An HR Leader’s Guide to Employee Compensation

We all remember the excitement of setting up a lemonade stand as a child. Arranging the cups just so, adding the perfect amount of sugar and lemon, and anxiously waiting for customers to approach. And there was no moment more exciting than when a paying customer dropped a few coins into our jar!

The same is true as adults, now that we’re professionally employed. Everyone loves payday. While compensation is not the only deciding factor when it comes to where you work, it’s a crucial part of our professional lives.

And for HR leaders, determining appropriate compensation for each role and employee in the organization can be a complex process. There’s often some negotiating involved, too, when it comes to hooking the best and brightest job candidates. But the fundamental concept remains the same as when we were kids selling lemonade on the street corner: your employees’ time and effort have value, and it’s important to reward fair compensation for their work.

What is Compensation?

Compensation refers to the total package of wages, bonuses, and benefits that employees receive in exchange for their work. This includes not only a salary or hourly wage, but also other forms of payment such as bonuses, health insurance, retirement benefits, and more. Compensation is a crucial part of any organization, as it plays a key role in attracting and retaining top talent.

In corporate organizations, compensation is often a complex process that involves a variety of factors. These may include job responsibilities, education and experience level, performance metrics, geographic location, and industry benchmarks. Employers use this information to establish pay ranges for various positions within the company, and to determine the specific salary or wage that each employee will receive.

There are also different ways that employees can be compensated, based on their employment status. For example, a full-time employee might receive your most comprehensive compensation package, with a base salary, benefits, and stock options. A per diem employee might be paid a daily rate. And a 1099 contractor would simply receive compensation based on the hours or projects they complete.

What Laws Govern Compensation?

There are several federal laws that govern compensation in the United States. One of the most important is the Fair Labor Standards Act (FLSA), which establishes minimum wage and overtime pay requirements for most employees. The FLSA also lays out requirements and distinctions for exempt and non-exempt employees. This is one of the most complex areas of compensation law, but generally plays out as follows:

• Exempt employees: Typically salaried workers who are paid a fixed amount of money each week, regardless of the number of hours they work.
• Non-exempt employees: Typically paid an hourly wage and are eligible for overtime pay.

Under the FLSA, non-exempt employees must be paid at least the federal minimum wage for every hour worked, and must be paid overtime at a rate of 1.5 times their normal hourly rate for any hours worked once they reach 40 in a workweek.

The FLSA is not the only law applicable to employee compensation. For example, the Equal Pay Act of 1963 requires that men and women be paid the same for equal work, and the Americans with Disabilities Act prohibits discrimination in pay based on an employee's disability status. Employers should also be aware of state and local laws that may apply, as these can vary widely depending on the location of the organization.

Types of Compensation

Employers have a wide variety of options when it comes to the types of compensation they can offer to employees.

• Base salary: The fixed amount of money that an employee receives regularly in exchange for their work. This is often the most significant component of an employee's compensation package and is usually determined by factors such as job responsibilities, education, and experience level. 
• Bonuses: Additional payments that are awarded to employees based on their performance or other factors, such as for relocation. Bonuses can be either cash or non-cash rewards such as stock options or extra vacation time. For example, a sales representative might receive a bonus of 10% of their annual salary for meeting their quarterly sales goals.
• Equity compensation: The granting of ownership in the company to employees in the form of stocks, stock options, or other equity-based instruments. Equity compensation can be a powerful motivator for employees, as it gives them a direct stake in the success of the company.
• Commissions: A form of variable pay that is based on an employee's sales or other performance metrics. Commission rates can vary widely depending on the industry, but are typically calculated as a percentage of the revenue generated by the employee. A real estate agent may, for instance, receive a commission of 3% on each home sale.
• Profit-sharing: A type of compensation that gives employees a share of any profits earned by the company. Profit-sharing can be a powerful motivator for employees, as it aligns their interests with those of the company. A company interested in this type of compensation may choose to offer employees a profit-sharing plan that pays out a percentage of the company's profits at the end of each fiscal year.
• Performance-based pay: A form of compensation that is tied directly to an employee's performance. This can include bonuses, commissions, and other incentives that are designed to reward employees for achieving specific goals. For example, an advertising executive might receive a bonus for winning a major new account.
• Benefits: Non-cash benefits that are provided by the employer, such as health insurance, retirement plans, and other perks. Benefits can be a significant part of an employee's compensation package, and can help to attract and retain top talent. For instance, employees might receive a comprehensive health insurance plan with coverage for medical, dental, and vision care.
• Perks: Additional benefits that are often offered to employees as a way to enhance their overall compensation package. Perks can include things like free meals, gym memberships, transportation subsidies, and more. For example, a tech company might offer free meals and snacks in the office as a way to keep employees happy, healthy, and productive.

How to Determine Compensation and Salary Rates

Here are several methods that organizations can use to determine fair compensation and salary rates for their employees:

• Compa ratio: This method involves comparing an employee's current salary or compensation package to the midpoint of the industry or company average for their role. The compa ratio is calculated by dividing the employee's current salary by the industry average or midpoint. For example, if the midpoint salary for a software engineer is $100,000 per year, and the engineer's current salary is $90,000 per year, their compa ratio would be 0.9. A compa ratio of 1.0 indicates that an employee is being paid exactly at the midpoint salary for their job.
• Market analysis: Market analysis or research is the process of researching the salaries and compensation packages that are being offered by other organizations in the same industry and geographic location. This can involve looking at job postings, survey data, or working with a third-party compensation consulting firm. By comparing their compensation offerings to those of other organizations, employers can ensure that they are offering competitive salaries and benefits.
• Skill-based pay: Under skill-based pay, employees are compensated based on their specific skills and abilities, rather than their job title or level. Employees who possess specialized skills or certifications may be eligible for higher pay rates, bonuses, or other incentives. For example, a nurse who has obtained a specialized certification in oncology nursing may be eligible for a higher rate of pay than a nurse without that certification.

By using one or more of these methods, organizations can ensure that their compensation packages are fair, competitive, and aligned with industry standards. Conducting pay equity analyses on a regular basis can help companies ensure compensation levels within the organization are fair and merit-based.

Wellbeing Contributes to a Complete Compensation Package

While salary and direct compensation show your team members that you value them, it’s far from the only thing that’s important to your employees. Eight out of 10 workers, in fact, say their wellbeing is just as important as their salary. A compensation strategy that doesn’t include employee wellness is likely to flounder in today’s competitive labor market. 

A total rewards package that also supports workforce health and wellbeing can encompass extensive healthcare options, an employee assistance program, and wellness programs. Wellhub’ all-inclusive program connects employees with thousands of wellbeing partners that can support them wherever they are on their wellness journey. Learn more about how to craft the perfect package by speaking to one of our wellbeing specialists!

References

• 1099 payroll – payroll for independent contractors. ADP. Retrieved May 31, 2023 from https://www.adp.com/resources/articles-and-insights/articles/1/1099-payroll-how-to-pay-independent-contractors.aspx 
• Americans with Disabilities Act. U.S. Department of Labor. Retrieved May 31, 2023 from https://www.dol.gov/general/topic/disability/ada 
  Chen, James. (January 23, 2023.) What Is an Exempt Employee in the Workplace? Pros & Cons. Investopedia. Retrieved May 31, 2023 from https://www.investopedia.com/terms/e/exempt-employee.asp 
• Chen, James. (April 12, 2023.) Understanding Non-Exempt Employee Status, Pros & Cons, Job Types. Investopedia. Retrieved May 31, 2023 from https://www.investopedia.com/terms/n/nonexempt-employee.asp 
• Equal Pay for Equal Work. Office of the Assistant Secretary for Administration & Management — U.S. Department of Labor. Retrieved May 31, 2023 from https://www.dol.gov/agencies/oasam/centers-offices/civil-rights-center/internal/policies/equal-pay-for-equal-work 
  Folwaczny, Michael. (September 30, 2019.) A different way of compensation – Skill-based Pay. LinkedIn. Retrieved May 31, 2023 from https://www.linkedin.com/pulse/different-way-compensation-skill-based-pay-michael-folwaczny 
• Indeed Editorial Team. (June 24, 2022.) Everything You Need To Know About Compensation Analysis. Indeed. Retrieved May 31, 2023 from https://www.indeed.com/career-advice/career-development/compensation-analysis 
• Questions and Answers About the Fair Labor Standards Act (FLSA). Wage and Hour Division — U.S. Department of Labor. Retrieved May 31, 2023 from https://www.dol.gov/agencies/whd/flsa/faq