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The Employer's Guide to Compensation Packages

By:
Ryan Shank

What Exactly is a Compensation Package

A compensation package is a type of employee compensation that goes beyond a base salary. This package also includes all the benefits that an employee receives.

It's useful for employee retention and to attract quality job seekers who want fair pay and benefits.

Companies renowned for their excellent compensation packages include:

  • Adobe
  • Calix
  • Boston Consulting Group
  • Encora
  • Amazon
  • Microsoft

Compensation package definition

A compensation package is the entire payment package that an employer offers an employee. This includes both direct payment (like wages) and indirect payment (like benefits).

A compensation plan describes this package in detail.

The way the compensation package is set out could be standard for all employees, or it might be position-based.

A fair compensation package will give your employees the motivation to work and remain loyal to the company.

Key components of a compensation package

The components of a compensation package will vary between companies as well as regions, industries, and job titles.

However, most compensation packages have the same general key components:

  1. Base salary: This refers to the money paid to the employee for doing their job.
  2. Paid time off: The package should include information on paid vacation time and sick days.
  3. Medical insurance: Some employers may decide to include medical insurance. This insurance can cover medical emergencies and dental and vision issues.
  4. Retirement benefits: Most companies will include a retirement savings plan in the compensation package. The most common retirement plan is a 401(k) in which the employer will match employee contributions.
  5. Remote working: To ensure a work-life balance, employers may opt to allow their employees to work from home a couple of days a week.
  6. Tuition reimbursement: Often, private companies will offer to pay back tuition fees or any training courses their employees did.
  7. Child care: Some employers offer on-site childcare facilities free of charge. This is a great way to retain talent, as mothers often have to leave their jobs to take care of their young children.

Employee Compensation Types

Different types of short- and long-term incentives can form part of a compensation package. There are also several different compensation package types, and the type you choose is discretionary.

Here are some employee incentive ideas to flesh out your compensation package.

Direct compensation: Salary and wages

All compensation packages include the base salary or wages of the employee. This is the fixed amount that your employee will receive for working at the company.

Indirect compensation: Benefits and perks

Indirect compensation can include various benefits:

Bonuses

A bonus is a financial reward paid to employees in addition to their salaries. A bonus can be paid when an employee goes above and beyond, has reached a work milestone, or when the company did well during a financial year.

Bonus plans can help to create a positive company culture as employees feel valued.

Benefits packages

"Employee benefits" is a wide term for a lot of indirect compensation offers.

These can include:

  • Paid time off
  • Health insurance
  • Company car
  • Disability insurance
  • Flexible work schedules
  • Remote work arrangement

Stock options or equity compensation

Stock options allow select employees to buy company stock at a set price. This is a form of equity compensation. It is an excellent business strategy as employees feel like they're benefiting directly from the company.

Retirement plans

A competitive compensation strategy should include a retirement plan, which is something that many employees look for when deciding to take a new job or stay at their current job.

These plans allow employees to save for their retirement. Employers and employees contribute to the plan.

Non-monetary compensation: Recognition and career development opportunities

If you feel like you have a high employee turnover, it might be time to evaluate your compensation packages and consider where you can make changes.

Many employers don't even consider career development opportunities as part of a compensation package. These opportunities can entail upskilling, further studying, tuition reimbursement, or professional development. It will add a lot of value to the compensation package.

Using Profit Sharing in Your Employee Compensation Package

Profit sharing is another way to add value to your total compensation package offering.

A profit sharing bonus is when employees receive a share of the company's profits. It is often calculated as a percentage of the employee's base salary.

Employers pay a portion of the company profits (before tax) into a pool or fund. This pool of money is then shared among eligible employees. It is up to the employer to determine eligibility criteria.

While compensation packages are usually standard, profit sharing plans are performance-based (which is why it is considered a type of performance bonus). These plans contribute to a company's overall reward structure - along with other perks like career advancement opportunities.

Including profit sharing as part of your compensation strategy can be very cost-effective. When the company makes a profit, the employee gets rewarded. There is no financial strain in years when the company isn't performing as well, like if you had to pay salary increases in lean years.

The Impact of Compensation on Employee Motivation and Performance

When you reward employees for their hard work, you are sure to see positive results.

By offering a compensation package, you can reduce employee turnover and instill loyalty in your employees. Employees who feel valued are less likely to seek employment elsewhere.

Employees will be motivated when they receive benefits and bonus perks. They feel more valued at their jobs and will want to work harder.

This is especially true if profit sharing is part of employee benefits. Employees will realize that when the company achieves its goals, they receive financial rewards, motivating them to be more productive.

A competitive compensation package will also help you attract top talent in your industry. Job seekers don't just want a base salary anymore; they're looking for additional benefits to make the job offer worth it.

When establishing your compensation package, you'll have to consider long-term versus short-term benefits.

Cash bonuses are great to motivate your employees in the short run; however, a long-term benefit like paid time off, stock options, or a retirement plan may work better to retain employees.

Market Standards and Expectations

Different industries have different compensation standards. This is because of the different demands and skill sets required from employees in these industries. The job market will also differ. For example, some industries like technology or finance are more competitive in terms of finding candidates than hospitality.

Let's look at some compensation packages offered by companies in different industries:

Adobe - Digital media

Adobe has a comprehensive compensation package and benefits program, which includes:

  • Medical plans (including dental and vision)
  • Heath savings account
  • Wellness centers
  • Wellbeing reimbursement program
  • Employee assistance program
  • Free access to the Headspace app
  • 401(k) retirement plan
  • Employee stock purchase plan
  • Life insurance and disability insurance
  • Financial coaching
  • Paid time off
  • Disability benefits
  • Learning fund
  • Commuter benefits
  • Employee discounts
  • Family services (including adoption support, caregiving, pet support, and student support)
  • Recognition programs
  • Business travel

Boston Consulting Group - Advisory services

Boston Consulting Group's compensation package goes beyond financial rewards. This package places a focus on health and wellness benefits.

Their benefits vary by region but include:

  • Gym reimbursement
  • Health insurance
  • Mental health resources
  • Subsidized recreational activities
  • Adoption support
  • Maternity and paternity leave
  • Flexible schedules

Microsoft - Technology

Microsoft offers a comprehensive compensation package, which includes:

  • Fair salaries
  • Annual bonuses (up to 40% of base pay)
  • Stock compensation
  • Savings opportunities
  • Deferred compensation for high-level employees
  • Health savings account
  • Life insurance
  • Wellness programs
  • Home relocation support
  • Family assistance
  • Tuition reimbursement

Calix - Communications

Based on employee reviews, Calix offers the following as part of their compensation package:

  • Competitive salary
  • Vacation leave
  • Wellness benefits
  • Quarterly bonuses
  • Healthcare
  • Stock options
  • Remote work compensation in line with the market rate

Compensation packages across regions/countries:

As would be expected, different regions across the U.S., as well as different countries, will have different compensation packages.

That's because salary rates across these regions differ.

This, of course, makes it very complicated for international companies who have to offer their employees benefit packages that are competitive in their areas to not lose staff.

Fortunately, companies can use a suite of compensation management software to help calculate and set up compensation packages across regions.

Legal and Tax Implications

It is up to you, as the employer, to ensure that your compensation package complies with local legal requirements. These requirements include:

  • Minimum wage according to federal and state laws. The minimum wage will differ according to your location and industry.
  • Overtime pay is a legal requirement in terms of the Fair Labor Standards Act, usually at a rate of 1.5 times their normal hourly rate.
  • Equal pay means that salary is based on industry standards and that employers can't discriminate according to race, gender, or age.
  • Certain benefits may be mandatory, depending on where your company is based.

Employers should also be aware of the tax implications of the different components of the compensation package.

For example, salaries are subject to income and payroll taxes, whereas stock options will be taxed when purchased or sold. Financial bonuses are usually taxed as income during the financial year they were received. Other contributions, like health insurance or retirement plan contributions, may be completely tax-free or subject to deferred tax when funds are withdrawn.

Add Profit Sharing To Your Compensation Package with our Free Template

If you want to take your compensation package to the next level and attract and retain talent, you should include profit sharing as part of the package.

Not sure where to get started? ShareWillow offers a free profit sharing template. Our software can help you manage your profit sharing plans, figure out how to calculate a profit sharing bonus, and simplify your compensation packages too.

ABOUT THE AUTHOR

Ryan is the founder of ShareWillow. He's passionate about helping businesses create incentive plans that motivate and reward employees. He previously built and sold PhoneWagon.

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