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Updated Nov 06, 2023

Understanding and Utilizing Total Compensation Packages

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Patrick Proctor, Senior Writer & Expert on Business Operations

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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 top talent. Additionally, it helps companies more thoroughly assess the total cost of a hire so they can budget accordingly.

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.), 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.

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 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?

The most common benefits employers include within their total compensation package, and statement, 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
Did You Know?Did you know

According to the U.S. Bureau of Labor Statistics, benefits (or non-salary-related compensation), on average, comprise roughly 30 percent of an employee’s total compensation.

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.

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 recruiting and onboarding process.

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, robust payroll solutions 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. 1

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.

Skye Schooley contributed to this article.

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Patrick Proctor, Senior Writer & Expert on Business Operations
Patrick Proctor is a human resources and people operations expert with SHRM-SCP certification and an MBA in business management. He has spent nearly 20 years leading HR for organizations of varying sizes, some international. He advises on regulatory compliance, workforce management, aligning strategic business objectives with human capital initiatives and more. Proctor is passionate about helping businesses establish employee-centric workplace cultures that increase team member satisfaction while also maintaining cost efficiency and improving ROI. He also enjoys integrating distributed teams and developing the next generation of leadership. He has written about workplace issues for publications like Entrepreneur and sits on the boards of advisors for people management company ChangeEngine and UC Santa Barbara's Professional and Continuing Education program.
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