Compensation and Benefits: The Complete Guide for HR Pros

Employees are a vital component of any organization, big or small. In fact, securing the best talent can ultimately make a substantial impact on the success of your company.

But to attract (and retain) said talent, you will need to — among other things — develop a first-class compensation and benefits strategy.

And that’s what this guide is for.

Here, we’ll explore everything you need to know about employee compensation, including its components and importance, as well as useful compensation and benefits metrics for your organization.

Let’s dig right in!

What is compensation and benefits?

Compensation and benefits, also known as comp and ben for short, refers to the monetary and non-monetary rewards offered to a company’s employees in exchange for their services.

It encompasses several components such as salary and stock options, which have financial value, as well as things like remote or flexible working arrangements and parental leave, which do not have financial value. Together, they make up what is known as total compensation.

Ultimately, as a core function of human resource management, it involves designing and administering a compensation strategy that is competitive, fair, sustainable and legally compliant.

Types of compensation

There are two main types of compensation: direct and indirect compensation.

Direct compensation

Direct, or monetary, compensation involves an exchange of money between the employer and the employee for their services. This includes:

Base pay

Also known as base salary, base pay refers to the fixed monetary reward that is offered to an employee, either as a monthly or yearly salary, or as an hourly rate.

In all cases, it’s important to offer pay that complies with local or federal minimum wage laws and that closes the gender pay gap as much as possible.

Base pay may be paid on an hourly, daily, weekly, biweekly or monthly basis, as negotiated and agreed on during the hiring process and as specified in the employment contract.

Bonuses

Bonuses are one-time payments paid to employees in addition to their overall compensation package.

There are many types of bonuses, including:

• Annual bonuses, which are distributed to employees after a particularly successful year
• Holiday bonuses, which are paid to all employees in a company during the holidays, usually between 5% and 10% of each employee’s annual earnings
• Performance bonuses, which are paid to employees based on their individual or team performance
• Referral bonuses, which are awarded to employees who successfully recruit qualified candidates to the company from their own networks
• Retention bonuses, which are offered to employees to entice them to stay with the company, or during a merger or acquisition
• Signing (or sign-on) bonuses, which are used to incentivize new employees to join a company, particularly executives and senior-level employees, as well as professional athletes and even recent graduates

Commission pay

In addition to base pay, employers can offer their employees commission pay based on the number of sales they generate, which incentivizes employees to work harder and make more sales.

This can be a percentage of the sales made or a fixed amount per sale, and commissions can be calculated on a tiered basis (for example: 10% of sales up to $1,000 per month, 15% of sales up to $1,500 per month, and so on).

Commissions are particularly popular with sales jobs such as retail salespeople, travel agents, insurance agents, advertising sales representatives, real estate agents and pharmaceutical marketers.

Overtime pay

Overtime pay is the monetary reward offered to employees who have worked beyond their standard working hours.

This is typically 40 hours a week in the US, and employers are required to pay employees 1.5 times their normal hourly rate for every extra hour worked. For example, if an employee works 48 hours one week, they will receive compensation for 52 hours (40 hours + 8 hours at a rate of 1.5).

Some employees are exempt from overtime pay provisions, including executives, administrative and professional employees who earn at least $684 a week, police officers and other first responders, and certain employees of retail or service establishments.

Indirect compensation

Indirect, or non-monetary, compensation refers to a type of payment made to employees without the direct exchange of money. This encompasses the following:

Equity-based compensation

Equity-based compensation is a type of non-monetary payment awarded to employees in the form of company shares or other ownership interests. This is sometimes offered to make up for a below-market salary, but it’s more commonly offered to boost total compensation further.

Types of equity compensation include:

• Stock options, where employees purchase company shares at a discounted or fixed price, who can then sell or transfer options after they vest — these are typically offered as incentive stock options or non-qualified stock options
• Restricted stock, which are unregistered shares of ownership typically awarded to executives, directors and other employees, and which must be traded according to SEC regulations
• Restricted stock units, which are similar to restricted stock but they have no financial value and instead represent a promise to employees that they will receive stock in the future
• Performance shares, which are only awarded to employees once certain performance benchmarks are met, typically over a three- to five-year period

Pay for time not worked

Pay for time not worked, also known as supplemental pay benefits, refers to the compensation that employees receive when they’re not actively performing their job duties.

It includes:

• Annual leave, typically worth two to four weeks each year, although some companies offer unlimited time off to employees
• Sick leave, which is paid time off awarded to employees to stay home to address their health needs
• Family (or parental) leave, which is paid time off awarded to employees to look after their children — it can also cover maternity and paternity leave, as well as adoption and miscarriage leave, although these are usually considered distinct from family leave
• Jury duty, which is paid time off for employees summoned for jury service
• Holiday leave, which is paid time off for observed holidays like New Year’s Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day

Protection programs

Protection programs refer are a type of non-monetary compensation given to employees and which offer them financial assistance during crises and emergencies that life may throw at them.

Health insurance is the most common protection program offered to employees, but there are other types of insurance you can offer them too, such as auto, dental, disability, life, pet, property or vision insurance.

Protection programs can also include things like pension plans, retirement benefits and tuition reimbursements.

Services and perquisites

Services and perquisites are another major type of indirect compensation, and are offered to employees as a way to offset the pressures associated with working.

They cover a wide range of perks, such as:

• Access to recreational facilities
• Childcare services, either on-site or through affiliated providers
• Company car
• Financial planning services
• In-office amenities like coffee, tea and snacks
• Low-cost or free meals
• Paid memberships to gyms and athletic facilities, country clubs, and social clubs
• Wellness services like massages and chiropractic care
• Work equipment like cell phones, laptops and ergonomic furniture

Types of benefits

Some employee benefits are legally required by local, state or federal law, while others are offered completely at the discretion of the employer.

Legally required benefits

Also known as mandatory or statutory benefits, legally required benefits refer to the benefits that an organization must provide its employees. These include:

Family and medical leave

Under the Family and Medical Leave Act, employers must provide eligible employees with unpaid, job-protected leave for:

• 12 workweeks for the birth or adoption of a child, for caring for a newborn child, for serious health conditions affecting the employee or a family member, or for emergencies affecting a relative who is an active-duty member of the military
• 26 workweeks to care for a spouse, child or parent who is a covered servicemember with a serious injury or illness

Eligible employees must have worked for the employer for 12 months and have worked 1,250 hours during the 12 months prior to the leave, among other criteria. The act applies to public agencies, as well as private sector employers with 50 or more employees.

Medicare tax contributions

Every employer must contribute towards the Medicare tax rate of 2.9% every month for each employee, a rate that is equally split between the employer and the employee.

For example, if an employee earns $10,000 a month, you will withhold 1.45% of that amount (equaling $145) from the employee’s wages. You will also take another $145 out of payroll, and then send the total (amounting to $290) to the IRS.

Employers must pay an additional 0.9% of the employee’s wages if they earn over $200,000 a year — for example, if an employee earns an annual salary of $250,000, the employer and the employee must each pay 2.35% on the additional $50,000. This equals $4,075 for the year.

OASDI contributions

More commonly known as Social Security, the Old-Age, Survivors and Disability Insurance program requires employers to withhold 6.2% from employees’ wages, salaries and even tips, and to contribute a matching 6.2% at a total of 12.4%.

For example, an employee who earns $48,000 a year will pay 6.2% of their monthly income ($248) to OASDI, which the employer must also match.

That said, taxable earnings are capped at $168,600 annually. For example, if an employee earns $200,000 a year, only $168,600 will be taxed. This equals $10,453.20 for the year, plus another $10,453.20 contributed to the fund by the employer.

Unemployment insurance

Employers are responsible for paying both federal and state unemployment insurance taxes for each of their employees, regardless company size, which is intended to cover a portion of employees’ wages in case of layoffs.

The federal unemployment insurance tax rate is currently set at 6% of the employee’s taxable wages — the first $7,000 during a calendar year.

The state unemployment insurance tax rate, meanwhile, varies from state to state — for example, employers in Colorado pay between 0.64% and 8.68% on a $23,800 wage base, while employers in New York pay between 1.5% and 8.9% on a $12,500 wage base. Three states also require employees to contribute to SUI taxes: Alaska, New Jersey and Pennsylvania.

Workers’ compensation

Under the Workers’ Compensation Act, most employers are required to take out workers’ compensation insurance, which is intended to give employees benefits if they suffer an injury or become ill as a direct result of their job.

On average, employers pay $1 for every $100 on payroll as part of workers’ compensation insurance. For example, a company with 20 employees on its payroll at a monthly cost of $80,000 will typically pay $800 a month.

However, rates vary from state to state. In Ohio, for example, companies pay about $0.68 per $100 of payroll, while employers in South Carolina pay $1.55 per $100 of payroll.

Discretionary benefits

Discretionary benefits refer to the benefits that a company offers its employees at its own discretion, as the name suggests. They include (but are certainly not limited to):

Commuter benefits

Employers can offer their employees a variety of commuter benefits, which are intended to help offset the financial cost of traveling to and from work. The state of New Jersey, meanwhile, requires companies with 20 or more employees to offer such benefits.

Examples of commuter benefits include:

• Free parking, either on-site or near the company
• Free shuttle services from central parking lots or train stations
• Monthly or annual fuel credits
• Monthly or annual stipends for taxi or ride-sharing services
• Monthly fuel allotments for employees who carpool together
• Subsidies for public transportation cards and passes
• Toll reimbursements

Employee discounts

Another great benefit to offer employees is discounted prices to company products and services. This can be a flat fee or be based on a tiered structure based on factors like performance, sales generated in a specific period and years of service.

For example, a clothing retail company can offer new employees a 10% discount for their first year, increasing in 5% increments for every additional year of service and capped at 60%.

Meanwhile, a restaurant can offer all its staff free or discounted meals as part of its employee benefits package.

Flexible hours

Flexible working hours is a great employee benefit, particularly for companies whose employees work remotely, but it can also be awarded to on-site staff, to allow employees a better work–life balance.

For example, employees can be allowed to start work anytime between 7am and 10am, and finish once they have completed an 8-hour workday. Alternatively, you can give employees complete freedom over their work schedules, as long as they complete 40 hours of work a week.

You will need to develop clear and comprehensive policies for flexible hours, and you might want to consider investing in time monitoring software to ensure employees aren’t taking advantage of this benefit.

Gifts and activities

Another great benefit that companies can offer their employees is gifts for birthdays, work anniversaries or other notable life and professional events. These gifts can be cash-based, or they can be given in the form of gift cards or personalized physical gifts.

Meanwhile, it’s also worth considering incorporating fun activities into your benefits package. This can go beyond — or even be incorporated into — your typical team-building activity, and can include things like weekly happy hour at a nearby bar (after work), regular company outings, and other types of gatherings.

Compensation and benefits examples

What does a good compensation and benefits package look like? Here are some examples for inspiration:

Hourly employee

Compensation	Benefits
Base pay: $10.00 per hour, up to 40 hours a week	10% employee discount / 25% discount after 12 months of employment
Overtime pay: $15.00 per hour for overtime overworked	21 days’ annual leave

Sales employee

Compensation	Benefits
Base pay: $20,000 per year	25% employee discount
Commission: 10% of each successful sale capped at $500	Travel reimbursement
	Company laptop
	75% discount on gym memberships
	Flexible hours
	25 days’ annual leave

Salaried employee

Compensation	Benefits
Base pay: $120,000 per year paid in monthly instalments of $10,000	Company car
Signing bonus: $24,000	Unlimited PTO
Referral bonus: $5,000	Paid sick leave
	Free meals
	Stock options
	Life, health and pet insurance
	Parental leave up to 10 weeks
	Remote work
	Travel reimbursement

The importance of compensation and benefits

Offering your employees a competitive compensation and benefits package is important in several ways, including:

It attracts — and retains — talent

A competitive compensation and benefits package — one that is equal or better than those offered by a company’s competitors — has the power to not only attract top talent but also improve long-term retention rates.

Indeed (and provided that your organization is thriving in other areas, too, such as fostering a great company culture), prospective employees will want to join your company if they’re remunerated fairly and competitively. And existing employees will want to stay with your company for this very reason, particularly if they receive regular salary bumps.

It improves productivity

When employees feel undervalued and undercompensated, they will likely only do the bare minimum of their jobs — and sometimes even less. After all, why should they go above and beyond their job description if they’re only earning a mediocre (at best) salary?

But when they’re paid in proportion to their skills, expertise and workloads, and according to (or, better yet, over) market standards, they will put in the work and take the initiative to do more for the company.

Essentially, a competitive compensation and benefits package boosts overall employee productivity and input — and this, in turn, can make the company more profitable (especially when you consider how lost productivity costs companies $1.8 trillion every year).

It keeps employees motivated

Another reason to pay special attention to your compensation and benefits strategy is that it helps improve all-around employee motivation.

Indeed, there’s a direct link between employees’ motivation levels and how they’re compensated. For example, an employee who receives next to nothing will feel unmotivated in their job, which can decrease the quality of their work.

On the other hand, if they’re compensated fairly and competitively, they will strive for excellence, which ties into job satisfaction and increased productivity. And this results in, again, higher retention rates.

The role of HR in compensation and benefits

HR departments play a crucial role in all aspects of the employee lifecycle, from recruitment to employee performance and — yes — compensation and benefits management.

The role of HR in this particular area is a nuanced one and involves the following:

Establishing a compensation strategy

The first step any HR manager needs to take when it comes to employee compensation and benefits is to develop an effective compensation strategy. This essentially outlines your business’s approach towards what you offer new and existing employees in terms of pay and benefits.

To do this, you’ll need to analyze and understand your organizational culture, and then identify the ways you can promote said culture through your strategy. You’ll finally need to consider what compensation and benefits elements you want to offer, your budget for these, and how these align with the company’s goals.

Conducting market research

Another important task of HR relating to compensation and benefits is to conduct thorough market research to stay relevant in your industry and location as a top employer to work for.

You’ll find many external sources of information for this, such as Glassdoor and the Bureau of Labor Statistics, but you’ll also need to use internal sources for average pay scales for different job levels within your company.

Finally, once you’ve collected all the necessary data, you will then need to carefully analyze it to uncover any trends and potential gaps, and make informed decisions based on this data.

Ensuring compliance with laws and regulations

Perhaps the most important task that the HR department has is to make sure the company’s compensation and benefits program (and all other aspects of hiring and managing employees) is in adherence to relevant laws and regulations.

These may differ between local, state and federal requirements, so it’s essential to research and understand these thoroughly.

Indeed, this will avoid legal risks, potential lawsuits and even penalties from relevant authorities, while it will also allow you to pay staff fairly and create a positive work environment.

Compensation metrics

Using compensation metrics can help you determine if you’re paying below, at or above the market, as well as identify any noticeable errors or efforts, to ensure your overall compensation and benefits program is working.

Some metrics to consider include:

• Compa ratio — a comparison of an employee’s salary to the range midpoint for similar positions within the target market or within a company
• Geographic differential — the additional pay offered to employees on account of labor costs or living costs, or both
• Pay range — the minimum, midpoint and maximum pay boundary for a specific role
• Pay range minimum — the lowest value in the scale and what would typically be offered to a new employee
• Pay range midpoint — the midway point between the pay range minimum and maximum
• Pay range maximum — the highest value in the scale
• Pay range spread or width — the difference between the bottom and top end of the range
• Salary differential — the difference in salary between employees with the same skill sets but in different locations or industries
• Wage gap — the difference in salary between genders, ethnicities and other demographics (addressing these gaps is particularly crucial for your DEI efforts)

Compensation and benefits certification

Whether you’re just starting out in the world of HR or you have plenty of experience behind you, investing in compensation and benefits certification will make you an asset to your employer.

Here are some of the best certifications to consider:

1. Certified Employee Benefit Specialist Program

Offered through the International Foundation of Employee Benefit Plans, the CEBS program features five online courses developed by Dalhousie University and the University of Pennsylvania’s Wharton School. You’ll need to successfully pass the corresponding exams, which comprise 75–85 questions with a 90-minute timer, to receive the CEBS designation.

• Price: Available upon request
• Duration: Self-paced

2. HRCI Pro: Compensation

As one of the world’s leading institutions for professional development within HR, the HRCI offers a range of certification programs across all key areas of HR. The HRCI Pro: Compensation certificate, in particular, includes courses in compensation communication, compensation systems, and internal and external equity.

• Price: $399
• Duration: 180 days

3. HRCI Pro: Benefits

The HRCI also offers a certificate program dedicated to employee benefits. Like its compensation certificate, the HRCI Pro: Benefits program comes with a digital badge upon successful completion. It covers a range of topics, such as medical-related benefits, retirement plans, and supporting health and wellness.

• Price: $399
• Duration: 180 days

4. Certified Benefits Professional

Ideal for entry- to mid-level HR professionals, WorldatWork’s Certified Benefits Professional certification comprises seven courses (including health and welfare plans, retirement plans, benefits outsourcing, and strategic communication). The program requires the successful completion of all seven courses and their accompanying exams.

• Price: $1,350 per course (members) or $1,929 per course (non-members)
• Duration: Not specified

5. Compensation & Benefits

A comprehensive certificate program offered through the Academy to Innovative HR, the Compensation & Benefits course contains 14 modules ranging from total rewards to sales compensation and pay principles to pay gap analysis. At the end of the program, you’ll need to complete a capstone project and exam, which lasts 90 minutes.

• Price: $1,125 per certificate program (additional pricing plans available)
• Duration: Self-paced

Frequently asked questions

Got more questions about compensation and benefits? You might find the answers below:

Key takeaways

Here’s a rundown of what we covered in this article:

• Compensation and benefits refer to the monetary and non-monetary rewards provided to employees for their services.
• The four main types of compensation and benefits are direct compensation (such as salary), indirect compensation (such as equity compensation), mandatory benefits (such as Medicare tax contributions) and discretionary benefits (such as employee discounts).
• Offering a fair and competitive compensation and benefits package is crucial for attracting and retaining talent, improving productivity, and keeping employees motivated.

Got a question about employee compensation and benefits that you’d like to ask, or want to share your own tips and strategies with fellow HR professionals? Let us know in the comments section below.