A concrete and mutual understanding of total compensation and benefits is crucial. Employees need to know what their job offers them. Potential employees need to know them to make the best decision when choosing a job. Total compensation and benefits can make or break work quality. Employers need to know what they are providing their employees. It is also important to know how to present such information.
What is Total Compensation?
Total compensation is anything given to an employee from their employer. Its purpose is to reward or pay them for their work or services completed.
There are two components to total compensation:
- Pay elements (salary, special pay, bonuses, overtime, etc.)
- Benefits (life insurance, health coverage, paid leave, etc.)
In other words, total compensation is the umbrella term for what a job provides. It encompasses all the aspects of livelihood for employees.
What is the Purpose of a Total Compensation Statement?
The purpose of a total compensation statement is to inform your employees. It informs employees about the benefits they are receiving. Also, it informs potential employees about why they should take the job. Many employees may not even be aware of their benefits. Employers should be assisting employees in a full comprehension of their benefits. By doing this you can raise company morale and loyalty.
What Does the Typical Total Compensation Statement Include?
The typical total compensation statement includes information about the following:
- Stock options
- Stock grants
- Employee stock purchase plan
- Retirement plan
- Social Security contributions
- 401(k) matching contributions
- Paid time off
- Coverages for health, life, and disability
- Wellness rewards (discounts, cash bonuses, etc.)
What Should You Provide Employees with a Total Compensation Statement?
There are many benefits to providing your employee with a total compensation statement. Some of these benefits include:
- Increasing employee awareness of benefits, they are being paid for and should use.
- Keeping track of how much benefits cost your company.
- Providing a fixed amount for benefits without specific monetary value. For example, dry cleaning services.
- Promoting total compensation beyond paychecks.
- Being a powerful retention tool. Companies that provide a total compensation statement see higher retention rates by employees.
- Reducing the workload for Human Resources. They can do this by eliminating the manual preparation of statements to each employee
- Making your business more competitive in the hiring process. They can do this by showing potential recruits their total calculated compensation on top of base compensation.
What is the Difference Between Base Salary and Total Compensation?
Base salary is what’s paid to exempt employees. These exempt employees are employees who:
- do their work with independent judgment
- are exempt from the Fair Labor Standard Act requirements (like over pay)
- get paid a set annual salary rather than an hourly wage
Exempt employees usually have job roles with titles like manager, director, or supervisor.
Base salary is not expressed in net terms but rather annual and gross terms. This means an exempt employee’s base salary is what they make before taxes and other deductions.
Like base salary, total compensation is also expressed in annual and gross terms. Base salary is part of total compensation. Total compensation includes both salaries and the dollar value of benefits. Sometimes companies make the mistake of referring to total compensation as total rewards. These terms are similar, but they have different meanings. Total rewards are more qualitative. They address policies, programs and practices provided to employees and beyond compensation. They also include things like workplace culture, quality of life, and work-life flexibility.
What Types of Things Can Be Included in Total Compensation?
The variety of things that may be included in total compensation are:
- Base salary or hourly rate of pay
- Paid leave (vacation, holidays, bereavement, military pay, jury duty, sick days, etc.)
- Commissions and bonuses
- Profit sharing distributions
- Medical and dental benefits coverage
- Life insurance
- Short-term and/or long-term disability insurance
- Healthcare flexible spending accounts or health savings accounts
- Retirement plans and benefits
- Educational assistance programs
- Career advancement opportunities
- Gym memberships
- Relocation expenses
- Employee assistance programs providing legal advice, counseling, and other services.
In short, base salary is what is paid to exempt employees annually. Base salary is part of total compensation. Total compensation is the total of every dollar amount paid to employees every year.
Should You Be Transparent With Your Costs?
YES! Honesty and transparency are the basis of being trustworthy to your employees. Making known the exact amounts available for employees can avoid:
- accidental debts
As well, some compensation is taxable, and some is not. The majority of nontaxable compensation items are most types of health insurance. Some other nontaxable items include:
- employer-paid life insurance with a payout up to $50,000
- tuitions assistance below $5250 yearly
- de minis payments (small gifts or occasional food orders)
Although, note that any payment with cash or cash equivalent is not a de minimis payments. For example, a $25 gift card given to employees would be taxable because it has cash equivalent value.
Beyond trust with employees, being transparent about your costs is important for legality. Such as when preparing your taxes and providing accurate information to the Internal Revenue Service (IRS).
To further understand limits and exceptions, check the IRS’s Publication 15-B, Employer’s Tax Guide to Fringe Benefits.
Why is Showing Total Compensation Important?
Often, employees do not understand the total costs associated with the business. It is easy to look at the take-home pay, and not calculate the total cost of employing a person. It is important for employees to know all the benefits available to them. Such is a vital part of understanding options when taking a new position with a company.
AUI is here to help you when developing your employment options. We provide you with a full list of benefits for your employees to use for their betterment. Never assume that someone understands all your offerings. Providing employees and candidates a detailed total compensation statement is crucial for success. It makes the difference between someone passing on a position or excelling in their role.
Contact AUI insurance to assist you with your total compensation statement needs.