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A Full Guide to Compensation and Bene!ts

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Compensation and bene!ts refer to the bene!ts a !rm provides to its employees in Type and hit enter … 󬁑
W exchange for their labor. Compensation and bene!ts are thus a key part of Human Resource

+ Management. In this article, we will provide you with a full guide about compensation and

bene!ts.

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How do HR Departments calculate compensation and bene!ts? Tips to Get it Right

3 Models to Explain Compensation and Bene!ts

Compensation and bene!ts package example Job Rotation: A Full Guide with
5 Examples
Frequently Asked Questions

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What are compensation and bene!ts? Know

When you receive a job o"er, the !rst thing you look at is the salary. Whether the recruiter lists the

wage as an hourly, weekly, monthly, or hourly rate, candidates see it as the most critical part of any
job o"er. Typically, when employees think about compensation, the salary is what they think of.
But, for many employees (especially senior employees) compensation is far more than just the
regular paycheck.

Bene!ts cover indirect pay. This can be health insurance, stock options, or any myriad of things NEW
o"ered to employees. All of these things are critical in any job o"er. Two jobs that o"er identical

salaries may vary wildly in the bene!ts category, making one a better !nancial proposition than the Talent
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Overtime pay, stock options, 401k matches, pension plans, days o", and even free lunches make up
an essential part of the compensation and bene!ts package.
Gain the skills to de!ne and
optimize your recruitment
Some bene!ts are country-speci!c. In the United States, health insurance makes up a key strategy
component of bene!ts. Who your employer is, determines your health care options – even down to
which doctors you can see and which medications are covered.

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In Europe, there is often a focus on more social bene!ts, including maternity and paternity leave,
severance pay, and termination notice. In countries like France and Finland, it is not uncommon for
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employers to pay for restaurant vouchers that cover part of the employee’s lunch.
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Cultural di"erences in bene!ts: In France, employees get a restaurant voucher for every
workday if their company doesn’t have a canteen.

Most often, compensation and bene!ts (commonly referred to as comp & bene!ts) fall under the
responsibility of the Human Resources department. In a small company, an HR generalist would
handle all aspects of this process, while in a large company, there would be dedicated departments
to manage these.

Why are compensation and bene!ts

important?
Compensation and bene!ts are important for two reasons.

First, people won’t work for you without pay. And unless you’re a non-pro!t organization, it’s illegal
to ask them to work for you for free. There is a social contract between the employer and

employee, where the employee puts in the work and the employer rewards this. Compensation and

bene!ts are an important part of that equation.

Other things play a role too – and we’ll discuss them later – but what the employee receives is
central. In addition to salary, bene!ts remain a crucial motivator for job candidates.

Second, as of June 2019, bene!ts make up 31.4 percent of the cost of employing someone. It is a
signi!cant expense with a clear goal so it’s not something businesses can overlook. This is why

paying careful attention to a fair compensation and bene!ts structure is so important.

But, how does compensation motivate employees and do increases make a di"erence?

Compensation and bene!ts and employee

motivation
Glassdoor found that a 10 percent increase in base pay resulted in a 1.5 percent increase in the

chance that the employee would stay at the company for their next role, rather than moving on.
While their !ndings were statistically signi!cant and turnover is expensive, it’s probably not enough

to convince a boss to give someone a 10 percent raise.

This same research found that a higher company rating on Glassdoor resulted in a four percent

increase in the chance that someone would stay at the company. Salary is clearly important, but
there is something other than money going on.

A Payscale study gives some insight into the in#uence of salary. They found a strong correlation

between pay and engagement (and engagement profoundly in#uences retention), but what was

stronger is pay clarity. When employees understood that their compensation was fair, it increased
their engagement.

Procedural and distributive fairness

Compensation fairness consists out of two elements: procedural fairness and distributive fairness.

1. Distributive fairness refers to the perceived fairness of the amount of compensation the

employee receives.
2. Procedural fairness refers to the perceived fairness of the means used to determine those

amounts.

Research shows that both distributive fairness and procedural fairness lead to higher employee

retention.

However, when it comes to employee engagement (or motivation), procedural fairness seems more
important than distributive fairness. A study in the UK showed a link between procedural fairness

and engagement. Another study among Chinese compulsory school teachers showed that
procedural fairness, not distributive fairness, predicted employee motivation.

In other words, it’s not so much about money as it is about communication and honesty.
Traditionally, many companies keep salary information con!dential. Some managers even punish

employees for sharing their salaries with co-workers, even though the National Labor Relations Act
protects employees’ rights to discuss their working conditions, including salary. Secrecy can

back!re, though, as employees are concerned that their pay is not fair.

When an employee clearly understands that their compensation is commensurate with their skills,

position in the company, and broader job market, they are more likely to be engaged in their work.

Bene!ts and motivation

Salary is only a part of compensation, though. Other bene!ts, such as pensions, 401ks, and stock

options, also help increase employee retention. Many of these bene!ts require a period before the
employee is vested. That is, you don’t receive the money or bene!t from these forms of

compensation until you’ve worked a minimum amount of time. If you quit before this date, you give
up the stock or 401k match or other bene!ts.

Researchers at the University of Pennsylvania found that delayed compensation did decrease

turnover overall, but it also resulted in employees quitting just after they did vest. In other words,
employees are acting strategically when choosing to leave their jobs. They wish to move on but also

want to maximize their compensation.

The Society for Human Resource Management (SHRM) found that 62 percent of U.S. employees
rated their health care bene!ts as very important to them, meaning that this is an area that

companies can focus on to increase engagement and retention.

The same SHRM study also found that indirect compensation bene!ts also strongly in#uenced

employee happiness. Things such as paid time o" (63 percent said it was very important), #exibility
(53 percent), and family-friendly bene!ts (35 percent) strongly in#uenced employee satisfaction

with their jobs. The traditional money-based programs, such as retirement bene!ts, were also
important. Still, at 48 percent saying retirement bene!ts were important, you can see how #exibility

and vacation may cost you less and increase happiness overall.

Of course, because compensation and bene!ts can vary across companies and geographic regions,
it’s important to benchmark your programs to ensure you’re maximizing the bene!ts from your
programs.

How do HR Departments calculate

compensation and bene!ts?
While governments set the #oor for pay, known as a minimum wage, businesses are generally free
to set their own wages. However, you’d be hard-pressed to hire an accountant for minimum wage.
Instead, you’ll need to pay a market rate.

A market-rate can also be de!ned as a “going rate” and is the amount people are willing to pay for a

particular good or service. Employees are o"ering their services and fall under this de!nition. There
are market rates for each position, but because people are rarely transparent about salaries, this
can be di$cult to ascertain.

A compensation specialist will use salary surveys to help her determine a market rate. A salary
survey asks many businesses to share their compensation data for positions. The data is then
anonymized and sold back to businesses. In this way, a company can determine that the average

rate for a junior accountant is $X, while the average rate for a marketing manager is $Y.

Because positions vary from company to company, you cannot just look at the salary survey and
base all your salaries on the average salary for someone with that title. A marketing manager at a
Fortune 500 company will have a very di"erent job description than a marketing manager at a 25-

person business.

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Compensation managers will determine not only an ideal salary for a position but a salary range.
Because candidates vary wildly, it doesn’t always make sense to pay di"erent people the same

amount. One person may have more experience and better skills than another and deserves a
higher salary. Each range has a mid-point, which you may hear as a compa-ratio. If you have a
compa-ratio of 100 percent, that means you are at the midpoint of the salary range.

Determining where someone !ts within that salary range can also be complicated. Compensation
managers often use statistical tools, such as regression analysis, to establish a proper salary

position. The variables that the regression use can include

Highest degree earned (and type and degree area)

Years of experience
Tenure with the company
Position tenure
Current salary

Full-time equivalent status

Exempt vs. non-exempt status
Grade level or salary band classi!cation

Employee location (if you have multiple locations)

Job performance ratings

In addition to salaries, stocks, retirement bene!ts, health insurance, and any other bene!t are
included in compensation !gures.

3 Models to explain compensation and

bene!ts
While compensation and bene!ts is a #at model to explain di"erences in pay, there are two
scienti!c models that enable us to understand compensation and bene!ts in a better way.

Compensation and bene!ts vs. total rewards

As discussed, compensation and bene!ts are not the only aspects of employee happiness,
engagement, and retention. The Total Rewards Model demonstrates the interplay between the

organization and compensation.

The Total Rewards Model, coined by WorldatWork, proposes that total rewards are made up out of

two elements:

1. Direct compensation. This consists of:

1. Salary. This is the base and variable pay for work.
2. Rewards. Other monetary bene!ts from working at the company, including health
care, retirement pay, and allowances.

2. Indirect compensation. This consists of:

1. Work-life balance. A good work-life balance is crucial for a happy career.

2. Recognition. Recognition by colleagues and supervisors, as well as external
recognition for your job.

3. Development & career. Training and development, mentor programs, talent

(mobility) programs.

If you only look at compensation when determining what makes employees happy, you’ll fall short.
Total rewards look at how all aspects of an employee’s work-life impact their satisfaction. Research
shows that Total Rewards o"ers a valid framework to reduce employee turnover.

For years, Gallup tracked employee engagement daily and found that engagement generally stayed
between 30 and 35 percent of employees. This means there is a lot of work to be done in this area.

As established above, pay and bene!ts are not the only things that make employees happy.
Management practices have signi!cant impacts on employee happiness and pro!tability and even

reduced workplace accidents. Ignoring the culture part of an employees’ total rewards can reduce
company performance and increase turnover.

Warr’s Vitamin model

Another approach to compensation and bene!ts is Warr’s vitamin model. A vitamin de!ciency
produces bodily impairment and may lead to physical illness. Normal vitamin intake improves
health. However, an excess of vitamins can have di"erent e"ects. According to Warr, an overdose

of vitamins C and E neither improve nor impair the individual’s health. However, excess of vitamins
A and D lead to toxic concentrations, which causes ill health.
Warr grouped job characteristics in these two categories, CE and AD.

1. CE is short for Constant E"ects. Once an optimum is reached, any additional resources
don’t add anything to employee well-being. Examples include
1. Pay level
2. Pleasant environment

3. Safe work practices

4. Adequate equipment
5. Value to society
6. Supportive and considerate supervision

7. Job security

2. AD is short for Additional Decrement. Once the optimum is reached, any additional
resources hurt employee well-being. Examples include
1. Task discretion

2. In#uence
3. Skill use
4. Number of job demands
5. Di$culty of job demands

6. Range of di"erent tasks

7. Future predictability
8. Availability of feedback
9. Amount of social contact.

It is key to identify the optimum level for employees when it comes to compensation and bene!ts.

Too much will either cost the organization resources (time, money, administration) in the case of
CE, or will decrease employee well-being in the case of AD.

Researchers in Germany found that Warr’s theories did have a correlation with employee happiness
and engagement and business success, at least in the German Horticulture business. While that
may be a very speci!c area, it’s worth noting that these ideas do have merit, and looking at the total

picture (or making sure employees receive all their vitamins) has a positive impact on your
business.

Simon Sinek’s Why model

Simon Sinek’s Why model can also apply to compensation and bene!ts. As Warr’s Vitamins and the
Total Rewards Matrix demonstrate, employees want to know the why and understanding that
in#uences their performance. Sinek says that the best and most in#uential communicators begin
with the why – why we do this. And the answer to the question, “Why?” cannot be to achieve
shareholder value. That does not inspire.

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Inspiration and understanding of underlying company culture and values increase engagement,

especially among Millennials and Gen Z. The oldest Millennials are now in their late 30s (de!ning
the millennials as those born between 1981 and 1996), but they still behave di"erently than prior
generations. They prefer to meet with their managers one on one–and !nding the why in their job
is part of this. Millennials want to see companies bene!ting society, not just shareholders. If you
can explain why your company exists, it can impact your millennial turnover and engagement.

Your compensation packages and your total rewards models should not remain static. There are
generational di"erences. As Gen Z enters the workforce, you’ll note that they (generally speaking)
behave di"erently than prior generations, and compensation needs to adjust.

Compensation and bene!ts package

example
What should a compensation and bene!ts package look like? There is no one answer for that as the
package for a grocery store clerk will have little in common with the CEO’s package. However, here
are some standard items that companies often include in a job o"er. You’ll need to adjust for your
organization, local laws, and employee level.

Salary
Overtime pay
Bonuses and commissions (discretionary and non-discretionary)
Retirement (de!ned bene!t and de!ned contribution plans)

Stock options
Restricted stock
Vacation
Pro!t-sharing
Merit pay
Sign-on bonuses
Relocation bonuses

Housing, school, and meal reimbursement

Healthcare bene!ts (medical, dental, vision, etc.)

Salespeople, for instance, will need a commission plan that details what their commission is, and
under what circumstances they receive it (is it when the paperwork for the sale is signed or is it
when the customer pays?). Pro!t-sharing plans need to de!ne what constitutes a pro!t, and when

such, the company pays the bonuses (yearly, quarterly?).

Companies must operate within the con!nes of laws. Summary Plan Descriptions should de!ne
everything legally, and you should provide these to employees, so they know precisely what their
compensation and bene!ts are. While all these things are, generally, negotiable, you must maintain
equity with similarly situated employees, to prevent illegal or immoral discrimination.

Compensation packages cannot detail the total rewards aspect of any job o"er. But, understand

that your job candidates look for that. Websites such as Glassdoor give insights into your total
rewards, whether you like it or not. It’s important to remember that candidates consider all that
information when deciding to accept or reject a job o"er.

You can no longer hide behind a large salary o"er and hope that everyone ignores the culture your
o$ce has to o"er.

Compensation and bene!ts are key components for company success, employee engagement, and

turnover. You should evaluate your plans and programs regularly (at least yearly) to ensure that
you meet both employee expectations and remain competitive in the marketplace.

FAQ
What are compensation and bene!ts?
Typically, when employees think about compensation, the salary is what they think of. Bene!ts
cover indirect pay. Think of health insurance, stock options, or various other things o"ered to
employees.

What is the di"erence between compensation and bene!ts?

Put simply, compensation covers people’s direct pay, their salary. Bene!ts cover employees’ indirect
pay, things like health insurance and stock options but also social bene!ts such as parental leave.

Why are compensation and bene!ts important?

Compensation and bene!ts are important for two reasons. First, people won’t work for you without
pay. Second, bene!ts are a signi!cant expense with a clear goal and thus not something businesses

can overlook.

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Erik van Vulpen

Erik van Vulpen is founder of AIHR. He is an expert in connecting HR processes
to business results through qualitative and quantitative methods. Erik is an
instructor for the AIHR Academy and is a regular speaker at events and
workshops related to Digital HR. Connect with Erik on LinkedIn.

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