HR Mavericks

Eddy’s HR Mavericks

Encyclopedia

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.
58% of HR professionals say that compensation and benefits are the most important factors influencing the employee experience
Hiring Statistics

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. 54% of organizations are increasing pay in order to retain talent
54% of organizations are increasing pay in order to retain talent
Compensation and Benefits Statistics

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.
60% of employees rate compensation as very important to job satisfaction, and 36% rate it as important
Compensation and Benefits Statistics

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:
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.
The most important factors people consider when deciding whether to accept a job are compensation (49%), professional development (33%), and work/life balance (29%)
Hiring Statistics
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.

How to Talk to Employees About Compensation

While employers determine how much they're willing to compensate employees in general, each individual employee has the ability to negotiate, asking for the compensation they believe they deserve. There’s a right way to have conversations about compensation, and there’s a wrong way. David Bard shared his list of 10 dos and 10 don’ts to help managers approach compensation discussions in the most effective way possible. If you’re in a management role, use these tips as a guide. If you’re in HR, share with your managers to make sure they walk into every compensation-related conversation prepared and confident.

What to Do When Talking About Compensation

  1. Be honest and transparent, even if the answer is no because of X, Y, and/or Z. Most people don’t appreciate sugarcoating the truth.
  2. Explain the “why” and the process.
  3. Stick to the facts, and separate the person from the equation. This isn’t anything personal, and it is essential that they know this.
  4. Acknowledge their thoughts and feelings, even if you don’t agree. This helps validate that you are listening and that you sympathize with their perspective.
  5. Actively listen to the employee. If you find yourself coming up with a response in your head as they are talking, you are not actively listening. Silence is perfectly fine as you formulate a response. If it is helpful, take notes to refer back to along the way. Also, repeating back what they said to ensure they know you understood can be a very useful tool. Start with “I want to make sure I am tracking correctly with what you said, which was...”
  6. Keep an open mind and try to see if from their perspective.
  7. Document the conversation in some way, whether that is through email, Slack, or a notepad.
  8. Encourage the employee to come prepared if the conversation is preplanned. They should know what their “ask” is and be able to explain why. Also, it is okay to delay the conversation to another time if it is brought up unexpectedly. If a delay has to occur, schedule the meeting right away to avoid confusion and frustration.
  9. Follow through with what you say you will do. If you say you will get back to them in a week, then do that, even if a decision has not been made yet.
  10. Be firm when delivering what can be perceived as a negative decision. There will be times where we can’t grant an employee’s request, either fully or partially, and opening up the conversation to negotiation can lead to delays and extra frustration if the answer is, yet again, a no. With that said, if the employee notes a substantiated error that you made, you need to own that and reevaluate.

What Not to Do When Talking About Compensation

  1. Don’t be afraid to dive in. Talking about compensation will happen regularly, and we want to engage with this head-on!
  2. Don’t make any promises you can’t keep. It is better to make no promises and be transparent about that, versus making promises that you then break that lead to frustration, or even the person leaving the company.
  3. Don’t be afraid of what an employee might say if asked about compensation.
  4. Don’t try to handle the situation on your own. HR and the CEO are involved in all pay discussions to ensure consistency and equity.
  5. Don’t rush. It can be easy to feel the influence of the urgency of the employee, but no decision happens overnight. Be clear with the employee that there is a process that we can’t deviate from and explain why.
  6. Don’t jump to conclusions or assume the worst. Let them do most of the talking, at least initially, to find out what they are looking for.
  7. Don’t attempt to discuss compensation in a group environment. Many view their pay to be a private matter, and it should only be discussed in a 1:1 setting.
  8. Don’t indicate your stance on where you feel their pay should be. Also, avoid indicating whether you agree or not on a compensation request, regardless if it may seem unreasonable. Refer back to the process and who is involved in making the decision.
  9. Don’t make exceptions outside of the process. In the world of compensation, consistency is the top priority to ensure equity. What you do for one, you must be willing to do for all of the rest, if all other variables are the same.
  10. Don’t dwell on these conversations for too long, especially if things don’t go the way they want them to. We cannot grant every request, and that is okay! Equity sometimes will require a firm stance for the greater good, and moving forward is the best path through these conversations.

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.
Topics
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.
View author page
Frequently asked questions
Other Related Terms
Compa-Ratio
Compensable Factors
Compensation Philosophy
Compensation Strategy
Executive Compensation
Health Insurance Benefits
Internal Equity
Job Classification
Lag-the-Market Compensation Strategy
Lead-the-Market Compensation Strategy
Meet-the-Market Compensation Strategy
On-Target Earnings
Pay Differentials
Pay Mix
Pay Transparency
SPIFFs
Salary Range
Salary Survey
Sales Compensation
Skill-Based Pay
Eddy's HR Newsletter
Sign up for our email newsletter for helpful HR advice and ideas.
HR Mavericks
Simple and accurate payroll from Eddy
Pay your U.S.-based employees on time, every time.