Total compensation is an incredibly effective tool to utilize when attracting top talent and when informing team members about the value they receive in the form of benefits from your company. Understanding what total compensation is and how it works is essential to winning and retaining top talent. Additionally, it helps companies more completely assess the total cost of a hire so they can budget accordingly.
What is total compensation?
Total compensation is the collective compensation you provide to your employees in return for their services. It includes the employee's base salary (how much you pay the employee as either the hourly rate or their annual salary), the total dollar amount of the fringe benefits you offer (health insurance, paid time off, retirement plan, profit sharing, gym membership, etc.), bonuses and/or commissions.
Employers can show employees (or potential employees) the total value of the compensation and benefits they receive by supplying them with a total compensation document.
What are the differences between salary and total compensation?
Salary is the fixed sum employees are paid each pay period.
Total compensation encompasses the base salary the employee receives plus other monetized benefits, such as paid time off and health insurance. In other words, salary is one element of an employee's total compensation.
One reason why a company may review one's total compensation, as opposed to salary alone, is that any useful budget needs to reflect the cumulative costs of each employee.
What is included in total compensation?
The most common benefits employers include within their total compensation package, and statement, include but are not limited to:
- Annual salary or hourly rate of pay
- Medical and dental benefits coverage (including employer-paid portions)
- Healthcare flexible spending accounts or health savings accounts
- Paid leave (vacation/sick/PTO, holiday, personal, bereavement, military pay, jury duty, etc.)
- Short-term and/or long-term disability insurance
- Life insurance
- An employee assistance program
- Retirement benefits
- Educational assistance programs
- Relocation expenses
- Learning and development offerings
- Career advancement opportunities
Research from the U.S. Bureau of Labor Statistics shows that as of 2020, benefits (or non-salary-related compensation), on average, comprise 30% of an employee's total compensation.
Why is total compensation important?
Total compensation, and having an effective compensation management program, is important to winning and retaining talent within your industry. Employees are looking for, and expect to find, compensation packages that are comprehensive and meaningful to them.
If your company doesn't offer a good benefits package, candidates may spurn your job offer for one from a company that is extending the benefits they want. And for your existing employees, they may leave for another job offering better benefits than what you offer.
Total compensation is discussed earlier in the recruiting process than it used to be. Applicants prefer to hear about compensation and benefits during the interview process now. One of the many reasons for this is the uniqueness of applicants' needs. For example, student loan assistance, work flexibility, and career advancement are sought-after benefits, and if you're willing to offer these perks to new hires, discussing these perks, along with the job duties, can ensure that you capture – and retain – candidates' interest and enthusiasm throughout the recruiting and onboarding process.
What is total compensation vs. total rewards?
Total rewards address the policies, programs, and practices that provide employees with a valued and desired reward infrastructure. In addition to compensation, your workplace culture, quality of life, and work-life flexibility are all part of a total rewards program that's essential to attracting and retaining top talent.
When it comes down to it, companies choose whether they want to reference "total compensation" or "total rewards" within their nomenclature. Although they do not carry the same meaning, the amount of overlap and similarities between the two commonly result in companies using one term or the other, but rarely both.
Marketing your total compensation
Total compensation plans are an opportunity to promote your company to candidates and current employees through tangible data that shows the value they get when working for your organization.
For your existing employees, creating and implementing a total compensation (even better, your total rewards) program helps keep team members engaged, lowers turnover and increases a company's return on investment.
Total compensation statements are the best tool for achieving this objective. A total compensation statement should be one or two pages long, and it should show what benefits are being offered to candidates or are enjoyed by employees.
Although the appearance can vary, the content is essentially the same. The goal is to list the totality of your compensation program. If you can place a monetization quality on a benefit or perk, include it in your statement.
How to determine total compensation
There are many formulas for determining total compensation. The truth is, many strategies can work, as long as the basic aspects are included. One way organizations achieve this objective is with total compensation calculators.
In addition to the use of calculators, assess the value of each benefit you provide to your workers. Most of the common benefits have monetized values listed next to them. What portion do you pay for medical and/or dental insurance? How many paid time-off (PTO) days do employees get? How much do you match in your retirement program?
How some candidates assess total compensation
Candidates are savvy when assessing job offers. Some add the cumulative value of all the benefits presented within a total compensation plan and divide that by the number of hours typically worked within a year to get the "total compensation hourly rate." That is how some candidates compare apples with apples (if there are multiple job offers).
Here is an example:
| Benefit Name | Job Offer No. 1 | Job Offer No. 1 |
| Salary | $75,000 | $75,000 |
| Paid Time Off | $4,000 | $5,000 |
| Retirement Matching | 50% matching first 5% of contribution = $1,850 | No match |
| Free Gym Membership | $50 per month ($600 annually) | N/A |
| Commute Cost Savings | N/A | $100 per month ($1,200 annually) |
| Total | $81,450.00 | $81,200.00 |
| Hourly Rate Equivalent | $39.16 (based on 2080 hours annually) | $39.04 (based on 2080 hours annually) |
Some fringe benefits are difficult to place a numeric value on, such as the ability to work from home or enjoying a highly flexible schedule, etc. Putting a value on those benefits is difficult, as for some, it is worth more than healthcare insurance, while for others, they would prefer to work a predictable schedule that never fluctuates.
Adding a summary or narrative section to your total compensation (or total rewards) statement can help paint this picture for candidates and employees alike. Customizing total compensation documents when soliciting top talent or hard-to-find subject matter experts (SMEs) is also recommended. If you can tailor your narrative to attract a specific candidate, it may prove to be more persuasive.