May 15, 2023
Total compensation has emerged as a prominent term among companies looking to attract and retain top talent. However, it has always been an integral part of the employee compensation structure, which aims to provide equitable remuneration. While compensation is defined as “money that an employee receives for doing their job,” total compensation is about more than monetary value. The concept is rooted in work-life balance, focusing on details beyond pay that help employees feel valued while also considering their efforts.
In this post, we’ll explore total compensation, from defining the term to determining how to calculate it. Whether you’re a business owner or looking for a new job, our comprehensive guide has you covered.
What is Total Compensation?
Total compensation refers to the combination of direct and indirect compensation. These two categories boil down to more specific measures:
- Benefits packages
- Equity in the company
- Stock options
As you can see, direct compensation is monetary-based. It might involve one or more of the types listed above, such as a salary with a bonus or hourly pay with the addition of commissions. The specific figures that constitute direct compensation are visible on employee paychecks and are typically determined by evaluating economic factors and comparing similar roles, responsibilities, and experience to reach a final number.
Indirect compensation, on the other hand, refers to non-monetary benefits and perks associated with a particular job. These can be influenced by market factors (for example, most roles will have some kind of health benefits package and personal time off) or based on company values, such as a gym membership or subscription to a wellness app. Indirect compensation can also include monetary value within the company, such as stock options or gifted shares.
When we think about total compensation, it boils down to more than dollars and cents: it’s a holistic look at how employees are compensated for their efforts based on the company’s concept of support for work-life balance.
What is the Difference Between Salary and Total Compensation?
There is no specific difference between salary and total compensation. Direct compensation is an important part of total compensation, and one of the types of direct compensation can be salary. You can usually find this amount through your company’s HR portal or accounting software. However, total compensation is generally communicated differently, perhaps through an onboarding process or package that outlines all the available compensation to you.
For some, when they think of salary, they may consider that number as total compensation since it is a definite total given out over a period of time. However, it is important to consider total compensation beyond financial markers, especially when considering a new role where salary is prominently listed but total compensation is not prioritized.
What’s Included in Total Compensation?
As we established above, total compensation combines both direct and indirect forms of compensation. What’s included will vary from company to company and perhaps even role to role within those companies. In any case, total compensation typically consists of some form of set monetary pay, like salary or hourly, along with an indirect form, like a benefits package and personal time off. It’s important to note that these aspects of total compensation are important foundationally, but companies can improve their packages by considering adding other aspects that would benefit employees.
For example, businesses that work remotely might consider:
- Company laptops or cell phones for ease of communication
- A spending account for team lunches
- A bonus plan linked to performance metrics
Organizations that operate in person could look at:
- A gym membership to a local facility
- Flexible work hours to be in or out of the office
- A company car for work trips
What might work best for one business might not be ideal for another. Industry can play a significant role in what’s included in total compensation, as can company values. An organization prioritizing work-life balance for families might offer elongated parental leave and childcare. If your organization is updating or improving its current total compensation package, compensation consulting can be a step in the right direction for current and future employees.
Why is Total Compensation Important?
Total compensation is important to staff and employers for numerous reasons. Increasingly, staff have begun to prioritize work-life balance as something significant to them when it comes to their roles. Total compensation, by extension, is meaningful because it helps them achieve this while feeling valued by the company they work for.
Employers, by extension, find total compensation crucial for retention rates but also the overall morale of employees. This means a good total compensation package can meet the needs and benefits on both sides of the employer and employee relationship. By creating an environment where staff are valued, they can feel engaged in the organization’s mission and help it achieve its goals.
How to Calculate Total Compensation
Calculating total compensation involves finding the sum of all the financial and non-financial benefits an employee receives from their employer in exchange for their work. To calculate total compensation, you need to consider all the elements of compensation, including:
- Base salary: The amount of money an employee is paid annually or hourly for their work.
- Bonuses: Additional payments made to employees as a reward for their performance or achievement of specific goals.
- Commission: Payments made to sales employees based on their sales performance.
- Benefits: Non-financial rewards provided to employees, such as health insurance, retirement plans, vacation days, sick leave, and other perks.
- Stock options: The opportunity for employees to buy shares in their company at a discounted price.
To calculate total compensation, you should add up all these elements of compensation. Here’s an example:
Suppose an employee earns a base salary of $60,000 per year. They receive an annual bonus of $5,000 if they achieve their performance goals and a commission of 2% on all their sales. They have health insurance, a retirement plan with a 5% match, and four weeks of vacation per year. They do not have any stock options.
To calculate their total compensation, you would do the following:
- Base salary: $60,000
- Annual bonus: $5,000
- Commission: Let’s say they made $100,000 in sales, so their commission would be 2% of $100,000, or $2,000.
- Benefits: Health insurance, retirement plan, and vacation days are all benefits that add value to their compensation package. Let’s say the value of these benefits is $15,000 per year.
Total compensation: $60,000 + $5,000 + $2,000 + $15,000 = $82,000
This employee’s total compensation package is $82,000 annually, including their base salary, bonuses, commission, and benefits.
It’s important to note that total compensation can vary significantly depending on the employee’s role, industry, location, and other factors. Employers may also offer additional benefits, such as tuition reimbursement, wellness programs, or flexible work arrangements, which would add to an employee’s total compensation.
Example of Total Compensation
Below, we’ve put together a table to put the idea of total compensation into perspective for two different roles. This can help when searching for jobs, as comparing salaries isn’t always the best indicator of what role will work best for an individual.
|Type of Compensation||Job #1||Job #2|
|Paid Time Off||Approx. $8,100 (six weeks)||Approx. $5,800 (four weeks)|
|Miscellaneous||$3,000 (work laptop and cell phone)||$2,400 (work travel expenses, $200/month)|
Total compensation involves taking a few factors into account, including both monetary and non-financial options. Not all total compensation packages look the same — and that’s okay! In general, companies should consider current market trends for the role and company values to find a central point to their total compensation packages. At True North, we’re passionate about ensuring that employees are compensated well and balancing direct and indirect options. We’ll work with your team to identify the areas that will strengthen your compensation offerings, helping you reward key employees and attract new team members. Ready to get started? Reach out to us.