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Compensation

Today, the world of compensation is more diverse than ever before. Companies no longer create compensation plans that scream dollar signs and long work days. They’re creating plans that send a new message—one that says, “We care about your work-life balance, personal goals and health.”

So what can you really include in a compensation plan? Today, we’re answering that question. Spoiler alert: it’s not just money, insurance and retirement.

What Is Compensation?

We often talk about compensation in terms of salary and bonuses, but it is much broader than that.

Compensation is everything of value that the employee receives from their employer in exchange for their work. Yes, this does include salary and bonuses, but also health insurance, gym memberships, paid vacation, training stipends, and other benefits.

Compensation vs Salary

Compensation is an umbrella term to describe everything the employee receives for working with the company. Salary, on the other hand, is just one form of compensation.

Why It’s Important to Get Compensation Right

Compensation is extremely important for any organization. Here’s why:

  • The right compensation plan helps you compete for top talent even when you can’t offer the highest salary.
  • Compensation plans that value employees improve employee morale and performance and reduce turnover.
  • Your compensation philosophy says a lot about your company brand and culture.
  • Creative and efficient compensation strategies help you stay on budget.

Types of Compensation

There are three main types of compensation: monetary, non-monetary, and equity.

Monetary Compensation

Monetary compensation includes base pay and any additional variable pay. Monetary compensation is paid in cash or a cash equivalent (like Bitcoin). The total monetary compensation paid to an employee is called gross pay. Once you make all deductions, the remaining monetary compensation is net pay.

Salary

Salary is the guaranteed base pay earned by an employee. Unlike hourly wages, an employee will be paid the same salary amount every payroll period throughout the year regardless of how many hours they work.

Incentive Pay

Incentive pay is additional pay awarded to employees when they meet certain goals or exceed performance expectations. Incentive pay is common in sales compensation plans, where employees earn commissions for achieving sales goals.

Hourly Wage

An employee’s hourly wage is how much they earn per hour of work. Employers cannot pay employees less than minimum wage, which varies depending on federal, state and local law. To accurately calculate hourly wages, you need a time-tracking system.

Overtime Pay

Overtime pay is additional pay earned by employees who work more than 40 hours a week, or in some states, more than eight hours in a day. State laws have varying requirements for overtime pay, but employers can offer more than what is legally required.

Tips

Tips are payments made to employees directly by customers or clients. In most cases, customers are not required to pay tips, but the practice is common in many industries, particularly in food service.

Reimbursements (if not part of an accountable plan)

Reimbursements are considered monetary compensation when they’re not part of an accountable plan. Accountable plans are plans used by the company to make sure that all costs are accounted for using receipts or per diem calculations.

Non-Monetary Compensation

It’s important to remember that although all compensation has some monetary value—and cost to the company—employees may not think of it in terms of money. Non-monetary forms of compensation provide employees with increased work-life balance, convenience, professional development, and health and retirement benefits.

Health and Retirement

  • Health, dental, and vision insurance
  • Employee Assistance Program (EAP)
  • Life insurance
  • Retirement plans
  • Health Savings Accounts (HSA)
  • Flex Spending Accounts (FSA)
  • Other health- and exercise-related benefits.

Work-Life Balance

  • Paid leave
  • Flex-time scheduling
  • Remote work
  • Child care assistance
  • Sabbaticals
  • Paid vacations

Professional Development

  • Tuition reimbursement
  • Student loan repayment assistance
  • Training stipends
  • Professional-development-related subscriptions

Perks

  • Meals
  • Company car
  • Other on-site amenities

Equity Compensation

Equity compensation is a unique form of remuneration often included in executive compensation plans. It may include:

  • Employee stock purchase plans (ESPPs)
  • Restricted shares
  • Stock options

How to Know How Much and in What Ways Your Employees Should Be Compensated

Companies in many industries have come a long way when it comes to compensating employees, but strategies also vary greatly. With so much variety, you might be wondering, How do I create the right compensation program for us? Here are five steps to help you get started.

Step 1: Analyze Your Budget

On average, a company’s compensation budget makes up approximately one-third of the company’s overhead costs. According to the Bureau of Labor Statistics, about 70% of that overhead is employee salaries, while 30% goes benefits.

To know how much you can pay your employees, you’ll have to understand how much money you have to allocate towards employee compensation and benefits.

Step 2: Obtain Internal and External (Market) Salary Data

Once you know your budget, you can do market research to determine what the average compensation is in your industry and your region. You can do this by purchasing salary surveys or finding free market salary data online.

It will also be helpful to collect information about all current internal compensation to help you track where you need to make pay adjustments. This information can help you complete a job evaluation, which is the formal process of evaluating a position’s duties, responsibilities, and value to the company to determine compensation.

Step 3: Consider Whether to Lag, Meet or Lead the Market in Compensation

With this data, you can now decide which of the following three market compensation strategies aligns best with your compensation strategy and your business strategy:

  • Lag-the-market compensation strategy
  • Lead-the-market compensation strategy
  • Meet-the-market compensation strategy

Which strategy or strategies you choose to implement will depend on your budget, the status of the job market, and which non-monetary benefits you’re able to provide.

Step 4: Align Your Compensation Philosophy with Your Company Mission, Goals and Business Strategy

A compensation philosophy answers the question, “Why have we chosen this compensation strategy?”

Companies build their compensation philosophy to meet certain company goals, continue the company’s mission, and contribute to the company’s success by executing its business strategy.

For example, your compensation philosophy may focus on retaining the best engineers. Or, it may prioritize building community within your workforce. What kind of philosophy your company has will also determine which types of non-monetary compensation you incorporate. For example, if your company sells exercise clothes, you probably want to prioritize non-monetary benefits that align with your health-centered brand.

Regardless of your compensation philosophy, you’ll want to discuss your options with other company leaders to be in alignment with both short- and long-term goals. Continue to check in with leadership as your compensation program develops.

Step 5: Know How to Communicate Compensation

Most employees, particularly those new to the workforce, are focused on monetary compensation. If you’ve created a compensation program with great non-monetary elements, advertise this to potential employees in a way that makes sense to them. For example, you can advertise the monetary value of certain benefits, like gym memberships or child care assistance.

Further, if you offer benefits that send a particular message to your employees, such as “our company is parent-friendly,” highlight this when advertising your jobs.

Legal Considerations

Federal and State Labor Laws

In the United States, there are many laws that impact compensation planning. So, before implementing any changes to compensation, review any applicable state or federal labor laws. Federal labor laws include:

  • Family Medical Leave Act (FMLA)
  • Equal Pay Act (EPA)
  • Title VII of the Civil Rights Act of 1964
  • Americans with Disabilities Act (ADA)
  • Age Discrimination in Employment Act (ADEA)
  • Fair Labor Standards Act (FLSA)
  • NLRA (National Labor Relations Act)

Employee Contracts and Collective Bargaining Agreements

Your employees may also have employment contracts in place, or they may belong to a union that has negotiated a collective bargaining agreement. These two types of contracts can limit your ability to change your compensation program.

Questions You’ve Asked Us About Compensation

What is total compensation?
Total compensation represents everything of monetary value given by an employer to an employee in exchange for working for the company. This includes both monetary and non-monetary compensation.
How do I know if we’re compensating our employees enough?
Signs that you’re compensating your employees enough include high retention rates, employee performance, employee morale and engagement, and successful recruitments with strong applicant pools.
Natasha Wiebusch

Natasha Wiebusch

Natasha is a writer and former labor and employment attorney turned HR professional. Her experience as a litigator and HR trainer inspired her to begin writing about anti-discrimination laws in the workplace. As a writer at Eddy HR, she hopes to provide helpful information to both employees and HR professionals who need help navigating the vast world of human resources. When she’s not writing, you might find her cheering on the Green Bay Packers or hiking in the Northwoods of Wisconsin.

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