Employee compensation is the sum of the salaries you pay each employee and the benefits you offer them in return for their labour. Salary, benefits, commissions, and stock options can all be included in a compensation package, but the ideal mix of compensation for each employee will depend on a number of different factors. Understanding the different kinds of compensation packages available is crucial if you want to attract and keep top talent. Fair and competitive employee compensation is therefore essential.
5 types of compensation packages to consider
You can offer employees one of five basic compensation plans. You are not required to limit employee compensation to just one of these possibilities; you are free to combine them. Standard employee compensation packages "are typically made up of cash, equity and non-cash components (e.g., insurance, other types of benefits and perks)," according to Amy Roy, vice president of talent at the employer of record company Atlas.
The appropriate form of compensation for each employee is determined by elements like their job description and level of seniority.
Consider the following five different kinds of compensation packages:
1. Base pay package
A base pay package is a regular sum of money that an employee receives in exchange for putting in a certain number of hours each week (usually 40). A base pay package pays employees either an hourly wage or a salary. The majority of employees receive a base salary, but whether they are salaried or hourly depends on their position.
According to Jeremy Jarry, founder and CEO of the stock-option advisory firm B3GIN, "an employee working on a project or with defined tasks will typically prefer a base salary package." "Hourly-type packages are frequently offered for entry-level or low-paying positions."
2. Commission package
Compensation given based on employee performance is known as a commission package. While some commission packages offer both high commissions and low base pay, others only offer commissions. Since their pay is based on performance, employees are encouraged to work hard when they receive a commission package.
These compensation packages are frequently given to people in the sales industry, according to Jarry. If they meet a sales goal, they will receive a flat dollar amount or a percentage of the turnover they produce.
3. Equity package
By giving employees a base salary and stock options, employers can create equity compensation packages.
According to Jarry, incentive stock options, nonqualified stock options, and restricted stock units are some of the different kinds of stock options. "Stock options are a financial instrument that gives its beneficiary the possibility to purchase a certain number of shares in a company at a fixed price," Jarry said.
Employees in leadership positions or for difficult-to-recruit profiles are typically offered equity packages. However, according to Jarry, providing stock options to every employee can foster a climate of cooperation and inclusion while also bringing together the interests of investors, founders, and workers.
According to Roy, "Equity will vary by organisation and may be used as a larger component if cash is tight (for example, at a startup) and as a method to encourage employee retention."
4. Benefits package
An employee benefits package consists of extra benefits on top of base pay that employees receive. Several employee benefits, such as paid family and medical leave, health insurance (for businesses with 50 or more full-time employees), FICA (contributions for Social Security, Medicare, and federal insurance), unemployment insurance, and workers' compensation are mandated by law.
Other common employee benefits include life and disability insurance, paid time off (such as holidays, sick leave, vacation time, parental leave), commuter benefits, gym reimbursement, tuition assistance, and employee assistance programmes (EAPs). Dental and vision insurance, tax-free accounts for medical expenses, life and disability insurance, paid time off (such as holidays, sick leave, vacation time, parental leave), retirement plans, commuter benefits, and EAPs are also common.
Although these benefits might seem pricey, a variety of employer budgets can accommodate them.
"There are lower-cost supplemental benefits that could be added to your compensation package that could help create a more enticing package," Roy said. "Examples include online fitness programmes, financial wellness, telemedicine, and flexible work schedules."
5. Bonuses
Bonuses are frequently based on how well an employee, their team, or the business as a whole performs. Although you can give bonuses to workers at any level, many employers only give them to those in executive positions.
"There is typically a higher percentage of a bonus that is available for VP through the C suite, and it frequently ties to the team's performance as well as your own and the company's financials," said Tara Furiani, CEO of the human resources consulting firm Not the HR Lady.
Think about the business's finances, forecasts, and objectives when developing a bonus plan.
The importance of employee compensation
Offering competitive and desirable employee compensation often pays off despite the fact that it's crucial to stick to your budget because you can use it to entice the best candidates, foster brand loyalty, and lower employee turnover.
Reviewing employee compensation over the course of their employment with the company is another smart move. Offering competitive raises and bonuses in exchange for your workers' hard work can increase employee satisfaction, promote excellence, and enhance the reputation of your business as a whole. Additionally, it can assist you in keeping your best employees; you don't want them to leave your company because they feel underappreciated.
"A good compensation package is part of why an employee will decide to join or stay in a business," Jarry said. "Therefore, it will be essential to combine a good corporate culture, strategic vision, and appropriate compensation package."
How to determine compensation
In order to accommodate various job types, seniority levels, and levels of expertise, there is a good chance that you will provide a variety of compensation packages across your entire organisation. Follow these four steps to determine each employee's proper compensation if you're unsure how to proceed:
1. Research current market rates.
Research is the first thing you should do. To find out what others in your industry are paying for similar positions, browse online job boards, look at open positions on rival companies' websites, and read market rate studies. You can also conduct a survey of current employees in your company who play similar roles to find out what they expect.
Roy advised posing the following inquiries to yourself as you examine market rates and choose your compensation management strategy:
- What are the industry and rivals doing?
- How will you compete with the market rate?
- What is typical in your field (for instance, tech workers might anticipate different benefits than those in the hospitality industry)?
- What is your approach to finding and keeping employees, and do you find it difficult?
- How much can you spend?
- What do the majority of your employees value?
2. Establish standard company benefits.
Even though some companies skip this step, it's crucial to establish standard employee benefits. Make a list of the fundamental benefits that each worker will get, such as overtime pay and health insurance. For each position type (such as entry-level, professional individual contributor, manager, senior manager, director, vice president, and C-level executive), Furiani said you can also compile a list of standard offerings.
This list of advantages can assist you in upholding an equitable workplace. Regardless of whether employees request it, be deliberate about the type of compensation you provide and reward similar levels of work equally.
Furiani gave the example that, "while it may seem counterintuitive, you don't want your chief marketing officer (a woman) whom you just hired to not have equity because she didn't ask for it, when all of her other C-suite counterparts (men) do," This is how you 'accidentally' bring about pay inequality and a biassed workplace.
3. Create a pay structure.
Establish a pay structure with various grades that includes a grade range or step increments and the minimum wage requirements.
"Each grade will also have a defined commission programme for specific positions (such as sales)," Jarry said. The pay structure "should at a more advanced level be catering to each business department and seniority level."
Be sure to take into account your current budget for compensation, your financial projections, and potential promotions.
4. Modify compensation as needed.
As your company expands, so should your compensation packages. Consider changing your compensation plans to reward your team with higher salaries and better benefits if your company experiences significant growth.
In order to take inflation and changing industry expectations into account, you must also regularly update your pay structures. Furiani advised carrying out a pay equity study to make sure you're paying fairly for both current and future roles.
In order to make sure you are both competitive in the market and fair and equitable at your company, this should be done annually by an impartial professional organisation, according to Furiani.
For a previous iteration of this article, source interviews were conducted.
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