For some business owners, compensation sounds like a straightforward equation: determine an employee’s salary or hourly wage, add a few benefits, and calculate the cost of keeping that employee on the payroll.
But the real cost of employing someone is much broader than their paycheck.
Total compensation includes an employee’s wages or salary plus the benefits and other forms of compensation an employer provides. Some of these costs are easy to see, while others happen behind the scenes and may never appear on an employee’s paycheck.
Understanding total compensation can help small business owners make better decisions about hiring, budgeting, employee benefits, and retention. It can also help employees understand that their compensation is worth more than the number printed on their pay stub.
Total compensation encompasses the complete value an employee receives from their employer in exchange for their work, including monetary payments and the full range of benefits and perks.
Salary or hourly wages are the most obvious part of compensation, but direct pay also includes bonuses and commissions on top of base salary and hourly wages. Contributions toward legally required benefits (such as unemployment insurance and workers' comp), as well as health insurance, retirement plans, paid time off, and other voluntary benefits are additional extensions to total compensation.
For small businesses, looking at compensation this way can provide a more accurate picture of what employees actually cost — and what they receive.
Small businesses often compete with larger employers to attract top talent in today's competitive job market. A smaller company may not always be able to offer the highest salary, but it can still build a competitive total compensation package - especially when they outsource to a Professional Employer Organization (PEO) like Stratus HR.
Looking only at wages can make it difficult to compare compensation packages accurately. Instead, business owners should consider questions such as:
Taking these factors into consideration gives you a more complete picture of what your employees truly receive and what your business is investing in their overall compensation.
One reason total compensation can be overlooked is that many benefits, including some indirect forms of compensation (and indirect rewards), never show up in an employee's regular pay. An employee may know their salary, for example, but may not know how much their employer contributes toward health insurance, workers' compensation, paid time off, or retirement.
To show the dollar value of pay and benefits rather than just the employee's gross annual pay, you can document your employer contributions through a Total Compensation Statement or Total Rewards Statement. This provides a useful way for employers to communicate the value of benefits that employees might otherwise overlook.
Not sure what this is or where to find it? Contact your Stratus HR rep.
Not every benefit an employer provides is optional; some benefits are required by federal or state law.
For example, Social Security, Medicare, workers' compensation insurance, and unemployment insurance are all mandated benefits. Although they aren't considered traditional employee benefits, their costs are part of the overall expense of employing someone.
Social Security and Medicare are federally mandated programs. The cost is shared between employers and employees, with applicable tax rules determining how contributions are calculated.
For a small business owner, these employer contributions should be considered when calculating the true cost of an employee.
Workers' compensation is a state-based program designed to provide benefits related to workplace injuries and illnesses, including medical treatment, wage-loss reimbursement, and rehabilitation services.
In most states, employers are the sole contributors to workers' compensation insurance.
Unemployment insurance is another cost associated with employment. It is a combined federal and state program that provides benefits to eligible individuals who are willing to work but cannot find employment.
In addition to legally required benefits, employers can choose to offer voluntary benefits such as pre-paid legal, pet insurance, hospital indemnity, critical illness, accident, mental health support, wellness programs, gym memberships, travel benefits, and so on.
These benefits may be fully paid by the employer, shared between the employer and employee, or made available for employees to participate at their own expense.
While these may be hard to offer on your own, partnering with a PEO like Stratus HR will provide your team access to these voluntary benefits and more.
Some employers pay the full cost of certain benefits for their employees. Examples might include:
Variable pay options should also be included as total compensation, such as an annual performance bonus, commissions, profit-sharing, employee stock options, and other stock options.
Some benefits may involve contributions from both the employer and employee. Examples include:
Even when an employee pays part of the cost, the employer's contribution still represents additional compensation beyond wages, including additional benefits and other perks.
Retirement benefits are a valuable component of total compensation that can be easy to overlook.
An employer contribution to a retirement plan or a matching 401(k) contribution represents real financial value to an employee, even though that money does not appear in their regular wages.
For employees comparing job offers, a position with a slightly lower salary but a strong employer retirement contribution could potentially provide more overall value than a higher-paying position with few benefits.
Paid time off (PTO) is another benefit that can be easy to undervalue but plays a critical role to help you retain talent.
When employees receive paid vacation, holidays, sick time, or other forms of PTO, they continue receiving compensation while away from work. This helps them check out and rejuvenate without feeling guilty for missing work, supporting their work life balance and job satisfaction.
Employers may also offer programs that employees can participate in, such as health savings accounts (HSAs), health flexible spending accounts (FSAs), dependent care flexible spending accounts, and 401(k) savings and retirement plans.
These programs provide employees with additional financial and tax-related opportunities while helping create a more comprehensive benefits package.
One of the most important takeaways for business owners is just how significant benefits can be when calculated as part of total compensation, not just pay.
On average, benefits can represent the equivalent of more than 30% of total compensation.
For example, consider an employee earning $50,000 annually. The estimated value of benefits typically add around $15,000 to the total compensation package, putting the total value of salary plus benefits at approximately $65,000.
While actual costs will vary from employer to employer, the example illustrates why salary alone does not tell the whole compensation story.
For small businesses, attracting and retaining top talent can be challenging. Compensation is an important part of that equation, but employees may not know what else to evaluate beyond salary.
Health coverage, retirement contributions, PTO, insurance, workplace perks, and other benefits can all influence how employees view the overall value of a job.
That makes total compensation an important part of your employee value proposition. Be sure your applicants and employees should know their full market value before considering other offers or negotiating total compensation.
The goal isn't necessarily to offer every possible benefit. Instead, small business owners should understand what their employees value through employee feedback, determine what the business can sustainably provide, and clearly communicate the full package.
Most of the battle is simply educating employees about what they already have and how to utilize it.
Remember, your employees' paychecks tell only part of the story. The true cost of employment includes legally required benefits, voluntary benefits, and other employer contributions. Likewise, the true value of an employee's compensation package includes direct and indirect forms, with both monetary and non-monetary elements.
For small business owners, understanding total compensation can make it easier to budget accurately, build competitive offers, and communicate the value of your benefits, including base salary bonuses and other benefits.
When employees can see the full picture, they gain a better appreciation for the investment their employer is making in them.
For more information, please contact your certified HR expert. Not a current Stratus HR client? Book a free consultation and our team will contact you shortly.