There was a time when attracting candidates in a competitive job market was driven by numbers — the organization that offered the highest base salary won. Today, that scenario has fundamentally changed. While base salary is still important, employees, at all levels, are taking a more holistic approach to evaluating job offers. Instead of looking at salary alone, job candidates are scrutinizing their prospective employers’ total compensation packages, often choosing the company offering benefits most closely aligned with their individual needs.
What is total compensation?
Whereas base salary is fixed rate paid to exempt employees for the work they perform, total compensation is that base salary plus the monetized value of the benefits the employee receives in addition to his or her salary. These benefits, which vary from company to company, can include a variety of items, like bonuses, commissions, health insurance, paid time off or tuition assistance, as well as profit sharing or 401K matching. As the talent pool tightens, organizations are getting even more creative with the benefits they offer, adding everything from gym memberships, childcare assistance, and ride-sharing vouchers for commutes into the office to flexible scheduling, free lunches, and discounts on travel, professional services and sporting events.
The challenge is, there is no one gold standard. The “right” total comp package is the one that is tailored to what the target employee group values, which could differ from industry to industry, location to location, and person to person.
But one thing is certain, the benefits an organization offers today can drive retention, and plays a critical role in the job seeker’s decision. Getting it right could mean getting and keeping the right employees in a competitive market.
How to calculate total compensation
According to a recent U.S. Bureau of Labor Statistics report, on average, the benefits organizations now provide account for around 30 percent of most salaried workers’ total compensation.
To calculate total compensation, add the gross base salary with bonuses, commissions and the monetary value of each type of indirect compensation, or fringe benefit, offered. This calculation will change for most employees from year to year, as the value of many benefits, like vacation time, PTO and matching 401K contributions will vary, based on the employee’s current salary.
A variety of software is available to both employers and employees to easily calculate and track total compensation. Many of these work much like retirement calculators, involving entering specific salary and benefits information and percentages, to arrive at the total value.
The value of total compensation statements
Once these calculations are complete, it’s important to share those total compensation values with individual employees in an easy-to-read, simple fashion, so they know what they’re getting. These documents, called Total Compensation Statements or Total Rewards Statements, detail the specific categories and monetize the various components that make up each package. These are like bank statements, showing an itemized list of both direct and indirect compensation and the actual value of each—and adding these up to reach an overall total.
Categories could include:
- Annual Salary
- Bonus
- Commissions
- Insurance Premiums
- Health
- Disability
- Dental
- Vision
- Life
- Paid Time Off
- Vacation Days
- PTO
- Holidays
- Maternity/Paternity Leave
- Retirement
- 401K Matching
- Paid Memberships
Total Compensation:
These statements are excellent retention tools, as they showcase the investment the company is making in the employee, in a very tangible way. If another company tries to recruit that employee with, for example, a salary increase of $10,000, but offers fewer benefits, your employee has a way to monetize the additional benefits your company offers. If that salary increase means losing $20,000 worth of indirect compensation, that employee may be more likely to stay.
While some organizations mail these statements to the employees’ home annually, others have the employee’s direct manager present and go over the total compensation statement with the employee as part of the annual performance review.
Many companies also use total compensation statements as part of their recruiting efforts. Instead of making a more traditional offer with base salary, bonus and commission detailed, they present the candidate with the total compensation statement to provide a more holistic view of his or her potential earnings and benefits.
Best practices for maximizing the benefits of your total comp program
A strong total compensation strategy can be a competitive hiring advantage as well as an effective retention tool. These best practices will help you ensure you have a relevant package that resonates with employees and candidates alike:
Be flexible.
Your employees are in different life stages, with different needs and goals. While parents with younger children may embrace childcare, paternity leave and flexible work schedules, those with older children or no children are likely more interested in travel discounts, gym memberships or reimbursem*nt for pursuing their MBAs. Use employee surveys to understand what’s important to different employee segments, and try to offer a variety of benefits to appeal to a variety of individuals.
Communicate, communicate, communicate.
Don’t keep the details of your program to yourself. In addition to providing annual total compensation statements to your employees, promote your program through communications, email blasts and on your company intranet year-round. If you’ve added a benefit, based on an employee survey, promote it. If employees took advantage of your tuition reimbursem*nt program and earned a long-desired degree, share their story, if they’re willing.
Regularly review and reevaluate what you have.
Business changes, people change, needs change, and so should the benefits you offer your employees. Evaluate the benefits and perks you offer at least once a year, and benchmark your program against what’s happening in the market. Study the trends, survey your employees, and refresh the benefits you offer as needed. New benefits keep your employees engaged, and let them know you’re looking out for their best interests. That improves morale, retention and overall satisfaction.
In short, everybody wins.
