Total compensation: a complete guide

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Published: June 19, 2024 | by Natasha K. A. Wiebusch, Brightmine Marketing Content Manager

Total compensation costs in the United States increased by a whopping 7% in 2023. For comparison, costs increased by 4% in 2021 and 5.3% in 2022, according to the US Bureau of Labor Statistics (BLS).

Many factors have contributed to this increase, including inflation and increased benefits costs. But it’s also a reminder of how important compensation still is to employees. In fact, according to ADP’s People at Work 2024 report, pay is still the number one priority for employees.

HR leaders must continue to prioritize competitive compensation to attract and retain top talent. And what’s competitive today goes well beyond salary and bonuses.

Learn everything you need to know about total compensation in this complete guide.

What is total compensation?

Total compensation is everything an employer offers employees in exchange for their services. It includes pay, employee benefits and other incentives employers offer to employees. Pay usually makes up about 70% of total compensation, while employee benefits make up about 30%.

You’ll often hear total compensation referred to as a total compensation package or a total rewards package. These terms reflect the combination of cash compensation and benefits. Total rewards also includes non-monetary incentives.

Types of compensation

What employers include in total compensation depends on each employer and what benefits the employee selects. Generally, however, there are two broad forms of compensation: direct compensation and indirect compensation.

Direct compensation is compensation in the form of money. The following are common examples of direct compensation:

Wages or salary

Also called base pay, base salary or fixed pay, this is a fixed amount of pay that employees earn in exchange for their work. Employers can pay employees based on an annual salary amount or hourly rate.

Incentive pay

Incentive pay includes bonuses, profit sharing and commissions. Companies usually base this type of pay on individual or company performance, or obtaining a goal.

Supplemental pay

This is pay that is added to an employee’s regular pay. Companies usually offer this for overtime work, overnight or holidays shifts, or other unique circumstances.

Cost of living adjustments (COLAs)

Pay increases to account for inflation. COLAs help ensure base pay keeps up with increased cost of living.

Indirect Compensation has monetary value, but it is not paid directly to the employee in cash. This includes:

Paid leave

Vacation time, paid holidays, sick time, personal leave and other paid time provided to an employee to spend time away from work.

Insurance

Premium contributions to life insurance, healthcare benefits, supplemental insurance, and short- and long-term disability.

Retirement plans

Money contributions to a retirement account. Employers can sponsor either defined benefit or defined contribution plans.

Legally required benefits

Benefits to which employers are legally required to make contributions. This includes Social Security, Medicare, federal and state unemployment insurance contributions, and workers’ compensation.

Employee stock options (ESOs)

Options companies give to employees to purchase company stock at a specific or discounted price.

Employee stock ownership plans (ESOPs)

Plans that allow employees to earn stock in the company based on performance or tenure.

Perks

Additional benefits with monetary value, such as gym memberships or store discounts.

Non-monetary incentives

Non-monetary incentives (also called non-monetary compensation) are rewards that cannot be easily measured in dollars. For this reason, employers may exclude it from a total compensation calculation.

HR leaders often refer to these non-monetary incentives as non-monetary rewards or benefits. Examples include:

Flexible work

Adjustments to when, where or how employees get work done to accommodate personal needs.

Career development

Programs, training and other activities focused on helping the employee develop their skills and career path.

Recreational activities

Non-work-related activities the employer sponsors and/or hosts to help employees connect and have fun.

Recognition

Announcements, awards or other displays of appreciation for an employee’s work, contributions and accomplishments in the organization.

Non-monetary incentives are now extremely important to total reward strategies. According to the People at Work 2024 report, flexible work and career development are leading priorities for today’s employees. For this reason, competitive employers are now making additional efforts to communicate these by including reference to them in their job advertisements.

Many employers also include these rewards in their total compensation statements, often opting to rename them total rewards statements to help reflect the inclusive nature of the statement.

The difference between total compensation and employee benefits

The meaning of total compensation can be confusing. HR teams often refer to “compensation” as only salary and other cash compensation. And others prefer to use the term “total rewards” instead of “total compensation.” Today, total compensation is an umbrella term that encompasses both pay and employee benefits.

Employee benefits, on the other hand, are indirect forms of compensation offered to employees in exchange for their work. Common types of employee benefits include health insurance, life insurance and paid time off (or paid leave).

Employee benefits are extremely important to a total compensation strategy because they can help employers differentiate themselves from competitors. They improve the employee experience by supporting work-life balance and well-being, and they communicate the organization’s values.

Benefits can also help employers create a competitive total compensation package when they can’t offer the highest base salaries. Unlike salaries, many employee benefits are tax-favored, meaning employers can offer more value without increasing their tax liability. Leveraging as many tax-favored benefits as possible is key to maximizing total compensation value.

Tax-favored employee benefits

The following are a few examples of tax-favored employee benefits:

  • Qualified health care, dental and vision insurance plans.
  • Qualified retirement plans.
  • Qualified educational assistance (including student loan repayments through December 31, 2025).
  • Group-term life insurance.
  • Devices used for business purposes (e.g., phones or a laptop).
  • Gas mileage.
  • Working condition fringe benefits.

Calculating total compensation

To calculate total compensation, add an employee’s total direct and indirect compensation. In other words, total compensation is the sum of the base pay, any variable pay and employee benefits. Because employees can pick and choose certain benefits, their total compensation will often vary.

For example, an employee can choose to enroll in a more or less expensive health care plan. This will impact their “take home pay” and their taxable income.

When calculating total compensation, it’s important to determine whether you’re calculating the total cost or the total value.

The total cost of compensation is the cost an employer incurs to provide compensation to their employees. You can calculate the average total cost per employee or the total cost for an individual employee:

  • Average total cost of compensation is the average cost to compensate your employees. Employers usually calculate this as an hourly rate. For example, in the US, the average cost of total compensation for 2023 was $45.42 per hour per employee, according to the BLS.
  • Total cost of compensation for an employee is the total cost to compensate an individual employee. Employers can either calculate the hourly cost (i.e., how much does an hour of their work cost), or as a total yearly cost.

The total value of a total compensation plan, on the other hand, represents the total value to the employee. This is usually higher than the total cost, as companies can often obtain better rates on benefits than employees could as individuals. For example, you may offer employees a free subscription that costs the company $8 per month but is worth $15 per month.

Total compensation example

The following is an example of an employee’s total compensation statement*:

Cash Compensation

CategoryAmount
Salary$135,000
Bonus (maximum)$30,000

Health, dental and life insurance

CategoryEmployer contribution
Health insurance$8,094
Dental insurance$1,867
Employee assistance program (EAP)$40
Life insurance$300

Retirement benefits

CategoryEmployer contribution
401(k) plan match (5% max)$6,750

Mandatory taxes and insurance

CategoryEmployer contribution
Social security$8,370
Medicare$1,957.50
Unemployment (FUTA)$420

Other benefits

CategoryEmployer contribution
PTO$7,788
Home office stipened$800
Student loan repayment$5,250
Total Compensation
$206,636.50
*This example statement excludes bonus tax calculations, required state withholdings and required employee contributions.

Employees usually receive a total compensation statement with their job offer and then once a year moving forward. This helps employees understand the total value of their offer, not just their base salary and bonus structure.

HR’s role in total compensation

HR business partners, benefits leaders and CHROs are all intimately involved in evaluating total compensation, as each has a role to play in building the compensation strategy.

A total compensation strategy greatly impacts employee engagement and efforts to attract and retain top talent. Accordingly, people leaders are responsible for ensuring compensation is competitive and fair through precise benchmarking and research. HR leaders are also responsible for constructing the compensation philosophy and gaining buy-in for the compensation strategy.

Labor costs also usually make up the majority of total business costs (about 70%). Accordingly, CHROs, have a responsibility to ensure the strategy is within budget and aligns with the business strategy.

HR also has the primary responsibility of marketing the total compensation package to candidates and employees. In fact, in recent years, HR leaders have had somewhat of a benefits communications renaissance. That is, they have responded to historically low benefits use rates by revamping their communications.

Now, aside from onboarding and open enrollment communications, HR is issuing targeted communications throughout the year. And with the help of AI, HR can personalize benefits communications and apply marketing principles to nurture benefits uptake.

In addition to leading benefits communications, HR is responsible for gathering and elevating employee voice. Obtaining employee feedback helps the organization shape the total compensation plan and gauge performance. It can also support benefits communication efforts so that employees understand the true value of their compensation package.

Ensuring competitive total compensation

Competitive total compensation packages will give you the edge in the talent market. To determine what’s competitive and within reach for your organization, consider the following recommendations:

Make data your top priority

Market research — particularly salary benchmarking — is paramount to a competitive total compensation strategy. It helps you understand how competitive your pay is in market and supports pay equity.

Be sure to stay updated on industry trends in your specific industry and continue to benchmark compensation and benefits. In addition to conducting formal benchmarking exercises, consider evaluating what your competitor’s career websites and social media say about their compensation.

Be human-centric

In today’s world of work, human-centricity is key to attracting and retaining top talent. Leverage any information you have about your employees to understand their personal needs and career aspirations. The more information you have about your employees, the more you can tailor the compensation package to fit those needs.

To get the right insights, consider AI-powered platforms that can provide hyper-personalized employee insights.

Maximize tax-favored and non-monetary benefits

No matter your budget, you can only spend so much on employee salaries. And in uncertain economic times, bloating pay can lead to budget problems down the road. Tax-favored benefits will provide employees with needed benefits while not increasing taxable income. And, non-monetary benefits can improve the employee experience in a budget-friendly way.

Review your total compensation strategy often

Compensation trends will inevitably change over time, as will the organization. To help ensure your total compensation strategy continues to be competitive, review your compensation offering often. At a minimum, continue to benchmark your compensation and obtain employee feedback.

Conclusion

Designing and implementing a competitive total compensation package is crucial to attracting and retaining top talent in today’s competitive job market. By prioritizing data and human-centricity, companies can create competitive and sustainable strategies while meeting the unique needs of the workforce.

Want to ensure your total compensation is competitive? Consider the Brightmine suite of data-backed HR solutions.