Employee compensation is what employees receive for services or work rendered at a company or business. While it typically refers to the money that workers get from employers, there are many forms of compensation for employees. Aside from wages and bonuses, it includes non-monetary items like stock options, company-assigned computers, and benefits (such as health insurance plans). Knowing what employee compensation is and its different forms can help you create a compensation plan for attracting qualified candidates, retaining employees, and managing business finances.
Employee Compensation Types
The amount of money you pay workers is only a part of employee compensation. It consists of different elements, which can be monetary and non-monetary items. Below are its three main types, including a few common employee compensation examples.
How to Create Employee Compensation Plans
Developing a compensation plan for employees isn’t an easy task. It takes time to complete because you have to consider and look at several factors—from your budget to labor laws and local and/or state pay-related regulations. While there are different strategies for creating employee compensation packages, below are the common steps.
Create an inventory of all the positions in your company. You may need to write job descriptions, as these allow you to determine the value of each position based on job complexity, work responsibilities, and other requirements (such as technical skills).
Job descriptions are also helpful for comparing the role’s work responsibilities with the job duties of similar positions in the market. However, you mustn’t rely on position titles alone. A senior accountant role in your company may have slightly different tasks compared to a competitor’s senior accountant. One may have more complex duties than the other, which would likely push that role’s salary or compensation package up.
Check how much your competitors and other organizations in the same industry are paying for similar positions in your company. Compare the data with what you’re currently offering or plan to provide. Use the position titles and applicable job descriptions as the basis for comparison. However, don’t look at only salary and wage amounts. Take time to research the benefits, bonus and merit increase percentages, and other employee perks that these businesses offer.
You should also consider your company’s competitiveness in terms of total employee compensation. Are you offering more or less than other companies or your competitors? Or is your salary package at par with market rates but your employee benefits plans are below standard? Understanding the gaps in your compensation plan lets you know which areas to improve on.
Once you get your market data and have completed your comparison of positions, identify the direct compensation items for each role. Do you plan to provide bonuses or incentive pay in addition to salaries and wages?
You also need to determine the standard benefits that all employees can enjoy. These can be paid time off, maternity and paternity leaves, and insurance plans (like medical, dental, vision, and retirement plans). Don’t forget to consider federal and local laws, such as tipped minimum wages per state and overtime regulations. For more information about state-related pay information, check out our state payroll directory.
Avoid giving special perks to specific positions or employees to prevent pay inequity. If you decide to provide additional benefits or perks, it should be based on job roles. For example, providing a company car or a car allowance for all managerial and/or field sales roles.
Establish salary bands or pay grades for each position based on the market data you collected and the role’s job description. With this pay structure, you can identify the minimum and maximum salary amounts to give and even set up pay increments per pay grade. This makes it easy to calculate the starting wages for new hires and the promotion increases for employees.
It’s important to compare your compensation plans with market rates on an annual basis given economic conditions (e.g., inflation) and changes in the industry that your business belongs to. This will also allow you to remain competitive with the salary and benefits packages that similar companies offer.
If you spot potential improvement areas, such as expanding your insurance coverage, check your budget. You may need to create a payroll budget to cover the additional costs. Don’t forget to inquire with your current insurance provider if they can handle the expanded coverage. If not, reach out to other providers and compare quotes to find the right benefits package for your company.
Best Practices for Creating Compensation Plans
Creating compensation plans requires strong research, analytical, and mathematical skills. It can be challenging to do, especially if you’re new to using salary analysis tools, managing pay equity, and calculating the compa ratio to assess the competitiveness of your workers’ pay. However, there are best practices you can follow to help you create a solid plan that covers the total compensation of employees.
- Set up a compensation philosophy A compensation philosophy is your company's position in setting salary ranges, paying employees, selecting benefits, and rewarding workers. It also explains what your compensation and benefits policy is, and identifies the practices to implement that policy. : A well-defined compensation philosophy serves as your guide for creating a compensation package that’s fair and competitive. It should also align with your company values, organizational goals, and HR strategies for attracting qualified candidates, improving staff engagement, and retaining top talent.
- Stay within a budget: Try to find the balance between offering competitive pay with top-notch benefits and managing your business finances. Look at financial forecasts to plan your compensation package and update your pay structure for the coming calendar year or as needed.
- Be mindful of payroll compliances: Don’t forget to check local, state, and federal laws when creating and implementing compensation plans. Given that running or doing payroll is connected to the different employee compensation types, you should ensure that payroll compliances are followed at all times.
- Ask employees what they want: While you can rely on competitor data and market research to identify the salaries and benefits to give, running anonymous employee surveys can provide you insights about what workers want. You can also get their feedback about your compensation plans and ask what works (and what doesn’t).
Frequently Asked Questions (FAQs)
Employee compensation, if the remuneration is fair and adequate, helps workers feel valued and motivated to work. A competitive employee compensation package also contributes to high job satisfaction and work productivity levels.
Many factors affect employee compensation. To determine the total compensation, you have to look at industry or market benchmarks and the position’s job complexity. The skill sets and work experience required for the role are also considered, along with labor regulations and location-based rules (such as state-related minimum wage and overtime pay laws).
This varies, depending on the employee compensation package that employers offer. However, the usual employer costs include premium payments for health and insurance plans, paid leave benefits, salaries and wages, supplemental pay for overtime and shift differential, and the taxes that employers shoulder (such as Social Security and Medicare taxes).
Bottom Line
Compensation plays a huge part in attracting and retaining workers. It also helps boost staff productivity and morale. Understanding what is employee compensation and what goes into it can help you develop a compensation plan that’s fair and competitive. Conducting market research is critical, but you should also consider your budget and business goals in building your company’s salary and benefits package.
