Total Compensation | Definition, Elements & Examples
What is meant by total compensation?
Total compensation is the amount an employee receives for pay plus the value of all of the benefits the company provides. Total compensation can vary from employee to employee.
What is a total compensation example?
A company who overs a salary, healthcare, eye, dental, education reimbursement, 401k is an example of a total compensation. Each company can offer a different package for total compensation.
How is total compensation calculated?
Total compensation is calculated by adding salary and all benefits together. Based on the insurance premium and the percentage the employer pays for health insurance, the employee can calculate the insurance benefit. The employee would determine how much is made per day to calculate paid time off.
The first thing a person wants to know when receiving a job offer is the compensation for the position. Compensation, also known as pay, can be calculated as hourly pay or as a salary. Compensation can vary based on experience, type of work being performed, and education level. It is easy to focus on the amount of money the company pays its employees, but it is also important to look at the total compensation package the company provides to employees. Total compensation is the amount of money the company pays the employee, plus the value of the benefits that the company provides to the employee.
Some companies have a simple total compensation plan that is the same for each employee and provides basic benefits. Other companies can have very complex total compensation packages that treat each employee differently. Benefits can include the cost of health insurance, dental insurance, and vision insurance covered by the employer. It can include bonuses, severance pay, paid time off, and many other benefits. When a job offer is made by a company, it is important to understand the total compensation package.
The two most important elements of the total compensation package are the rate of pay given for the job completed and health insurance benefits. These two elements cost the companies the most money and typically are the most important elements to the employee, but they are also mandated by the government.
The most valuable element of the compensation plan is the salary or pay the employer pays the employees. Companies vary in providing simple and complex compensation plans. Examples of organizations that use a simple process for determining pay compensation are the federal government and the public school system. The federal government publishes the pay scale to make it easy for applicants to know the salary for the various jobs.
Health insurance must be provided, by law, when the company employs more than 50 employees and the employee works over 30 hours. It is important to understand that employees may have to pay some money out of their paychecks for health care. This benefit varies from company to company. Some companies will cover 100% of the health insurance and then other companies will require employees to cover a percent of the health care cost. The company does not have to cover a spouse's health care if the spouse is employed and has health insurance at their place of employment. However, this may be a benefit they provide in the compensation package. A health care plan is typically the same for all employees in the company.
Other elements of a compensation plan can include paid time off, eye and dental insurance, retirement, as well as education reimbursement.
- Paid time off can include vacation days, personal days, paid holidays, and sick days. How the company lumps these days varies from company to company. Some companies will give employees at the time of employment, and every year thereafter, 2 or 3 weeks of paid time off. This paid time off can be used however the employee chooses. Other companies issue the days when earned or as the employees work so many hours. In addition to these days, companies give paid holidays which also vary. Some companies may give 6 paid holidays, while some companies may give 12 paid holidays.
- Eye and dental insurance are benefits that some companies will offer. Like health insurance, the amount the employer pays for insurance varies from company to company. The employee pays the remainder of the insurance plan.
- Retirement is an important element of the compensation play. Most private companies offer a 401K investment opportunity. An employee can have money deducted from their paycheck and invested into mutual funds. Depending on the company, they may match a percentage of what the employee contributes to the 401K account. The public servant industry, such as federal and state employees, teachers, and police officers may receive a pension as their retirement plan. A pension system involves both the employee and employer contributions to the pension plan.
- Some companies also offer educational opportunities. The company will pay for the employee to attend more schooling and receive specific degrees. This can then help the employee also promote to a new position within the company.
The total compensation package involves not just pay compensation and health care. There are many other elements that companies can offer. The goal behind a good total compensation package is to attract and retain top employees.
When calculating the total compensation plan, the employee must know the amount of money they must pay for the benefits offered.
Step 1: Know base salary: This can be found by taking the gross pay stated on the pay stub and multiplying it by the number of pay periods a company uses for payroll. A pay period is how frequently an employee receives a paycheck.
Step 2: Determine the value of paid time off: Determine how much is earned per day and take this amount times the number of paid days off the company provides. To calculate earnings per day, take the gross pay stated on the pay stub and divide it by the number of work days in a pay period.
Step 3: Determine insurance costs: This information should be provided by the employer. This can include health care, eye, and dental insurance.
Step 4: Education reimbursement: Companies that value education may provide education reimbursement. This could be a set dollar amount per year that the employee can spend on further education, or it could be the ability to take a set number of credits at specific colleges or universities. This dollar amount is part of the total compensation package.
Step 5: Retirement contributions: The total amount that a company contributes towards a 401K or a pension plan is a perk and needs to be calculated into the total compensation package.
Adding these numbers together, along with any other benefits that the company provides, determines the total compensation package.
Examples of Compensation Packages
Comparing company compensation plans helps a prospective employee negotiate the total compensation plan and make the decision on which job offers the best total compensation. It is not always about the salary that is listed in the job offer.
Example of compensation packages are:
- Company A
- Salary: $65,000
Healthcare: Employer pays 75% of the $10,000 insurance premium and the employee pays 25% of the insurance premium.
Paid-time off: 2 weeks of paid time off to use how the employee chooses to use it
Paid Holidays: 6 paid holidays
- Calculations
- Salary: $65,000
Healthcare: $10,000 x 75% = $7500
Paid-time off: Salary per day divided by # of days worked in a year (5 days x 52 weeks)
x 10 days
($65,000 divided by 260 days) x 10 days = $2500
Paid Holidays: Salary per day x 6
$250 x 6 = $1500
Total Benefit Package = $65,000 + $7500 + $2500 + $1500 = $76,500
- Company B
- Salary: $53,000
Healthcare: Employer pays 100% of the $10,000 insurance premium
Paid-time off: 3 weeks of paid time off to use how the employee chooses to use it
Paid Holidays: 6 paid holidays
- Calculations
- Salary: $53,000
Healthcare: $10,000 because the employer pays all of it
Paid-time off: Salary per day divided by # of days worked in a year (5 days x 52 weeks)
x 15 days off
($53,000 divided by 260 days) x 15 days = $3057.75
Paid Holidays: Salary per day x 6
$203.85 x 6 = $1233.08
Total Benefit Package = $53,000 + $10,000 + $3057.75 + $1233.08 = $67,290.08
Understanding how total compensation is calculated provides the employee with the knowledge and power to compare compensation packages. This power ensures that the employee's skills, experience, and knowledge are being valued. The employee is better informed and can compare the job offerings. Certain websites, like Glassdoor, are great resources for learning about the salaries and benefits that companies in similar job positions provide employees. These websites also allow one to read comments written by previous and current employees about working for the company and ratings on pay, benefits, and more. Generation X is a generation that is focused on finding a job that provides flexibility, job satisfaction, and pay for the education they have earned. Although Generation X is not a generation that job hops like that of the Millennials, Generation X averages about 5 years working for the same company.
When a job offer is presented to an employee, the employee can calculate the total compensation package and then negotiate with the company based on other job offers they receive. Using Glassdoor serves as a resource for gaining some insight into the company.
Everyone works to earn compensation. Total compensation is not just how much salary an employer pays its employees. Instead, total compensation is the money the company pays the employee, plus the value of the benefits that the company provides the employee. Total compensation includes pay compensation and healthcare benefits. It can also includes eye and dental insurance, paid time off, retirement, education reimbursement, and bonuses. Each company is different in the types of benefits they offer its employees. The federal government has a very straightforward compensation package. The federal government's defined pay scale is published and is used for all federal jobs. The federal government also provides the same benefit packages for all employees. There are other companies that allow the employee to negotiate the total compensation package and the package will be different for each employee. For Generation X, the total compensation package has become more of an incentive to work for a company. Generation X is the first generation to begin moving on to work for a new company for better total compensation. Companies must provide a total compensation package that attracts employees to work for the company.
Additional Info
Total Compensation
When most people hear compensation, they think about money, but total compensation is much more than that. Total Compensation is the entirety of benefit offerings that a company provides to a team member in exchange for work. This compensation includes, but is not limited to health care benefits, educational incentives (i.e. tuition reimbursement, etc.), vacation time, paid time off, flexible schedules, location options, retirement, work environment, special programs, and yes . . . salary.
Some companies have very simple and easy to understand compensation plans. This is very typical of smaller organizations. However larger organizations have a much more complex system of compensating team members.
Elements
There are two major foundational elements that companies can use in compensation. These elements are the rate of pay, and health care coverage. Primarily, these two costs make up the majority of employment compensation.
The most basic form of employee compensation is the rate of pay. Most companies like the US Federal Government tend to use pay grades or scale systems. These grades are based on the time in a position, education, specialized skills, location, and other factors. The government does a pretty good job of being transparent about how team members are compensated by using a published and well defined scale. Private companies may not be as clear as to how they decide what to pay. Even though these grades may work well for some team members, they may not work for all. Positons based on performance, (i.e. Sales or C-Suite) could have a very different rubric in determining how those members of the team get paid.
The second major foundation of compensation is healthcare. With the passage of the Affordable Care Act, there have been a great deal of changes with health care costs, needs, and requirements. Depending on the size of the family unit, these costs can vary greatly, and are of significant interest to both team members and companies. In fact some employees will spend just as much time and effort negotiating health care as they do with their salary.
Don't forget, there are other elements that go into the package, like parking spaces/privileges, child care, fitness memberships/facilities and the list goes on and on.
Some employers try to make this process simple for employees by producing an annual benefit summary. This summary is a detailed listing of all of the costs that the company has to pay to train, retain, support, and reward members of the team. Using these types of documents companies get an accurate snapshot on the dollars that they are spending on employees, and employees get a closer look at how much companies invest in them.
Effectively Using Total Compensation
When prospective team members are looking to make a decision to join a company, the total compensation is a huge factor in making the decision. Because this factor is so important, the companies must make sure that the offer is competitive, compelling, and comprehensive so that they can have a better chance in securing top tier talent.
Effective compensation plans should be easy to understand, predictable, and logical. Using this helps employees to be as knowledgeable as possible when making a decision.
Since human resources professionals are often the ones creating the compensation packages they have intimate knowledge of the nuances of the package. It's important that they make sure to explain the packages in a way that any person could easily understand it. Additionally, when team members are able to predict their movement in the company using established parameters, this insight allows them to see how they can progress within the company. This in turn goes a long way to promoting how long the team member will remain in that organization.
Finally, the most basic strategy in creating a fair and equitable compensation package, is to see what other companies are offering in compensation for similar positions. Sites like www.glassdoor.com or www.roberthalf.com offer some excellent insight as to what is standard for the marketplace today. Having a firm understanding of these rules will help HR professionals make competitive offers for talent, and can help talent to make better informed decisions when selecting their next opportunity.
Lesson Summary
Benefits compensation is much different today than it was in the past. Usually employees picked a company and worked there until they retired. These days, it's very rare for Gen X'ers and millennials to spend their entire career with one company. Because of this phenomena, total compensation packages are important in attracting the best and the brightest to companies, and for employees to make the best decisions on the companies they choose.
Total compensation packages should be easy to understand, competitive, compelling and comprehensive in order to be effective. The two main parts of the packages are salary and health benefits. In order to make sure that packages are fair, companies and individuals should research similar positions at other companies in the marketplace.
Having a good understanding of the features of total compensation packages help employers to be able to attract the best talent and employees to make wise strategic career decisions.
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