Written by Heather Bussing
December 13, 2021
Money matters. But it isn't everything, even in compensation.
While wages are an essential part of the employment relationship, understanding how all the elements of a compensation package go together is how you design a compensation strategy that attracts and retains great people.
There are two main types of compensation, direct and indirect. Most people think about them as wages and benefits.
Direct compensation includes base pay, merit pay, incentives, and bonuses.
Indirect compensation includes employee benefits like health, life, and disability insurance, retirement funds, paid time off, and any other type of employee support or perk.
In coming up with a compensation strategy, it's essential to get input and advice from a compensation expert and often an employment attorney to understand the financial and legal implications of your choices. Your friendly compensation expert can also help you understand what will help attract candidates and how compensation can improve your retention.
Coming up with a compelling compensation package is all about finding the right balance between resources, mission and strategy, and staying competitive in your market.
Your organization's compensation philosophy and strategy will dictate which types of rewards you include in your total compensation package. Here are specific types of compensation to consider.
Base pay - do the research to know whether your base pay is competitive for your market and industry.
Bonuses - bonuses can be a great way to encourage productivity and show appreciation for great work. Common bonuses include:
Commissions - this is most common with sales teams. If you decide to offer commissions, be sure to have a written commission agreement that sets out when commissions are earned, when they are paid, and what happens when employees leave.
Equity - stock and stock options give employees a direct financial incentive in the success of the company. Vesting schedules can help people stick around. It's important for employees to understand the tax consequences of these types of benefits.
Insurance - Health insurance is the big one. If possible, offer a variety of plans and coverage because people need and want coverage choices at different stages of their lives. Other forms of insurance include dental and vision expenses, life insurance, short and long term disability, critical illness and cancer insurance that cover extra expenses and treatment, and pet insurance.
Retirement funds - Get professional help to set this up because it's complicated (and not very fun unless you know what you're doing). Decide who will and can contribute, whether the employer will match all or part of employee contributions, and how employer contributions will vest. Having a generous plan and vesting over time can help with employee retention.
Time Off - time off is either paid or unpaid. Both sick leave and vacation time are kinds of paid leave, but they can vest differently and can be treated differently on termination. Get professional advice about the pros and cons of PTO versus sick & vacation leave.
Other kinds of time off include firm holidays, parental leave, family medical leave, leave for military service, voting, jury duty, volunteer first responders, crime victims, and bereavement leave. Many of these may be mandated by state or federal law.
Then there are sabbaticals and other personal leave, which are usually discretionary and could cover almost anything.
Wellness, commute benefits, and other perks - Offering reimbursements for gym membership, exercise equipment or classes is a great way to encourage people to move, especially if they sit a lot at work. Commute benefits can make a big difference to employees and there are sometimes programs that give government subsidies to employers who reimburse the costs of using public transportation.
Putting together a compelling total compensation package can take time and work, but it's an important opportunity to make the organization stand out and show employees you understand what they need and want.
Download our white paper to further understand how organizations across the country are using market data, internal analytics, and strategic communication to establish an equitable pay structure.