Total Compensation

What is total compensation?

Total compensation refers to the complete package of direct monetary payments (e.g., base salary, bonuses, commissions) and indirect non-monetary benefits (e.g., health insurance, paid time off) an employee receives from their employer. In addition to an employee’s base salary, a total compensation package may include:

• Insurance: Medical, dental, disability, and/or life insurance.
• Bonuses: Additional cash compensation based on performance, target achievement, or company profitability.
• Paid time off: Sick days, vacation days, and public holidays are common examples of paid time off.
• Overtime pay: Payment for extra working hours, typically for time worked beyond the usual 40 hours per week.
• Profit sharing: Payout of a portion of a company’s profits.
• Employee perks: Additional benefits such as gym memberships, free lunches, and subsidized childcare.

Why is total compensation important?

An overview of total compensation is a crucial HR tool for attracting, motivating, and retaining employees. When employees understand the full value of what they receive beyond their base salary — including bonuses, benefits, and equity — it can enhance their job satisfaction significantly.

A comprehensive total compensation package effectively communicates a company’s appreciation for its employees. By transparently showing the full value of this package, you can motivate employees and propel business success.

HR tip

A key part of your total compensation strategy is communication. When recruiting new talent, include an overview of the position’s total compensation package. This approach not only enhances the candidate’s interest but also gives them a detailed understanding of all the benefits and perks available.

Additionally, HR should consider providing a projected five-year outlook for the compensation package, especially for components that grow over time, such as stock options and 401(k) contributions. This strategy should also be extended to current employees to keep them informed and engaged.

Base salary vs. total compensation

There are some key differences between employees’ base salary and total compensation. For instance:

Total rewards vs. total compensation

Total rewards and total compensation are both terms used to describe employee remuneration, but there are some subtle differences between them: 

Total compensation is primarily focused on the financial aspects of employee benefits. This includes direct payments like base salary and bonuses, as well as indirect benefits such as health insurance and pension plans. It encompasses all the tangible financial value that employees receive from their employer.

Total rewards, while including all elements of total compensation, extend further by incorporating non-financial incentives that contribute to employee satisfaction and wellbeing. A total rewards package can include professional development opportunities, employee recognition programs, flexible working options, social activities, and more.

Total compensation package example

Here is an overview of the key elements of a total compensation package:

• Base salary: $120,000 annually.
• Performance-based bonus: Up to 10% of base salary, depending on individual and company performance.
• Paid time off: 20 paid vacation days, 10 sick days, up to 12 weeks of paid parental leave, and paid bereavement and jury duty leave.
• Insurance: Comprehensive health (no deductible, covers entire costs), dental (up to $2,000 per year), and life insurance (with a death benefit of 3x the employee’s annual salary).
• Stock options: Granted 1,000 stock options at a strike price of $45, vesting over four years (equivalent to $5,000).
• 401(K): 100% matching of employee contributions, up to 6% of salary.
• Employee perks: Commuter benefits (up to $100 per month), flexible working arrangements (up to two days of remote work per week), gym membership or wellness reimbursement (up to $600 per year), professional development opportunities (up to $3,000 per year).

How to calculate total compensation

Calculating an employee’s total compensation is fairly straightforward. Here is a step-by-step guide:

• Step 1: Gather data on direct compensation: Direct compensation includes all monetary payments made directly to employees.
  • Base salary: $120,000 per year
  • Bonuses: Additional compensation based on performance or company profitability (e.g., $5,000).
  • Overtime pay: Compensation for hours worked beyond the standard working hours (e.g., $3,000).
• Step 2: Gather data on indirect compensation: Indirect compensation consists of non-monetary benefits that have monetary value.
  • Health insurance: $7,500 for a comprehensive health insurance plan
  • Paid time off: The monetary value of vacation, sick leaves, and other paid leaves. A simple monetary amount estimate could be $4,000.
  • Employee perks: $600 (gym membership); $1,200 (subsidized transportation); $5,000 (tuition assistance). Total = $6,800.
• Step 3: Calculate: Add all direct and indirect compensation components to calculate the total compensation (see example below).
• Step 4: Review and adjust regularly: Review these compensation packages regularly to ensure they remain attractive and competitive within your industry. HR should consider the cost of living, job complexity, skills shortages, and employee performance. Benchmark your organization’s total compensation with others in your industry, particularly competitors.

Calculation example

Here’s an example of how to calculate total compensation using the data provided above: 

• Direct compensation:
  • Base salary: $120,000
  • Bonuses: $5,000
  • Overtime pay: $3,000
• Indirect compensation:
  • Health insurance: $7,500
  • Paid time off: $4,000
  • Employee perks: $6,800

Total compensation = Direct compensation ($128,000) + monetary value of indirect compensation ($18,300) = $146,300.

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