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Understanding and Utilizing Total Compensation Packages
Total compensation packages are important for employee recruitment and retention. Learn what total compensation is.
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Total compensation is an incredibly effective tool to utilize when attracting top talent and informing team members about the value of their benefits from your company. Understanding what total compensation is and how it works is essential to winning and retaining a great team. Additionally, it helps companies more thoroughly assess the total cost of a hire so they can budget accordingly. Read ahead to learn exactly what’s included and how to craft a robust total compensation package that works for your organization.
What is total compensation?
Total compensation is the collective compensation you provide to your employees in return for their services. It includes the employee’s base salary (how much you pay the employee as either the hourly rate or their annual salary), the total dollar amount of the fringe benefits you offer (health insurance, paid time off, retirement plan, profit sharing, gym membership, etc.), employee bonuses and/or commissions.
Employers can show employees (or potential employees) the total value of the compensation and benefits they receive by supplying them with a total compensation document.
What are the differences between salary and total compensation?
Salary is the fixed sum employees are paid each pay period. Total compensation encompasses the base salary the employee receives plus other money, such as paid time off and health insurance. In other words, salary is one element of an employee’s total compensation. One reason a company may review one’s total compensation, as opposed to salary alone, is that any useful budget needs to reflect the cumulative costs of each employee.
“Salary is what you are guaranteed every month from your employer for doing your work,” Bianca Burke, senior director of expert operations at Oyster, explained. “Total compensation includes salary, but can also include other financial components such as performance bonuses, equity/stock options, commission and other bonuses or financial incentives. Usually the parts of total compensation that are not salary have a condition attached to them. For example, the amount of bonus or commission you receive may be linked to performance results. For a retention bonus or equity/stock options, it might require you stay with the company a certain amount of time.”
What is total compensation vs. total rewards?
Total rewards address the policies, programs and practices that provide employees with a valued and desired reward infrastructure. In addition to compensation, your workplace culture, quality of life and work-life flexibility are all part of a total rewards program that’s essential to attracting and retaining top talent.
“When it comes to total rewards, this is a combination of [total compensation] plus additional non-monetary benefits such as access to therapy, additional leave and training courses,” Burke explained. “Total rewards usually incur additional monetary costs for a company, but the employee does not receive a direct monetary reward.”
When it comes down to it, companies choose whether they want to reference “total compensation” or “total rewards” within their vocabulary. Although they do not have the same meaning, the overlap and similarities between the two commonly result in companies using one term or the other, but rarely both.
What is included in total compensation?
Total compensation may differ from company to company, but there are a few general principles to consider when crafting packages for your company. “There is no one size fits all approach to determining total compensation for a company,” Burke noted. “When designing a total compensation package though, here are some factors to consider: What have candidates told you about their expectations before? What are your competitors doing in relation to total compensation? What is your company’s philosophy when it comes to how much compensation should be variable based on results/performance vs. fixed?”
The most common benefits employers include within their total compensation package typically include, but are not limited to:
- Annual salary or hourly rate of pay
- Medical and dental benefits coverage (including employer-paid portions)
- Healthcare flexible spending accounts or health savings accounts
- Paid leave (vacation/sick/PTO, holiday, personal, bereavement, military pay, jury duty, etc.)
- Short-term and/or long-term disability insurance
- Life insurance
- An employee assistance program
- Top retirement plans
- Educational assistance programs
- Relocation expenses
- Learning and development offerings
- Career advancement opportunities
Why is total compensation important?
Total compensation, and having an effective compensation management program, is important to winning and retaining talent within your industry. Employees are looking for, and expect to find, compensation packages that are comprehensive and meaningful to them.
If your company doesn’t offer a good benefits package, candidates may spurn your job offer for one from a company that is extending the benefits they want. And for your existing employees, they may leave for another job offering better benefits than what you offer. “Ultimately, to attract the best talent, you need to have an attractive offering as you will often be competing with other companies for this talent,” Burke said.
Total compensation is discussed earlier in the recruiting process than it used to be. Applicants prefer to hear about compensation and benefits during the interview process now. One of the many reasons for this is the uniqueness of applicants’ needs. For example, student loan assistance, work flexibility and career advancement are sought-after benefits, and if you’re willing to offer these perks to new hires, discussing these perks, along with the job duties, can ensure that you capture — and retain — candidates’ interest and enthusiasm throughout the new employee recruitment and onboarding process.
“If you just talk to candidates and employees about salary, you are underplaying the financial offering you are making, often very substantially,” Burke said. “You are making what you are offering appear less attractive than it actually is if you also offer components such as bonuses and equity. By ensuring you make employees aware of the full financial potential of working with you, rather than the guaranteed monthly salary only, you are more likely to close candidates and retain your existing talent.”
How do you determine total compensation?
There are many formulas for determining total compensation. The truth is, many strategies can work, as long as the basic aspects are included. One way that organizations achieve this objective is with total compensation calculators.
In addition to the use of calculators, assess the value of each benefit you provide to your workers. Most of the common benefits have monetized values listed next to them. What portion do you pay for medical and/or dental insurance? How many paid time-off (PTO) days do employees get? How much is the company match for your retirement account?
How can payroll and HR software help you manage total compensation?
Since total compensation comprises many aspects, it can be tough to manage manually. Instead, the best online payroll services and top-rated HR software can help manage and administer total compensation. The right systems streamline processes, ensure accuracy and provide valuable insights on compensation-related data.
Payroll processing automation
Manually calculating payroll can take hours or even days. Payroll and HR software can automate this process for you, saving you a significant amount of time and effort. Automating the calculation of salaries, taxes and deductions can also help reduce the risk of errors and ensure accurate payouts. If you are looking for software with comprehensive payroll features, check out our review of Gusto.
Bonus/commission calculation and distribution
If you have a bonus or commission program, you already know that calculating and distributing funds can be a complex and time-consuming process. Many HR software providers, like BambooHR (read our BambooHR review), offer performance management features to help track employee performance. That data can then be tied to performance-based bonuses. Payroll software can automate these bonuses and commissions for you, ensuring your employees are compensated fairly and accurately.
Employee benefits administration
HR software helps administer and track all employees’ benefits, including health insurance, retirement savings plans and paid time off. This ensures your employees are receiving the benefits they are entitled to. Most systems also have a guided enrollment feature to help employees select benefits. If benefits administration is a top priority for you, read our review of ADP. The HR solution has comprehensive offerings.
Compensation benchmarking and reporting
Payroll and HR software can be used to generate a variety of compensation reports, such as salary reports, bonus reports and benefits reports. These reports can help you to track your compensation trends, benchmark compensation against industry standards, identify potential areas of overpaying or underpaying, and make informed decisions about your compensation strategy. In our review of Paycor, you can learn more about how the HR software can help with reporting and analytics.
How do candidates assess total compensation?
Candidates are savvy when assessing job offers. Some add the cumulative value of all the benefits presented within a total compensation plan and divide that by the number of hours typically worked within a year to get the total compensation hourly rate. That is how some candidates compare apples to apples (if there are multiple job offers).
Here is an example:
Benefit | Job offer No. 1 | Job offer No. 2 |
|---|---|---|
Salary | $75,000 | $75,000 |
Paid time off | $4,000 | $5,000 |
Retirement Matching | 50% matching first 5% of contribution = $1,875 | No match |
Gym membership | $50 per month ($600 annually) | N/A |
Commute cost savings | N/A | $100 per month ($1,200 annually) |
Total | $81,475 | $81,200 |
Hourly Rate Equivalent | $39.17 (based on 2,080 hours annually) | $39.04 (based on 2,080 hours annually) |
Some fringe benefits are difficult to place a numeric value on, such as the ability to work from home or a highly flexible schedule. Putting a value on those benefits is difficult. For some, it is worth more than health insurance, while others may prefer to work a predictable schedule that never fluctuates.
Adding a summary or narrative section to your total compensation (or total rewards) statement can help paint this picture for candidates and employees alike. Customizing total compensation documents when soliciting top talent or hard-to-find subject matter experts (SMEs) is also recommended. If you can tailor your narrative to attract a specific candidate, it may prove to be more persuasive.
How do you market total compensation to employees?
Total compensation plans are an opportunity to promote your company to candidates and current employees through tangible data that shows the value they get when working for your organization.
For your existing employees, creating and implementing a total compensation (even better, your total rewards) program helps keep team members engaged, lowers turnover and increases a company’s return on investment.
Total compensation statements are the best tool for achieving this objective. A total compensation statement should be one or two pages long, and it should show what benefits are being offered to candidates or are enjoyed by employees.
Although the appearance can vary, the content is essentially the same. The goal is to list the totality of your compensation program. If you can itemize the cost of a benefit or perk, include it in your statement.
Natalie Hamingson and Skye Schooley contributed to the reporting and writing in this article.
