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Employee compensation – what you need to know and why

Employee compensation is more than just salary; it includes benefits like health insurance, retirement contributions, and paid time off. Competitive compensation is crucial for attracting and retaining talent, reducing turnover, and maintaining employee motivation. It's important to align compensation strategy with company culture and market standards.

Content team
Content team

Content manager Keith MacKenzie and content specialist Alex Pantelakis bring their HR & employment expertise to Resources.

employee compensation

Despite all of the talk about company culture, unique work environments, and flexible work schedules, it takes a lot more than free snacks and a ping pong table in the break room to recruit qualified candidates. Employee compensation continues to be the most effective way to attract and retain top talent in a competitive job market.

Fostering a positive environment that supports team members as people instead of human capital is important, and in many instances, those initiatives are actually part of a compensation strategy, but a generous compensation package is a surefire way to catch the attention of quality candidates and establish loyalty with high-performing employees.

What does employee compensation really mean?

When people think of employee compensation, it’s usually the base salary of a position that initially comes to mind. However, total compensation includes employee benefits and perks.

Health insurance, life insurance, disability insurance, 401k matching, stock options, employee assistance programs, profit sharing, paid time off, sick days and additional incentives could all potentially be included in an employee benefits package and would count as compensation.

Read more: Money for nothing: are we ready for universal basic income?

Direct and indirect compensation

There are generally two different types of compensation: direct and indirect. A generous mix of both helps create an attractive compensation package for employees and organizations alike.

Direct compensation

Direct compensation is monetary and usually the most appealing aspect of employee compensation. Direct compensation options include:

  • Salary/base pay
  • Hourly pay
  • Commission
  • Bonuses

Indirect compensation

Indirect compensation may have a financial benefit, but doesn’t involve an exchange of money. Indirect compensation usually includes benefits and perks that improve an employee’s quality of life, such as:

  • Healthcare
  • Life Insurance
  • Paid time off
  • Family leave
  • Sick leave
  • Retirement plan contributions
  • Company car
  • Technology allowance
  • Remote or hybrid work environment
  • Four-day work week or flex days
  • Tuition reimbursement
  • Physical or financial wellness program
  • Team outings or retreats
  • Childcare
  • Other perks

Indirect compensation options offer the additional advantage of increasing engagement, improving employee satisfaction, and demonstrating company culture.

Although a mountain of money always holds great appeal, a fair balance of cash plus life-improving benefits is a sustainable way for organizations to stay competitive when it comes to recruiting and retention.

Read more: New overtime law: How it works and what changes for employers

The importance of competitive employee compensation

The vast majority of employees work as a way to secure financial stability. So although your product could be amazing, your mission statement inspiring, and your corporate culture the coolest, it’s your ability to positively impact someone’s bottom line that’s going to make or break your staffing efforts.

Securing a highly skilled and/or productive workforce is one of the best investments an organization can make, and recruiting can be a challenge in a competitive job market. A generous compensation package can help attract talent, but maybe even more importantly, it can also help you keep valuable employees.

We learned this ourselves. According to our Great Discontent survey of over 500 full-time workers in the UK, 70.1% of respondents listed compensation as the leading motivator that could lure them from their current job. In the US, that number is 62.2%, but still the top choice for workers.

Employee turnover is costly and disruptive — the act of seeking out applicants, interviewing candidates, onboarding, equipping, training, and developing employees requires time, money, and expertise. An attractive employee compensation package builds loyalty and makes employees less vulnerable to competitor offers or recruiters.

As stated by a US-based respondent from the survey, “Employees will go where the money is. And where they’re treated respectfully and valued. But, mostly, it’s the money”.

This does raise a question around when in the hiring process you can start discussing salary. There’s a growing consensus on including salaries in job descriptions from the get-go – here’s why you can and should consider this in your own recruitment process.

How to build a competitive employee compensation plan

As you develop your employee compensation strategy, the first step is to decide how you’ll determine compensation for individual employees or positions. Options include:

1. Pay structures

Also known as salary or compensation structures, pay structures clarify an employee’s path to career growth and higher pay. This process for determining salaries is more transparent, predictable, and equitable than other options, particularly for companies with more than 250 employees. This compensation and development template can also be useful for your own work.

2. Salary history

Offering compensation based on prior salary history is tempting to many employees, however, it may perpetuate systemic pay disparities and could leave your organization vulnerable to discrimination lawsuits. Also, a growing number of US states prohibit employers from inquiring about salary history.

3. Arbitrary figures

A position that’s urgent or difficult to fill, or a particularly qualified candidate, may cause employers to offer whatever salary might persuade a candidate to accept their offer. A potential adverse effect is that direct reports could end up earning more than their managers or more than already-established employees with more seniority or experience.

Structure and strategy are key

To establish a pay structure, you need to first perform a job analysis to better define each position, and its duties, requirements, and qualifications. Then you need to determine the relative value of positions within your company.

You can determine base salary through benchmarking, where market trends would influence salary ranges or pay grades, where jobs are grouped and ranges are applied to each group. Some organizations use a combination of benchmarking and pay grades to establish compensation structures.

Enhance your compensation strategy by deciding on indirect compensation offerings to include in your employee benefits package. Consider not only benefit costs, but also what aligns with your company culture.

A competitive employee compensation package paired with being the type of organization talent wants to work for can pay off far beyond the costs.

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