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8/24/2020 A Full Guide to Compensation and Benefits | AIHR Digital
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A Full Guide to Compensation and

Bene ts
Home / Employee Experience / A Full Guide to Compensation…
Compensation and bene ts refer to the bene ts a rm provides to its

employees in 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.
Contents
What are compensation and bene ts?
Why are compensation and bene ts important?
Compensation and bene ts and employee motivation
How do HR Departments calculate compensation and bene ts?
3 Models to Explain Compensation and Bene ts
Compensation and bene ts package example
Frequently Asked Questions
󰊐
https://www.digitalhrtech.com/compensation-and-benefits/#Models 1/20
What are compensation and

benefits?
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 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 other.
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.
Some bene ts are country-speci c. In the United States, health insurance makes
up a key 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 employers to pay for restaurant vouchers that
cover part of the employee’s lunch.
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

benefits 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 benefits 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 benefits?
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 benefits
󰊐
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.
󰊐
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.
Subscribe to stay up-to-date.
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How great leaders inspire action | Simon Sinek

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.
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8/24/2020 A Full Guide to Compensation and Benefits | AIHR Digital

A Full Guide to Compensation and

Compensation and bene ts refer to the bene ts a rm provides to its

What are compensation and

making one a better nancial proposition than the other.

cover part of the employee’s lunch.

workday if their company doesn’t have a canteen.

fall under the responsibility of the Human Resources department. In a small

Why are compensation and

part of that equation.

compensation and bene ts structure is so important.

But, how does compensation motivate employees and do increases make a

Compensation and benefits and

strong correlation between pay and engagement (and engagement profoundly

understood that their compensation was fair, it increased their engagement.

Procedural 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

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

are concerned that their pay is not fair.

When an employee clearly understands that their compensation is commensurate

likely to be engaged in their work.

Bene ts and motivation

Researchers at the University of Pennsylvania found that delayed compensation

maximizing the bene ts from your programs.

How do HR Departments calculate

the average rate for a marketing manager is $Y.

job description than a marketing manager at a 25-person business.

NEW CERTIFICATE PROGAM

Learning & Development

Compensation managers often use statistical tools, such as regression analysis, to

Highest degree earned (and type and degree area)

Grade level or salary band classi cation

Job performance ratings

bene t are included in compensation gures.

3 Models to explain compensation

While compensation and bene ts is a at model to explain di erences in pay,

Compensation and bene ts vs. total rewards

1. Direct compensation. This consists of:

1. Salary. This is the base and variable pay for work.

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

2. Recognition. Recognition by colleagues and supervisors, as well as

3. Development & career. Training and development, mentor

lot of work to be done in this area.

employees happy. Management practices have signi cant impacts on employee

Warr’s Vitamin model

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

2. AD is short for Additional Decrement. Once the optimum is reached, any

9. Amount of social contact.

It is key to identify the optimum level for employees when it comes to

Simon Sinek’s Why model

employees, to prevent illegal or immoral discrimination.

the culture your o ce has to o er.

What is the di erence between compensation and bene ts?

Why are compensation and bene ts important? 󰊐

Subscribe to stay up-to-date.

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