While job hunting, it isn’t uncommon to find two companies offering the same compensation package. You apply, and you land both offers! Which one should you go for? The company with the better total compensation package should be your tiebreaker.

But what does total compensation mean? This article will take you through its definition, components and examples and guide you through pay package comparisons.

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Article Roadmap

• What Is Total Compensation?
• Components
• Calculating Total Compensation
• Examples of Total Compensation Packages
• Questions To ask
• Next Steps

What Is Total Compensation?

Total compensation is the complete blend of salary and benefits employees earn in return for their services. It goes beyond the base salary and includes bonuses, commissions, benefits and perks.

Companies include incentives like performance-based bonuses, profit-sharing, stock options and other financial rewards in this package. Non-monetary benefits like health and wellness programs, flexible work arrangements, paid time off, and professional development opportunities are also part of the total compensation package.

Total compensation packages are effective retention tools in HR talent management, and it’s vital to understand the full value of the benefits package when comparing job offers.

Key Components

What should you throw into the mix as an HR professional? Remember, your total compensation package reflects the worth you place on the job. These packages differ based on employer and role.

Here’s what to include in the compensation statement.

Base Salary

The fixed amount of money an employee receives as their regular pay is the base salary. It’s determined based on responsibilities, experience and market rates. An employee’s base salary doesn’t include benefits, bonuses or commissions.

Bonuses and Commissions

Bonuses and commissions are incentive programs that give workers extra pay for hitting specific targets or goals. Typically, bonuses are one-time payouts. Although they aren’t mandatory, companies frequently award employees bonuses to show their appreciation.

Stock Options (ESOPs)

Employee stock ownership plans are another component of total compensation. An ESOP is a type of equity remuneration businesses offer.

Owners of these ESOPs can buy or sell shares at a predetermined price and date by using call options.

These plans are issued assuming the stock will increase because they are calls. When ESOPs expire, the company must give its employees additional shares.

Being transparent about how stock options fit into total compensation packages is crucial. In fact, a 2022 Carta Survey found that only 37% of firms provided adequate equity education.

Consequently, 46.1% of ESOPs remained unexercised after they expired in 2022.

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Savings Plans

Employers often carve out a part of employees’ salaries to invest in deferred compensation plans that accrue tax-free interest annually. These programs serve as retirement and long-term financial advantages.

While some firms create an account and only allow their staff to contribute, others match employee payments or make their own contributions.

Through tax exemptions on retirement accounts, these plans let employees save money and increase their retirement funds through investing passively.

If a business wants to use company equity to pay employees, it can incorporate stock options and profit-sharing into its savings plans.

Insurance

Health insurance is one of the top perks employees look for. Employer-provided health insurance is a splendid addition to total compensation packages due to mounting healthcare costs.

Employers can vest their financial resources to fully support their employees’ health insurance or provide a discount on their selected plan. Insurance software matches your resources to the contextual requirements of your staff to create sound plans.

Typical components of employee insurance compensation include health savings accounts, standard insurance, dental and vision coverage.

Scheduling

Total compensation isn’t all about work — it also includes scheduled time off. This 2022 Compensation Trends report revealed that 38% of employees would be willing to take a salary cut for paid time off benefits.

Employers compensate workers for time off to support their work-life balance and foster more productivity at work. While some firms divide the time-offs between vacation, personal and sick time, some offer employees a bulk amount of paid time off that they can use for anything.

The compensation package can include additional time off for jury duty, bereavement and life events, whether paid or unpaid.

Tips

Service workers—bartenders, baristas, servers and so on—make a significant portion of their income from tips (on top of their base salary). Workers receive tips in cash, check or credit card.

Tips are taxable and must be disclosed when submitting your tax return to the IRS.

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Calculating Total Compensation

Compensation software solutions are a popular and effective method for automating total compensation calculations. They consider various elements to create a comprehensive picture of each employee’s remuneration package. These considerations often include:

• Base income
• Bonuses or incentives
• The value of benefits such as health, dental and retirement plans
• Other incentive values, like stock grants or profit-sharing

Alternatively, organizations might use manual computation methods like spreadsheets or Human Resource Information Systems (HRIS). In these cases, human resource specialists enter the necessary data for each employee, clearly outlining the many components of their remuneration package.

This structure covers the employee’s base income, any variable elements such as bonuses, and all kinds of benefits and incentives. HR professionals calculate the total worth of the compensation package by adding these separate components.

Conducting a Total Compensation Analysis

Gathering data, comparing industry norms and identifying areas for improvement are all part of doing a compensation analysis. Compensation planning and analysis tools help firms determine how their compensation packages stack up against competitors and industry benchmarks.

Let’s go step-by-step through an analysis.

Gathering Data

The first step is collecting salary and compensation information. Professional experience, education level and geographical location are all significant aspects to look for. It’s also essential to consider factors like ethnicity or gender to eliminate bias.

Data should be appropriately sourced, too. Government organizations like the U.S. Bureau of Labor Statistics provides high-quality pay statistics.

Consider organizing an internal employee benefits survey to gauge your team’s preferences and identify areas where you may need to adjust your total compensation packages.

Comparing Industry Standards

After gathering external and internal data, it’s time to compare pay packages to industry standards. This comparison assists organizations in determining how their compensation packages match competitors and whether they provide a worthy value proposition.

Benchmarking against industry standards reveals HR trends, best practices and areas for improvement. It guarantees that companies offer fair wages to recruit and retain outstanding people.

Setting Goals

Companies redesign their pay packages according to seasonality or when hiring needs change. Before setting goals, you must clarify a few areas:

• What are you hoping to achieve with a compensation analysis?
• Do you want to know where you stand among the leaders in your industry?
• Do you wish to address pay equity by enhancing your present employees’ pay packages?

Whatever your objectives are, your analysis should be consistent with your company’s philosophy.

Your objectives will also influence how you’ll shape the compensation analysis. For example, recognizing your company’s best achievers will warrant a different approach than tackling overall pay parity. No single method will work for two or more distinct situations.

Implementing and Monitoring

It’s time to implement the plan and monitor how things change. You accomplish this by contrasting prior salary information with the present employee pay.

Do the comparisons fall within or above the market norm? How far down are they?

If you match the market, you need to readjust your goals. Alternatively, if you lag behind the market, your total compensation package would reflect that.

You can tweak and change things once you answer these questions.

Businesses frequently use pay structures based on compensation ranges as a component of their solution.

Labor market patterns will change over time, so the data you use might not always be applicable. You should execute compensation analyses often to stay current with market changes.

As businesses scale up, goals and philosophies also frequently shift. Therefore, keeping these things in mind as your company expands is crucial.

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Examples of Total Compensation Packages

Consider a software engineer who recently joined a tech company. Their base salary is $100,000 per year, and they receive additional benefits that include health insurance, a 401(k) match and 15 days of paid time off (PTO) each year.

The health insurance premium costs $150 monthly, totaling $1,800 annually. The company also provides a 401(k) match of 5% of the employee’s annual salary, which amounts to $5,000.

Additionally, the 15 days of PTO are valued at $4,500 annually.

To calculate the total annual compensation for this software engineer, we can break it down as follows:

• Base Salary: $100,000
• Health Insurance: $1,800
• 401(k) Match: $5,000
• Paid Time Off (PTO): $4,500

Now, let’s sum up these components to find the total compensation package:

Total Compensation = Base Salary + Health Insurance + 401(k) Match + PTO

Total Compensation = $100,000 + $1,800 + $5,000 + $4,500

Total Compensation = $111,300

So, the total annual compensation for the software engineer in this example is $111,300.

Salary statements often follow a template to ensure parity across industries. Once you deploy the above formula, you’ll learn the holistic worth of your employment at your organization.

Case Studies: Companies with Successful Strategies

We’ve figured out that total compensation is an effective retention tool and how to calculate it. But what does total compensation mean in real life?

Here, we’ve considered a few case studies of companies that deployed compensation strategies to the advantage of them and their employees.

Google

The core aspects of Google’s total compensation are competitive pay, comprehensive career development and a broad range of perks. The company provides high salaries, extensive incentives, and non-traditional perks to entice and keep top talent.

Medical insurance, retirement pensions, free lunches and access to gym equipment are just a few of the perks offered by Google. Google’s compensation effectively attracts highly qualified workers who strengthen the business and its core competencies.

Salesforce

Salesforce is renowned for its dedication to pay equity and taking the initiative to rectify wage inequities inside the organization. The company resolves pay inequalities every year, and as its employee base grew, it witnessed a decrease in the average cost per person for remediation.

Based on input from sales professionals and executives, Salesforce made substantial modifications to its sales compensation schemes in addition to pay equity.

They reduced the amount of incentive plan metrics to concentrate on what matters, using gross margin as a measure to align with revenue growth and maintain an unlimited reward opportunity.

Briggs Equipment

Employee engagement and retention were issues at Briggs Equipment, a material-handling equipment supplier. They discovered misaligned work assignments, pay discrepancies between tenured and new hires, and ambiguous rules for higher wages.

Briggs adopted profit sharing, mapped out a clear career path for technicians and increased internal classroom training to address these problems. Their employee engagement survey saw improved results as a result of these adjustments.

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Questions To Ask

Even with the correct calculation formula and software, you might fall short of the guiding principles that make your total compensation package stand out.

Here’s a list of questions for you and your team to consider as you build out your total compensation package:

• What is the “why” of your business? What are your mission, vision and values?
• What distinguishes you from other employers?
• Which positions require the most robust recruitment right now?
• What keeps your present employees in place? What do they appreciate most about working for your company?
• What is your approach to and philosophy about compensation?
• What KPIs do you hold regarding compensation for performance?
• Are your company’s fundamental values and benefits compatible?

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Next Steps

A well-constructed total compensation plan considers monetary and non-monetary benefits, corresponds with company goals and represents the value of employees. It displays a company’s dedication to its employees’ financial security, well-being and professional development.

Remember that investing in your employees’ satisfaction and retention is an investment in your organization’s long-term success. Our free comparison report helps you identify top solutions that automate pay analyses and identify areas of improvement.

Which compensation solutions help make your pay strategies a breeze? Let us know in the comments!