Understanding Compensation and Benefits

Compensation and benefits refer to the total rewards an employee receives from their employer in exchange for their labor and services. This includes monetary compensation like salaries and bonuses, as well as non-monetary benefits such as health insurance, retirement contributions, paid time off, and other incentives aimed at attracting, motivating, and retaining a talented workforce.

Overall compensation is widely considered the primary factor potential employees weigh when evaluating and accepting new job opportunities. Simultaneously, for businesses, the combination of compensation, benefits, and associated taxes can account for up to 70% of total operating costs. This underscores the critical importance for organizations to strategically design and manage competitive, cost-effective total rewards programs that balance attracting and retaining top talent while maintaining fiscal prudence.

Employers must carefully balance offering robust, market-competitive compensation and benefits packages against budgetary constraints. Getting this balance right allows organizations to secure the skilled talent they need while avoiding exorbitant labor costs that could jeopardize profitability and sustainability. A well-designed total rewards strategy, tailored to the needs and preferences of the target workforce, is essential for success in today's competitive talent marketplace.

Compensation v. Benefits

Compensation refers to the direct financial remuneration an employee receives for their work, such as salary, wages, commissions, and bonuses. This monetary compensation is taxable income to the employee. Organizations use compensation strategically as a tool to attract top talent and incentivize retention.

In contrast, benefits are the non-cash perks, programs, and rewards that have financial value but do not directly provide cash to the employee. Common benefits include health insurance, retirement plans, paid time off, professional development, amenities like gym memberships, and other non-monetary incentives. Many benefits are exempt from taxation.

While compensation is primarily about financial rewards, benefits aim to increase employee motivation, engagement, productivity, and accommodate diverse needs and circumstances. The benefits that resonate most may vary based on life stage - e.g. parental leave for starting a family versus student loan assistance for recent grads.

HR professionals carefully structure comprehensive compensation and benefits programs to not only attract but also retain and inspire high performance from their workforce. The ideal package balances an employee's financial and non-financial priorities in a cost-effective way for the employer. Getting this total rewards strategy right is crucial for outcompeting for talent.

Compensation, Compensation, Compensation

TLDR; There’s all types of compensation that helps make you competitive in todays markets, so let’s go over them.

Direct Compensation

• Base Pay
  • This is the set rate or fixed financial amount that is negotiated and agreed upon for someones services. This can defined as an annual or monthly salary or an hourly rate.
    • Note: Don’t forget to define what roles are exempt v. non-exempt. Here’s a fact sheet from the Department of Labor (DOL) to help you understand what roles are exempt from the Fair Labor Standards Act (FLSA)
• Overtime Pay
  • Extra pay for working extra hours over the scheduled contract hours.
    • Note: Per the FLSA, those eligible for overtime pay are non-exempt employees which can be qualified as hourly, and in some cases salaried, employees
• Variable Compensation
  • This is additional pay because you did a great job! No really, this type of pay is dependent on performance. Think of it like Pavlov, you reward a certain behavior or result and in return can expect it to occur again and again.
    • Note: Your employees are people and not animals, therefore don’t treat them as such. Variable compensation can be paid out as a performance bonus of an individual, getting a spot bonus based on performance or achievement, or even the organization hitting a target and providing them to everyone in the company, or any other strategy you feel as an organization would promote repeat behavior.
• Sales Compensation
  • Build a successful strategy, and your team will do what they do best, bring in $$$. Sales compensation is a bit more technical than your standard salaried employee, meaning you want to drive incentive to achieve. We can do this in the way you take a 5-year old to get FroYo and give them free reign. You give them a cup (base salary) and have them fill it with FroYo (commissions), and you can even spice it up and tell them they can go as much as they can hold without spillover (uncapped commissions), and then let them add the toppings (bonuses and perks), and you’ll have giddy-sugar-rushed kid (sales person).
    • Note: Sales is your revenue generator so don’t forget to strategize on trainings as they’re your investment to success.

Indirect Compensation

• Equity
  • Providing shares or stock options in your offer. This is common in startups that are strapped for cash early on, but want to give a piece of the pie, metaphorically speaking. Please don’t offer them a piece of actual pie. This is what incentivizes as the companies success because there’s a potential payout for them at the end of it all.
• Stock
  • The eligibility for an employee to buy shares in the organization at a fixed price
• Employee Protections
  • We view this as “future planning” for employees. This comes at a cost to the employer in providing things like health insurance, life insurance, 401K and other retirement plans, and other benefits that opt into “future planning”.
• Fringe Benefits
  • Invest in incentives and perks. This is another way to “pay” your employees simply by offering floating holidays or birthday days, rewards programs, parental leave, growth and development opportunities (cough, cough invest in your people cough, cough), wellness and gym reimbursements, company swag, and others that give your employees more than just a salary.

Your employees are key to your success, remember to invest and incentivize with them as their happiness and loyalty to your organization is what’s going to drive them.

Benefits

TLDR; Work, health, finance, lifestyle.

Balancing your Benefits

Your benefits are meant to make an impact on the lives of your employees, not make it challenging. As an employer, you have two types of benefits, those that are legally mandated and those that are discretionary aka that make you attractive to new and legacy talent.

Legally Mandated Benefits in the U.S.

The following below are federally-mandated benefits that apply to qualifying employers. A single-member LLC wouldn’t qualify for most, but keep up the hustle! We love that for you.

Note: If you’re based outside of the U.S., check with your resident country for their federally-mandated benefits and stay relevant with your compliance! Also Note: States have varying laws regarding benefits so check with your Department of Labor or ask your HR team to refresh your memory on compliance.

• Social Security
  • Taxes. Some hate them, but they look out for us and our communities. Social Security taxes support our retirement fund. Employers and employees each pay 6.2% of the employees earnings, and if you’re self-employed, 12.4%
• Unemployment Insurance
  • This comes from the Federal Unemployment Tax Act (FUTA) and provides income support to those that lost their jobs.
• Workers Compensation Insurance
  • Hurt on the job? This insurance is provide income support and medical expenses to those that can’t work because they quite literally got hurt on the job.
• Family and Medical Leave
  • Derives from the Family and Medical Leave Act (FMLA), “..entitles eligible employees of covered employers to take unpaid, job-protected leave for specified family and medical reasons with continuation of group health insurance coverage under the same terms and conditions as if the employee had not taken leave.” Source: The Department of Labor
• Health Insurance
  • The Affordable Care Act (ACA) requires qualifying employers to provide affordable health insurance. 50+ employees? You qualify! Don’t have 50+, but want to compete with other businesses, consider providing benefits. 88% of people consider insurance when changing jobs

Discretionary Benefits

Literally all other benefits an employer can provide, but broken down into 4 categories: Work, Health, Finance, and Lifestyle.

Benefits at Work

• Paid Time Off (PTO)
  • Providing time off to employees
• Flexible Work Schedules
• Training and Development Opportunities
• Rewards Programs

Benefits for Health

• Health Insurance
  • Health insurance covers medical expenses, including doctor visits, hospital stays, and prescription medications.
• Wellness Programs
  • Wellness programs promote employee health through activities such as fitness challenges, health screenings, and nutrition education.
• Mental Health Benefits
  • These benefits include counseling services, mental health resources, and mental health days off.
• Telemedicine
  • Telemedicine allows employees to consult with healthcare providers remotely, which can be particularly useful for minor illnesses or injuries.

Benefits for Financial Security

• Retirement Plans
  • Employers can offer 401(k) plans or pension plans to help employees save for retirement.
• Life Insurance
  • Life insurance provides financial protection for employees' families in the event of their death.
• Disability Insurance
  • Disability insurance provides income replacement if an employee is unable to work due to a disability.
• Financial Education
  • Employers can offer financial education programs to help employees manage their finances and plan for the future.

Lifestyle Benefits

• Employee Discounts
  • Providing your employees with discounts to purchase goods or services from either their employer or other companies
• Commuter Benefits
  • Commuter benefits help employees save money on commuting expenses, such as parking fees or public transportation
• Childcare Assistance
  • Covering the cost or providing support for childcare
• Fitness Memberships
  • Offering discounts or subsidies for gym memberships or fitness classes to promote health and wellness
• Remote Work
  • Allowing remote work gives your employees freedom to work from anywhere. It allows

Just how important is all of it?

TLDR; Very.

Having a defined compensation and benefits strategy provides advantages in many crucial ways. Our industry identified some that might be pertinent to your organization:

It doesn’t just stop there. If you’ve ever heard of Maslow’s Hierarchy of Needs, then you’ll understand our approach to bringing motivation and engagement to your employees, and how in return they can be their best.

Taking into consideration the above chart, in order for us to see the employees at their best, it’s the role of the employer to foster an environment by providing the foundations and with time you begin to see the investment, and this begins from having a structured compensation and benefits strategy.

How can we help?

Our goals are your goals, so when it comes to building out your strategy, we become the 1992 USA Dream Team. To build the best possible strategy, we follow a process to identify and highlight what you need:

Discovery

Information and data collection is key for us. We need to understand what you’ve been doing, what your goals are, and the current data pieces you’re leveraging. This initial audit will take into account interviewing and surveying your teams, analyzing your current process and offerings to identify any discrepancies or bottlenecks, review your budget and the tools being used, and of course compliance.

Here’s what we look at:

Development

Working with your teams, we’ll outline what works best for you. Through the discovery, we’ll be able to assess all of the weak points, and provide a strategy best tailored for you and your goals. We’ll develop the Standard Operating Procedures (SOP), outline metrics to be monitored and collected, identify and negotiate with potential vendors regarding tools, and really spend time getting to work towards meeting goals.

Implementation

To wrap up the 1992 Dream Team run, we’ll work with you and your team to implement and offboard all information and intelligence so that your team can now pick up and continue the journey of keeping your employees engaged and want to come to work and be apart of your fmly.