Organizations go about recognizing the work of their employees or the potential of candidates in the pipeline in several ways. For the internal workforce, this is usually done in the form of promotions. But there are attractive employee compensation packages offered to the professionals willing to join a company. While these benefits are certainly welcome from an employee’s point of view, many of them find it difficult to differentiate between salary and compensation package. Employers who prioritize transparency and fairness in their compensation vs salary structures are more likely to earn the trust and loyalty of their employees.
This confusion is not limited to the employees as many small business owners also think of an employee’s salary to be the only component in the compensation package. The truth is – there are several types of compensation that you, as an employer, need to offer to your workforce for their services.
Through this guide, we will help you understand the differences between salary and compensation packages. Employers need to carefully consider the balance between compensation vs salary in order to attract and retain top talent.
What is Salary?
Base salary, also known as simply salary, is the initial compensation amount you agree to pay to an employee before considering taxes and other deductions. It is determined based on a variety of factors, such as the industry, the education and experience level of a candidate/employee, and the predetermined pay range specified by your organization.
In other words, it is the rate of compensation your company offers to an employee, not including any bonuses, raises, or other benefits. Depending on your business policy, the base salary can be expressed as an hourly, weekly, monthly, or annual rate. Furthermore, organizations may offer different benefits to hourly employees and salaried individuals.
If you are planning to hire more employees for your company, think of an employee’s base salary as the minimum amount you should pay during a specified pay period. Given below are a few other important points you must know about the base salary:
- A salaried employee is expected to work for a minimum number of hours in exchange for the base pay you offer. This is in contrast to the hourly employees who are only compensated for the exact number of hours they work.
- Many employees receiving a base salary are exempt from federal labor laws such as the Fair Labor Standards Act (FLSA).
Here, it is important to note that the base salary does not constitute the entire compensation package. However, several key employment perks other than the salary often appeal more to the job-seekers thing of joining an organization. Let’s dive deeper into what makes up the compensation package.
Factors that affect base salary
Years of experience
More experienced professionals generally benefit from a higher base salary. Similarly, if an open position requires an individual with six years of experience, a candidate who does not fulfill this requirement may receive a salary on the lower end.
The quality of education an individual has received influences his base salary. It means you would most likely pay more to a candidate who has a degree from a top program or institute. Although educational qualification has an impact on the earning potential of a candidate, it is not the only parameter that defines salary.
Memberships and certifications from trade associations or similar renowned institutions can have a positive influence on the base pay.
In certain cases, you may expect the potential candidates to perform their duties in less favorable shift timings. This will require paying a premium salary to get the work done outside the regular working hours.
What is total compensation?
Total compensation refers to the bouquet of benefits offered by an employer to an employee in exchange for work. In simple words, you offer total compensation to your employees, which includes base salary and other benefits. Most employees look at all the components of the total compensation before deciding to join an organization.
Other than the base salary, total compensation includes the following benefits in general:
Paid vacation or sick days
These cover the days in a year when you pay your employees even when they do not work. For example, you pay your employees for Thanksgiving and Christmas holidays even when they have these days off. Similarly, you offer sick days to employees when they face health issues and are thus unable to come to work.
Health insurance policies offered by an employer usually pay for the prescription drugs, medical, and surgical expenses incurred by the employees. You can either reimburse the expenses incurred by your employees or pay the insurance provider directly.
In general, healthcare insurance is a part of the total compensation package offered by an employer to attract and retain hard-working, talented hires. The insurance premium is partially paid by the employer while the rest is deducted from the employee’s paycheck. In terms of taxation, these premiums are tax-deductible for the payer, while the benefits are tax-free.
Maternity and parental leave refers to the break from work taken by employees after the birth of a child. In most cases, individuals are asked to provide notice of pregnancy to their employers to be eligible for these leaves.
In some cases, maternity leave begins before the planned date because of illness due to pregnancy or premature childbirth. As per the Family and Medical Leave Act (FMLA) of 1993, a total of 12 work weeks of leave during a 12-month period are allowed for the birth and postpartum care of a newborn.
If an employee is unable to work because of any injury or illness, he/she can benefit from short-term insurance and receive a certain portion of the total income until capable of returning to work. Similarly, there is long-term disability insurance that protects the employee’s income in case they are unable to work for a long period.
This type of insurance coverage is one of the most sought-after employment benefits in the total compensation package.
A 401(K) is a retirement savings plan that is designed to provide a certain income to employees after they retire. It allows them to contribute a part of their salary to their retirement fund. It depends on the organization whether they allows the employees to start a 401(K) from the date of joining or after a certain waiting period. Hence, it is important for you to define 401(K) policies carefully with the help of members of your company’s HR and finance departments.
Salary Vs. Compensation: Differences You Should Know
The following table summarizes the differences between total compensation and salary:
|It includes the amount payable before adding any other employment benefit.||It encompasses the base salary and other benefits offered by an employer.|
|It does not reflect any taxes withheld.||It covers benefits paid, either in full or partially, including non-taxable components, such as insurance coverage, tuition assistance, etc.|
|It is up to the employee to decide how he wants to utilize the amount for regular or retirement goals.||It includes funds paid by the organization toward a retirement plan for its employees|
|Annual bonus or commission is not included in the base salary.||Annual bonus/commission is included in the total compensation package.|
|Compensation for work is paid in cash as a salary.||The compensation package also includes benefits that are not paid in cash, like paid time off.|
Ultimately, the balance between compensation vs salary will depend on a variety of factors, including the company’s financial resources, competitive landscape, and strategic priorities.
How to Determine Total Compensation Payable to Employees
By this point, you might have realized that hiring new employees does not only mean paying them the base salary they deserve. To determine the total compensation package for an employee, you need to consider the following steps:
Start with the base salary
Sit with the HR and talent acquisition team members to decide how much salary you need to offer to different candidates. You can create different slabs based on qualification, experience, existing base salary, and skills to make it easier to calculate the salary that a potential candidate deserves.
Consider time-off benefits
Almost every employer provides time-off benefits to employees in the form of sick time, vacation time, or a lump sum of paid time off. Although you need not quantify these benefits in terms of per-day employee value, it is something you should keep in mind.
Add insurance costs
There are several federal mandatory employee benefits you should provide to your employees, including social security and medicare, worker’s compensation insurance, and FMLA protections. Here, the employer-paid portion of these benefits needs to be included in the total compensation assessment. This will not only help you plan the organizational finances but also define your hiring decisions.
Include applicable commissions and bonuses
Various job positions like in sales, ask for incentives and commissions based on their performance and the company’s revenue goals. Although higher sales are crucial for business growth, you can consider these variable capital outflows as a part of the employment perks you offer to your employees.
Assess any other benefit you offer
You might want to offer retirement benefits that allow the employees to contribute to their retirement savings. If you contribute funds to these savings accounts linked to your employees, the amount is to be included in their total compensation.
Why Do Employment Benefits and Perks Matter?
Employment benefits, loosely defined as items outside the base salary, are important to consider for several reasons. They can help your employees offset the cost of various necessary expenses like health insurance that they might otherwise have to pay by themselves or even be unable to afford. Being an employer, you can offer these insurance perks at a better rate than they would find on buying these policies independently.
Since they provide peace of mind to your workforce, the ultimate result will be a healthy work-life balance and improved morale for the employees, who will likely reward you with their loyalty.
Join Hands with Connect Tech+Talent to Hire the Best Talent Within Your Budget
With a better understanding of the differences between salary and total compensation, you can narrow down your search for potential candidates. To hire right within the budget you can afford, switch to Connect Tech+Talent – an Austin-based staffing agency with deep expertise in hiring top tech talent. Learn more about Connect Tech+Talent- here.