comprehensive guide to employee compensation and benefits.

With the ongoing labour shortage spurred by the great resignation, an ageing workforce, shifts in workers’ expectations, and the growing skills gap, today’s employers are under immense pressure to attract qualified candidates and retain top talent.

For decades, we’ve known that compensation and benefits, also known as rewards, are strong motivators for employees to change jobs.

For employers to remain competitive enough to attract and retain the talent they need to meet their business goals, they must ensure their company offers a robust compensation package.

Continue reading about employee compensation and benefits and obtain tips for creating a compensation strategy.

what are compensation and benefits?

In basic terms, compensation and benefits include monetary and non-monetary rewards employers give their employees in exchange for labour.

When you think of compensation, however, the first thing that comes to mind is probably wages. This factor is genuine for job seekers too. Wages are a crucial element of the overall compensation package and are typically the first thing candidates consider.

According to our research, salaries are the number one motivator for workers changing jobs.

While it's true that compensation is a direct payment made to workers in exchange for labour, it includes more than just basic salaries. When we think of compensation, there are usually two distinct components:

fixed pay rates

Fixed pay is the base salary paid to employees, such as an hourly pay rate or salary. Employees receive guaranteed wages in weekly, biweekly or monthly pay intervals.

variable pay

Unlike fixed pay, variable pay is not necessarily guaranteed wages. Instead, it's often based on the performance of individual employees or the company. This payment type is not based on a fixed rate but on various variables, such as performance and years of service.

Examples of variable pay include:

• tips
• commissions
• overtime
• incentive
• bonuses
• stock options.

When calculating an employee's complete compensation package, it's essential to include the entire fixed pay rate amount and an estimated variable pay rate. This breakdown gives employees and candidates a clear picture of how much they can anticipate earning.

on the other hand, employee benefits are indirect payments.

Benefits include all other types of monetary and non-monetary rewards given to employees in exchange for their labour, including:

• pension plans
• paid time off (including parental leave)
• childcare, transportation and home office subsidies
• tuition reimbursement
• employee training
• free lunches
• free or discounted services, such as gym memberships
• health, dental and vision insurance

The non-financial rewards are often forgotten but are also an essential part of the reward package, such as:

• employee recognition
• hybrid work schedules
• flexible work options
• on-the-job training
• volunteer opportunities

When establishing a complete workers' compensation and benefits package, it's essential to consider various factors, such as your overall strategy and company values, EVP and what your employees and target candidates want.

By making intelligent decisions about what benefits to include in your overall compensation package, your company can position itself to get noticed by your target candidates and entice your current workers to stay.  

importance of a compensation and benefits strategy

What makes compensation and benefits so important? First, your employees want to be paid — they need to be paid. 

Secondly, salaries and benefits comprise a large percentage of the company's budget. For most businesses, labour costs represent anywhere from 15% to 30% of the company budget, but these costs can be much higher for some businesses. Therefore, it only makes sense to have a strategy for an expense representing nearly a third of the budget.

Finally, developing an employee compensation and benefits package is not as easy as only setting wages and adding some benefits. Developing a compensation package requires strategic planning and intelligent choices regarding what benefits should and shouldn't be included in salaries. Understanding these choices' impact on your organisation and current and prospective talent can help you develop a package to achieve your business goals.

benefits of having a compensation strategy in place

A strategic compensation plan offers numerous benefits, including:

gives the company a competitive edge

A comprehensive employee compensation strategy can give your company a competitive edge by ensuring it offers the specific salaries and benefits talent in your industry want. Highlighting these compensation and benefits packages on your career page and job postings can increase your company's potential to attract and acquire top talent.

builds loyalty

In a recent study, 60% of workers who believe their employers care about their wellness plan to stay at their current job for at least the next two to three years.

Offering your employees the types of benefits they want can go a long way in showing them that the company cares. Over time, this sense of caring can build loyalty among your workers and improve employee retention rates.

increased productivity

Research shows that workers are 13% more productive when they're happy. Creating a compensation and benefits package focusing on workers' physical, mental and financial health can increase their well-being and productivity.

compensation strategy approach

One approach you can consider when developing your compensation strategy is to determine whether you want to be:

leading the market

This is an aggressive strategy where employers decide to set salaries above standard market rates. This approach can give your company a competitive edge and make it easier to acquire talent. You may also offer a lighter benefits package since wages are higher. The downfall is that higher wages mean higher labour costs.

lagging the market

Lagging in the market means employers set salaries lower than standard market rates. This method is common among nonprofits, attracting workers due to their charitable services. The risk of low wages is that the company may struggle to attract and retain workers. With this strategy, employee benefits, such as flexible work schedules and paid time off, are even more critical.

meeting the market

Meeting the need is the most common option and requires employers to set salaries close to market standards. Choosing this option allows companies to maintain competitive wages while staying within budget. This strategy makes benefits a handy tool for attracting and retaining talent.

Remember that this is only one way to evaluate your compensation strategy. It's also important to consider what type of company you want to be, how much you want to differentiate from the competition and at what cost. 

how are employee compensation and benefits calculated?

The first step to calculating employee compensation for your workers is to set a salary range for each position. Typically, employers base their salary fields on industry standards. Most employers use detailed salary surveys to identify average salaries for their respective industries.

Once a salary range is in place, HR teams must determine where the specific pay for each employee falls within the pay range. Typically, when making this determination, employers will look at various data points, such as particular job duties, years of experience, required qualifications and location.

Employee benefits are a little more challenging to calculate per employee. In most cases, employers add up all costs associated with benefits and divide them by the number of employees. This calculation can serve as a rough estimate to determine the total compensation costs for each employee.