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Understanding Total Compensation

Written by Sarah Reynolds

March 14, 2019

Understanding Total Compensation Hero

While many employees think of compensation in terms of their base pay, they may also be eligible for other forms of compensation beyond just this number. If your organization offers short-term and long-term incentives to your employees, reframing conversations with employees around total compensation, instead of base salary, can help you communicate the true value of your compensation packages to your employees.

How do you calculate and define total compensation?

Total Compensation definition: HR professionals define total compensation as the annual sum of an employee’s base salary, their short-term incentives (STIs), and their long-term incentives (LTIs). Understanding total compensation can help employees visualize the total value of all compensation and reward elements in their individual pay packages.

How is base salary defined?

Base salary is the fixed pay an employee receives for carrying out their job. Base salary does not include incentives or any other type of variable pay. Similarly, base salary does not include overtime pay or the value of benefits like retirement plan contributions.

What is included in short-term incentives?

Short-term incentives and bonuses include any cash awards provided to an employee for the achievement of individual or organizational goals based on performance periods of one year or less in length. For sales positions, commissions are typically classified short-term incentives. For non-sales roles, short-term incentives can be handed out when performance against pre-determined targets is met, or they can come in the form of spot bonuses and other discretionary awards.

What are long-term incentives?

Long-term incentives include any type of award granted to an employee for the achievement of individual or organization goals based on performance periods over one year in length. Long-term incentives can be provided in cash, but are more often awarded as equity, most typically in the form of stock options or restricted stock.

What is the total cash compensation definition?

While the terms are similar, total cash compensation is slightly different than total compensation. Because most employees don’t receive long-term incentives as part of their pay plans, organizations often focus on total cash compensation, which is the annual sum of base salary and any short-term incentives and bonuses paid to an employee. Even for employees that are eligible for long-term incentives, total cash compensation often represents the biggest portion of their overall total compensation.

How can you set total compensation expectations with employees?

Providing employees with a total rewards statement, which outlines the total value of all of the elements in an employee’s pay package, is a critical first step to communicating the value of your organization’s investment in each employee. Should employee expectations around total compensation packages radically differ from your organization’s approach, you may need to revisit your market pricing to understand if you’re out of alignment with the competitive conditions and market rates of your local pay markets. You may also need to educate employees to reset expectations appropriately.

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