benefits package
An employee benefits package includes additional perks that workers receive on top of their base wages. You are legally required to offer a few employee benefits, including family and medical leave, health insurance (for companies with 50 or more full-time employees), FICA (Social Security, Medicare and federal insurance contributions), unemployment insurance and workers’ compensation.
Other standard employee benefits include dental and vision insurance, tax-free accounts for medical expenses (such as health savings accounts, flexible spending accounts or health reimbursement arrangements), life and disability insurance, paid time off (e.g. holidays, sick leave, vacation time, parental leave), retirement plans, commuter benefits, gym reimbursement, tuition assistance, and employee assistance programs (EAPs).
Although these benefits may sound expensive, these options can work for a range of employer budgets.
“There are lower-cost supplemental benefits (e.g., online fitness programs, financial wellness, telemedicine, flexible work schedules) that could be included in your compensation package that could help create a more attractive package,” Roy said.
Bonuses are often tied to the performance of the employee, their team or the company as a whole. Although you can offer bonuses to employees of any level, many employers give bonuses to employees in leadership roles.
“For VP through the C suite, there’s generally a higher percentage of a bonus that’s available, and it often ties to the team’s performance as well as your own and the company’s financials,” said Tara Furiani, CEO of people consultancy firm Not the HR Lady.
When creating a bonus plan for your business, consider the company’s financials, projections and goals.
The importance of employee compensation
Although it is important to stay within your budget, offering competitive and desirable employee compensation often pays off because you can use it to recruit and attract the best employees, encourage company loyalty, and reduce employee turnover.
It’s also a good idea to review employees’ compensation throughout their tenure with the company. Rewarding your employees’ hard work with competitive raises and bonuses can boost employee satisfaction, encourage high performance, and improve your overall company reputation. It can also help you retain your best workers; you don’t want good employees to leave your company because they feel undervalued.
“A good compensation package is a part of why an employee will decide to join or stay in a business,” Jarry said. “Thus, combining a good corporate culture, strategic vision and right compensation package will be fundamental.”
According to the Bureau of Labor Statistics, wages and salaries comprise 69 percent of total employee compensation, while benefits account for 31 percent.
How to determine compensation
There is a good chance you will offer a variety of compensation packages throughout your organization to accommodate different job types, seniority levels and expertise. If you are wondering how to determine the proper compensation for each employee, follow these four steps:
1. Research current market rates.
The first step is to do your research. Search online job boards, view open jobs on competitors’ websites, and read market rate studies to identify what others in your industry are paying for similar positions. You can also survey current employees with similar roles within your organization to see their expectations.
When you’re analyzing market rates and determining your compensation management strategy, Roy said to ask yourself the following questions:
- What are the market and competitors doing?
- How do you want to compete against the market rate?
- What is expected in your industry (e.g., tech employees may expect different benefits than hospitality employees)?
- What is your strategy to attract new talent or retain employees, and are you having difficulty doing so?
- What is your budget?
- What do your employees value most?
2. Establish standard company benefits.
Although some businesses overlook this step, it’s important to establish standard company benefits. Create a list of the basic offerings that every employee will receive, like overtime pay and health insurance. Furiani said you can also create a list of standard offerings for each position type (e.g., entry-level, professional individual contributor, manager, senior manager, director, vice president, C-level executive).
This list of benefits can help you maintain a fair and equal workplace. Be intentional about what type of compensation you are offering, and reward similar levels of work the same, regardless of whether employees ask for it.
For example, “while it may seem counterintuitive, you don’t want your chief marketing officer (a woman) whom you just hired to not have equity because she didn’t ask for it, when all of her other C-suite counterparts (men) do,” Furiani said. “This is how you ‘accidentally’ create a biased workplace and pay inequity.”
3. Create a pay structure.
Establish a pay structure with different grades containing the minimum wage requirements and a grade range or step increments.
“For specific positions (such as sales), each grade will also have a defined commission program,” Jarry said. “At a more advanced level, the pay structure should be catering to each business department and seniority level.”
Make sure to consider your current compensation budget, your financial forecasts, and potential promotions.
4. Modify compensation as needed.
Your compensation packages need to grow as your business does. If your business becomes highly profitable, consider adjusting your compensation packages to reward your team with higher wages and increased benefits.
You must also continually update your pay structures to account for inflation and evolving industry expectations. Furiani recommended conducting a pay equity study to ensure you offer appropriate compensation for existing and new roles.
“This should be done annually, by an unbiased professional organization, the results of which will help determine pay ranges, to ensure you’re competitive in the market while being fair and equitable at your company,” Furiani said.
Source interviews were conducted for a previous version of this article.