Compensation Package: A Guide For HR

Across most industries, the competition for talent is tough. As an HR professional, you must be strategic in order to attract the right talent and retain employees. Offering an appealing and generous compensation package is an important part of your employee value proposition. To stand out from other organizations, what should your compensation package include and how do you go about assembling one?

And once you have your package ready, how do you communicate this information to candidates and existing employees in a compelling way? Let’s dive in.

Contents
What is a compensation package?
How can an attractive compensation package be useful for the organization?
What is included in a compensation package?
How is a total compensation package tied to HR strategy?
Crafting a total compensation package
Best practices for building a compensation package

What is a compensation package?

A basic compensation package definition is a combination of all the rewards that employees receive for performing the work they are hired for.

We will discuss all the types of rewards and benefits that you can offer further below.

For now, consider that a compensation package can have a high degree of flexibility, depending on how it will be used. It can include unique rewards for different job levels, such as mid-level management vs. executives — who are seeking different forms of compensation (performance bonuses vs. equity in the company).  In some industries, this is critical for a candidate who may want to work for a start-up but understands salary could be limited in the first few years. In this case, generous stock options and decision-making power may be very attractive. 

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A compensation package can also be customized in order to incentivize a new position that an existing employee is moving into, with structured value added during this career growth. For example, a new department director role was created as a result of new technology.

As companies face the future, they must be able to maintain a skilled workforce that will include knowledge and responsibilities. Human Resources already has the task of ensuring fair compensation according to state and federal laws, but the matter of rewards goes well beyond that. Essentially, compensation is at the core of sustaining a solid team and a crucial part of your employee value proposition.

How can an attractive compensation package be useful for the organization? 

HR-Guide advises that compensation serves several purposes, which include:

• Recruitment and retention 
• Raising or maintaining employee morale
• Rewarding high-performance workers
• Achieving internal and external pay equity
• Increasing employee loyalty 
• Leverage during union negotiations 

Your organization can use the compensation package for employees to improve any or all of these areas. It becomes a living document that you will want to come back to every year to ensure employees are being compensated in a fair, equitable way.

What is included in a compensation package?

Building a total compensation package starts with understanding what your organization can offer and then organizing this information in an easy-to-read document. Remember, the purpose is to demonstrate to the candidate or employee all the rewards that they can expect as a result of working for your organization. 

What belongs in a total compensation package are all the direct and indirect rewards that create the perception of additional value. When you share this information with employees or candidates, they can see in black-and-white everything that you as a (potential) employer offers them vs. the competition. Candidates, who are comparing offers, can clearly see what they could be enjoying if they work for your company. 

Typically, a compensation package consists of both direct compensation (cash) and indirect compensation (non-cash) rewards. 

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Direct compensation includes:

• Salary or hourly wages
• Retirement savings
• Paid time off
• Health insurance

These are just for starters. You may also want to add things like:

• Performance bonuses
• Profit-sharing
• Stock options
• Supplemental insurance
• Travel reimbursement
• Uniforms/suits
• Relocation bonuses

Indirect compensation may include:

• Career development
• Flexible work arrangements
• Corporate discounts
• Employee recognition programs

This is an area you can expand on as there are many perks that employees may not realize you offer, like:

• Free meals
• Corporate wellness support
• Mentoring programs
• Industry seminars and conferences
• Ground-level leadership roles (leading to rapid advancement)
• In-house daycare
• Debt reduction programs
• Corporate housing
• Remote work
• Allowing private use of a company car, cell phone, and laptop

In short, your organization’s compensation package consists of numerous components. Find the visualised breakdown below:

How is a total compensation package tied to HR strategy?

The WorldatWork Total Rewards model outlines that compensation is just one factor in a total rewards strategy. The goal of HR is to find a balance between the organizational goals and employee needs. By engaging with and motivating employees, the organization attracts and retains more talent. Compensation becomes closely tied to the corporate culture and HR strategy. Employees who feel they are fairly compensated are less likely to jump ship. 

An Employee Benefit News article highlights an employee survey of how 1,549 Staples.com employees feel about their compensation. “More than half of the employees indicated that better incentives and perks improve employee morale” and a surprising “62.3% said they would even accept a lower salary in exchange for better workplace perks”. 

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During the survey, Staples identified four categories of perks and their order of value to employees. Here’s a rundown:

Do little to motivate

• Free e-readers and e-books: 37.1%
• Time off to volunteer: 26.3%
• Onsite daycare: 25.9%
• Daycare reimbursement: 25.3%
• Onsite fitness classes: 21.7
• Student loan paydowns: 20.7%

Nice-to have

• Employee discounts: 42.7%
• Free coffee and snacks: 42.3%
• Streaming subscriptions: 42.2%
• Gym membership reimbursement: 35.1%
• Onsite fitness classes: 30.3%
• Company car, laptop, or phone: 30.2%

Must-haves

• Flexible hours: 40.2%
• Paid insurance premiums: 33.6%
• Paid family leave: 29.2%
• Regular remote work: 26.4%
• Financial assistance with professional certifications: 26.3%

Convince employees not to leave

• Remote work: 17%
• Employee discounts: 11.9%
• Flexible hours: 9.2%
• Paid insurance premiums: 9%
• Streaming subscriptions: 7.8%
• Financial assistance with professional certifications: 7.6%

If you note, the must-have perks and those that can be offered to convince exiting employees not to leave are almost identical.

While the Staples employees enjoy a unique work culture that values education and flexible work, this can give you some ideas of rewards you can add to your own compensation package. 

Crafting a total compensation package 

Designing or redesigning a compensation package starts with taking an inventory of all the current direct and indirect rewards that you offer to current and future employees. The compensation must be fair because once this information is transparent, employees will know if they are not getting what they are entitled to. 

Each employee’s total compensation statement will be unique. It will include a few areas that are specific to them, such as their salary or hourly rate, and how much the company contributes to their benefits premiums, retirement savings, and reimbursement accounts (education, travel, etc.) or if they are in higher compensation brackets (like the management or executive team). Indirect compensation elements will be essentially the same for all employees. 

Go through your indirect compensation first to compile a thorough list. Thinking about adding more value to your employee compensation plan? This is the perfect time as long as your company can gain a return on investment. 

Low-cost/high-value perks are a good place to start since you can provide a snapshot of how they benefit employees over a year’s time. For example, offering remote work arrangements can save employees on gas and commute time, which you can average out for your employees. Corporate discounts can save employees between 15-30% on their purchases. This costs your company almost nothing by sharing but is meaningful to employees. 

More confidential information of direct compensation should be kept that way for existing employees. However, this can be a good time to evaluate how well your company is doing with keeping up with current market salary rates for employees in specific job types. Conduct a compensation analysis to determine if any employees are overdue for a pay raise. 

A simple total compensation statement can help you organize the direct compensation and indirect compensation items into sections. Include the financial value for each reward or perk offered, which you will use to calculate a total rewards amount. 

Best practices for building a compensation package

In addition to structuring your compensation package for employees, there are some best practices for building one that can ensure positive results. 

Stay in compliance

All rewards offered must be fair and comply with employment laws. For example, direct compensation must not interfere with the Fair Labor Standards Act (FLSA), which dictates minimum wages, overtime, tips, and bonuses — as well as how some job classifications receive compensation.

All perks must be made available to all employees, regardless of their abilities and characteristics. Otherwise, one could be getting into the areas of discrimination under Title VII and associated laws. 

Align with your company’s compensation philosophy

Every organization should be able to determine how much compensation is available and how much is anticipated for future growth initiatives. For example, “(d)ecide the extent to which employee benefits should replace or supplement cash compensation.” A well-designed compensation package can offset some of the limits or uncertainties with rewards that mean something to employees. 

Consider the impact on current vs. future employees

Before you make any changes or updates to the compensation package, how will this impact your existing employees? Is there enough flexibility in your perks that you can adapt them to future ways of working? It is necessary to continuously reevaluate your offering to respond to the situation on the labor market and industry developments.

Leave room for personalization

Think about how employees will read the information on the total compensation statement and evaluate if it speaks to their individual needs. For example, your sales employees may find it motivating to have commission comprise a significant portion of their compensation package, while non-sales employees might prefer a higher base salary.

Communicate your compensation packages effectively

Design positive and compelling ways to share the compensation package so it’s well-received. This is crucial when making job offers. There may be rewards that are not immediately perceived as valuable or very tangible, such as stock options. Hence, a little crunching of numbers is in order to help make this information easier to digest. 

Make sure employees know how to access their rewards

It’s one thing to offer a compensation package; it’s another to access it. Create a central online hub where employees can get more information and access their rewards. A self-service, password-protected website is a good place to start educating employees on how to make the most of their compensation package. 

Wrapping things up 

A fair compensation package is a good tool not only to attract new talent but also to retain and motivate existing employees. While it does take effort to create one that’s right for your labor force, it’s worth the effort as you can expect employees who understand how much you value their efforts. When they see the full picture of your investment in them, it becomes clearer.

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