Think about the last job that you applied to. Was your first earnings-related thought about salary or the total compensation—the salary and benefits—you could receive?
If you’re like most employees, you probably care more about your potential salary than your total compensation, at least right off the bat. While both are important, salary directly relates to how much money you earn from a job, making it a priority for many employees. Even when employers provide numerous benefits, it’s usually salary that gives that wow factor.
Difference Between Total Compensation and Salary
Salary is the amount an employee earns for their work. Employees earning a salary get a set amount per year, which gets divided by each pay period.
Total compensation is the entire amount of compensation given to an employee, including salary and benefits. Although total compensation is a crucial part of attracting qualified talent for roles, it tends to fall lower on the importance scale than salary.
That’s because total compensation can include non-monetary benefits, like retirement plans or tuition reimbursement. These all work to benefit an employee, but they don’t provide the same immediate cash value as salary does. After all, money is the reason people work, and salary is the reward for that work.
Common Forms of Total Compensation In Addition to Salary
Several benefits can be added to a worker’s salary to create a total compensation package, including, but not limited to:
- Bonuses
- Tips
- Paid vacation
- Unlimited paid time off
- Paid leave
- Student loan repayment
- Retirement plans
- Stock options
- Pension funds
- Commission
- Profit sharing
- Travel allowances
- Tuition reimbursement
- Health insurance
- Incentive pay
When Does Total Compensation vs Salary Matter
Salary is part of an employee’s total compensation, so it’s important to treat it as a separate element when reviewing an employee’s overall pay and how it compares to the market rate. It’s important to consider the differences between total compensation vs. salary in the following situations, which could affect both employers and employees.
Significant Variable Pay
Variable pay is any compensation in addition to salary that may not be paid on a set schedule or include the same amount of compensation each time. Discretionary bonuses, referral bonuses, or sales commission are good examples of variable pay.
Some workers may have more variable pay components in their total compensation than they do salary. Or, a significant portion of their total compensation includes types of variable pay. This might be true for a traveling sales representative earning a large portion of their total compensation from commissions.
In this case, drawing a line between salary vs. total compensation is important. In the case of a sales representative, their salary could be lower than or similar to their commissions. Although their total compensation seems fair, their salary may not be close to the market rate for a similar position.
I’ll illustrate. Say Julie’s total compensation package is worth about $100,000. Her salary is $50,000, and she usually earns her allowable amount of $30,000 a year in commissions and bonuses. The other $20,000 includes Julie’s paid time off, travel allowances, retirement plan, and health insurance benefits.
At another company, Kristen’s total compensation is also $100,000. However, she earns $40,000 a year in salary and can earn up to $40,000 in commissions, with $20,000 left for benefits. Unfortunately, this year, she only earned $10,000 in commissions.
Despite having the same total compensation rates, Kristen and Julie’s direct pay vary significantly. While Julie has a higher salary and takes home $80,000 with commissions, Kristen has a lower starting salary and lower commissions, resulting in $50,000 in income.
Companies can fall into the trap of relying too much on variable pay to even out an employee’s total compensation rather than placing the focus on salary. Regular salary reviews for variable pay owners can help ensure a fair starting point for their roles.
Ultra-Competitive Job Markets
Ultra-competitive job markets can also make total compensation tricky. Although your total compensation package might seem attractive, if a high salary and enticing benefits aren’t included, your company probably won’t win over the talent you expect.
Think about markets with high-paying careers, like the healthcare or finance industry. Most reputable organizations in these industries pay top salaries for positions like surgeons or financial analysts. But what if they don’t pay the benefits people in those roles expect?
For example, a financial analyst moving across the country for a position in a leading investment firm might expect relocation benefits, a sizable retirement plan, and stock options. Meanwhile, a top surgeon might expect student loan reimbursement, childcare benefits, and a pension fund.
The primary goal for total compensation is to show appreciation for workers by giving them a salary and benefits that make sense for them. When it’s time to hire, those compensation packages should make it difficult for prospective candidates to turn down a role.
If your company is in an ultra-competitive job market, think not only of offering an above-average salary but also above-average benefits. Unlimited paid time off and flexible vacation policies are hot commodities in today’s market, as are retirement plans with employer contribution matches and tuition or student loan reimbursements.
Tax Liabilities and Contribution Limits
Another point for employers to consider when determining how much salary vs. total compensation is that employee compensation can either be taxable or non-taxable, with taxable compensation eating into how much money an employee takes home.
Salary is an example of taxable earnings. Additionally, non-salary items, like bonuses, severance pay, and some employer-provided educational assistance—all of which fall under the total compensation umbrella—are also taxable.
Taxable benefits can count toward a worker’s income, potentially placing them in another tax bracket. Despite offering several benefits in addition to salary for employees, you should also consider whether these benefits are taxable, leaving workers with larger tax bills than they might expect. Some workers might prefer some of that “income” from benefits as salary instead.
On the other side of the coin, HR has to keep track of taxable and non-taxable compensation for each employee, which can get more challenging with additional forms of compensation included in total compensation.
Also, it’s important to note that contribution-type plans, like 401(k) plans, may be limited by a worker’s total compensation rather than their salary. For employers, that could mean larger contributions.
In 2023, for example, the annual compensation limit for contributions is $330,000 for 401(k) plans. Say an employee earns $200,000 in salary but has a total compensation of $300,000 for the year.
If the employer matches 3% of that employee’s total compensation, the employee receives $9,000 in contributions. The employer would only be responsible for $6,000 in contributions if it were based on salary alone.
Individual Circumstances
Finally, individual circumstances can influence how workers feel about salary and total compensation. Young employees working toward financial goals might see more value in having a higher salary. Meanwhile, workers starting families might prioritize parental leave.
Most companies have a mix of workers with different needs, making it impossible to offer benefits that make sense for everyone. While some research shows that benefits can increase innovation, job satisfaction, and other positive outcomes at work, each employee is probably going to have a different view of what those benefits should entail.
Therefore, businesses should focus on creating benefits packages that align with their reputation in the market. Family-focused companies might offer paid parental leave, childcare benefits, and paid sick leave, while companies investing in their employees’ future could provide tuition reimbursement, professional development, and retirement benefits.
Of course, getting your workers’ opinions is always a good start. Speak with them, host meetings, and conduct interviews to learn what matters most to them. Then, you can create salaries and total compensation packages that make an impact.
In Summary
Total compensation can vary significantly from salary, and it’s a company’s job to ensure that both of them mesh well together. Benefits are great, but they shouldn’t overshadow salaries. Workers want and deserve a salary that reflects their hard work and the value they bring to a company. Benefits are the icing on the cake to continue rewarding workers and attracting new talent.
Where will your company fall on the scale? Will it lead, lag, or match the market in terms of salary and benefits? Remember to review total compensation and salaries regularly for every employee, using market research as a guide to fit your company’s compensation goals.
