Here are two surefire ways to know if your compensation package isn’t meeting the needs of your company: A) You have high turnover rates, and B) the applicants you get aren’t the high-quality candidates you expect. In these cases, your compensation package may be turning away the very people your company wants to attract.
On the flip side, if you’re consistently getting grade-A applicants your way and have low turnover rates, congratulations—you probably have a compensation package that’s doing what it’s supposed to.
What Is A Compensation Package?
A compensation package details how a company pays its employees. Compensation packages include all forms of direct and indirect compensation. Direct compensation covers money paid directly to employees, like salary and bonuses, while indirect compensation refers to non-monetary pay offered as benefits, like a retirement plan or paid time off.
Compensation plans don’t have to be the same throughout a company. For instance, small businesses might have the same compensation plan for all workers. However, large organizations with multiple roles and pay grades usually have different compensation packages for each employee or role, as those packages may vary in terms of pay and benefits.
Federal and state laws don’t directly impact a company’s compensation package. However, companies must pay employees within federal regulations provided by the Fair Labor Standards Act (FLSA). The FLSA oversees minimum wage, overtime pay, recordkeeping, and other critical elements of employee pay.
What Is Included in a Compensation Package?
Compensation packages can include much more than the common items we’ve outlined below, depending on an organization’s specific needs. However, these are the must-haves that an employer should include in a compensation package if the company provides these particular payment types.
Base Salary or Wage
Base salary and wages are forms of direct pay that employees earn for the work they perform.
Base salary is typically an annual amount that an employee makes regardless of the hours they work, split into regular pay periods. In contrast, wages are based on hourly work, with employees earning a specific amount per hour worked. Those hours are totaled for a pay period to pay an employee’s wages.
Base salary and wages are the most important part of a compensation package for employees getting paid this way, as they denote the specific amount of money employees can expect to earn for their work. Other forms of pay may vary, but wages and salary are more consistent and, generally, the pay workers prioritize most.
Some employees get paid by commission only rather than by salary or wages. Other companies pay commission in addition to a base salary or wages. Commission pays based on sales, so it’s usually reserved for sales-based workers.
When you include commission in a compensation plan, it’s necessary to lay out the details of your commission structure. For example, will you pay a flat fee per sale, known as straight commission? Or will you pay a percentage of revenue or the gross profits a sale generates? If you have a tiered commission, its payment structure should be included in detail in a compensation package.
Paid leave is a form of indirect pay that gives employees paid time off of work. Several forms of paid leave exist, including bereavement leave to grieve the passing of a loved one or family leave to care for a family member.
A compensation package should include all types of paid leave your company offers that employee or role. This should align with your PTO policy, so both documents will ideally be reviewed and updated on the same schedule. Also, ensure that what you offer adheres to state PTO laws governing how sick time and other forms of leave must accrue and be paid.
Health insurance is a benefit many companies offer employees, with some employers paying most or all of employee premiums and others paying a smaller percentage. According to the U.S. Bureau of Labor Statistics (BLS), employers paid 67% of employee health insurance premiums in 2022.
Companies can choose between a few types of health insurance to offer their employees, with the selected option(s) detailed in a compensation package:
- Group insurance: Group insurance is a business plan purchased from an insurance company to provide to employees. This is the most common form of employer-sponsored health insurance. It can include a wide variety of coverages and coverage limits, depending on the chosen plan.
- Health reimbursement arrangements (HRAs): An HRA is a company-funded system that reimburses employees for medical-related expenses or health insurance premiums.
- Health savings accounts (HSAs): An HSA is a savings account for health-related expenses. Employers might offer contributions or contribution matches into an employee’s HSA.
- Health stipends: Health stipends are bonuses paid to employees to cover health-related costs. These are typically used by smaller businesses that might not yet have the funds to invest in employer-sponsored health plans.
Compensation packages include retirement plans, if offered, allowing employees to begin saving for retirement. Although workers can open a retirement account on their own, company-sponsored retirement plans typically hold additional savings benefits through company contributions.
A 401(k) is the most common type of company-sponsored retirement plan. Workers contribute money from their paychecks to a 401(k), and employers can contribute to the plan by offering a fixed amount, a percentage of the employee’s paycheck, or a matched contribution.
SIMPLE 401(k) plans are alternatives to a traditional 401(k), usually reserved for small businesses. Companies using this plan can contribute either up to a 3% matched contribution or a 2% non-elective contribution. Small businesses can also offer a SIMPLE IRA, which doesn’t allow employees to take loans or hardship withdrawals against their savings.
Eligibility for Variable Pay
Variable pay is any form of pay that varies and is paid in addition to a base salary or wages. Variable pay is usually based on performance, but not always. Discretionary bonuses, commissions, and hiring bonuses are examples of variable pay.
PayScale data finds that almost three-quarters of companies offer employees some type of variable pay, with individual incentive bonuses, hiring bonuses, and employee referral bonuses the top three types.
Because variable pay is usually given for a specific purpose, like meeting an objective, an employee may not automatically qualify to receive it. Instead, employers can detail the types of variable pay offered for a position and the eligibility requirements necessary to receive that pay in a compensation package.
I’ve covered some of the more common types of pay to include in a compensation package, but companies have a lot of leeway to add other benefits for employees in their compensation packages. A few other benefits an employer might offer include:
- Tuition reimbursement
- Student loan payments
- Company transportation
- Life insurance
- Mental health coverage
- Wellness or fitness benefits
- Moving or travel reimbursement
- Meal plans
- Paid training and development
- Disability benefits
- Flexible scheduling or remote work
- Company-furnished equipment, like computers or cell phones
When is a Compensation Package Enough?
Is your company providing enough compensation to encourage qualified talent to apply for your jobs? If you’re not getting the applications you expect or you’re consistently losing great workers and seeing increased turnover rates, the cycle is telling you something: Your compensation package isn’t enough.
Now is the time to decide whether you want to lead, lag, or match the market. In other words, do you want to make your compensation package competitive in relation to similar companies in the industry (lead), or would you rather save money and chance acquiring so-so talent (lag)? Alternatively, you can meet in the middle, aligning your compensation package with the market (match).
Once you’ve figured that out, you need to do some salary research to determine how your compensation compares. This is known as salary benchmarking, an analysis of your company’s salaries compared to salaries from similar roles in comparable companies.
Salary benchmarking requires you to gather up-to-date salary information from other companies. Companies like Indeed, Payscale, and Salary.com provide tools for collecting this data. The BLS’s Occupational Employment Wage Statistics is another good starting point for finding salary data nationwide and for each state.
Compa-ratio is a form of salary benchmarking that specifically compares an employee’s or position’s salary in one company to the median salary for that role in other companies or an industry. To calculate compa-ratio, you divide the employee’s salary by the median salary, multiplying the result by 100 to get a percentage.
For example, say Carly earns $60,000 per year. The median salary for Carly’s role is $65,000 per year. The compa-ratio would be calculated as $60,000/$65,000=0.923. Multiplying this by 100, we get 92.3%, meaning that Carly’s salary is 92.3% of the median salary for her position.
Now, if Carly earned $70,000 per year, the compa-ratio would be 107.7%. This might be a better target to shoot for if you want to remain competitive with your compensation package.
Why It’s Important to Review Compensation Packages
Regular compensation package reviews help companies determine whether their employees are being paid fairly. Companies should review compensation packages at least once annually, comparing the company’s salaries to the market rate or salaries at similar companies.
Companies that skip this important step could run into problems with salary compression, or pay inequity between long-term workers and newer workers. It can result from events like inflation, minimum wage increases, and outdated market data.
With consistent salary reviews, salary compression is much less likely to occur. For example, as inflation rose in 2022, research found that 73% of U.S. organizations increased their budgets for merit-based salary growth by at least 5%.
Analyzing a company’s compensation practices is the best way to even the salary playing field. For starters, make sure your company uses the most current salary information for compa-ratios and other salary data analysis techniques.
Also, review job descriptions regularly, preferably once or twice a year. This can help you make sure you’re not missing any key responsibilities of roles when updating salary bands. Talk to or monitor employees over a period to get a better understanding of what their roles entail.
Finally, consider whether the benefits your company provides really meet employees’ needs. Hold one-on-one meetings or group roundtables to discuss the benefits employees have and want and use that information to update compensation packages.