Defining Total Compensation

As is often the case in Human Resources, a discussion related to total employee compensation presents many perspectives and points of view.  To an employer, it represents the total cost of retaining an employee and to that employee it translates into the total value that they are receiving for their efforts.  In either case, it is critically important that all parties realize that total compensation, whether you are interested in the total cost or the value, is so much more than just gross wages or an annual salary.  Depending on the employer and the level of employee, a total compensation package would include the fair value or cost of any or all of the following items:

Wages and Salary – This is the most obvious of the items but gross wages are usually the largest portion of the total compensation package.

Bonuses and Commissions – These items increase gross and pay are normally based on performance and/or achievement.

Employer Taxes and Workers’ Compensation – An item that employees tend to overlook is the fact that employer payroll expenses aren’t limited to gross wages.  In general, employers must pay an additional 10% of gross wages to their state and federal agencies for Social Security and Medicare matches and federal and state unemployment insurance.  In addition, employers must carry workers’ compensation insurance.  While not a direct monetary employee benefit, it protects employees against medical expenses and lost wages incurred in the event of a workplace related injury or illness.

Paid Time Off (Vacation, Holidays, etc.) – Although the value of any paid time off is already included in a salary amount or annualized hourly wage and, therefore, doesn’t affect the mathematical “total” of compensation, it is of great nonmonetary value to employees and can result in additional related costs for employers (i.e. temporary help, overtime, lost productivity, etc.)

Group Insurance benefits – The value of group insurance benefits such as health, dental, life and disability insurance, of course, varies widely based upon the plans, company participation and the amount of premium paid by the employer but is often a very significant benefit (particularly if pre-tax) and employer cost.

Other Benefits – The fair value of other tangible benefits such as retirement plan matches, pension plans, stock options, etc. should also be considered.  In addition, companies find other very creative ways to attract and retain quality employees. Some popular intangible benefits include flexible work scheduling, telecommuting, wellness programs or in-kind services and employee appreciation efforts.

Training and Education – Depending on the type of employees, some companies may pay for continuing professional education, specialized training, licensing and even tuition reimbursement expenses on behalf of their employees.

Personal Use Assets –  It is also important to consider the fair value of business assets that employees are permitted to use for personal purposes (i.e. laptops, vehicles, cell phones, equipment, etc.)

In short, no matter if you are an employee or an employer, it is essential to have a current estimate of the fair value of total compensation per employee within the organization.  For a business owner, it provides an estimate of labor costs on a per employee basis and can be a great tool when making strategic, management and financial decisions.  For an employee, it offers a comprehensive picture of the value they receive for their hard work and drives home the fact that gross wages may be just the beginning of the benefits that their employer provides.