Compensation Planning for HR & Business Leaders
For all hiring managers and talent acquisition professionals alike, being able to speak about compensation is a prerequisite. Depending on the role, you may need to determine total cost of an employee, perform a compensation analysis or explain why compensation differs across different cities. So, before you head into your next salary negotiation or budget planning session, here is a breakdown of the main types of direct compensation, common types of indirect compensation and how to explain them to your co-workers, leadership team or job candidates.
Four Main Types of Direct Compensation
Salary: Considered one of two options of base compensation, a salary is fixed wages paid on a regular schedule, regardless of hours worked. Usually, employees with higher levels of education or in white-collar professional or management roles are salaried.
Hourly wage: The other form of base compensation, wages are based on hours worked. Generally, blue-collar, service-sector, temporary, part-time and contract workers tend to be hourly workers. However, exceptions do exist. Highly educated or specialized workers in roles requiring frequent overtime are often paid hourly. In 2020, there were 73.3 million hourly-paid workers in the US – 55.5% of all U.S. wage workers – per the Bureau of Labor Statistics.
Commission: Typically paid in sales-driven environments when a person achieves set targets or goals. The bigger the target, the higher the commission. Commission can be calculated based on a percentage of new business brought in, gross profit and profit margins. Workers could also receive a commission or placement fee, which is a fixed commission amount for each unit sold.
This form of compensation can be structured multiple ways:
- Salary plus commission: Employee earns both a salary and commission.
- Straight commission: Employee is only paid commission.
- Residual commission: Employee continues receiving commission from current clients or accounts.
- Graduated commission: Employee’s commission amount increases based on higher sales amount.
- Variable commission: Employee receives a mix of compensation types.
Bonus: This payment is discretionary and usually based on specific company or individual goals. Unlike a commission, it is not limited to salespeople. Common forms are year-end and quarterly company performance bonuses or a project-based bonus for completing a goal in a specific timeframe.
In addition to the above types, indirect compensation also plays a role in calculating the total cost of an employee. Total compensation is comprised of the annual sum of an employee’s base wages (salary or hourly), short-term incentives and long-term incentives. Common forms of indirect compensation include:
- Equity stake
- Stock options
- Life and accident insurance
- Healthcare benefits
- Educational incentives (e.g., tuition reimbursement, student loan repayment plans, etc.)
- Vacation time and paid time off
- Retirement 401(k) packages
Understanding total compensation can help employees visualize the total value of all compensation and reward elements in their individual pay packages. This can be helpful when comparing offers with a job candidate or explaining pay structure with a current employee.
Total Cost of an Employee
When calculating the total cost of an employee, factor in each type of compensation the worker receives. Also known as an employee rewards report, a total compensation statement is useful when determining the actual cost of an employee.
First, list the employee’s salary or hourly rate. For hourly, make sure the total is based on the standard number of hours the employee usually works and any overtime this role may frequently work through the year. Next, add in any commission or bonus payments the employee may qualify for, so you can figure out the total direct compensation costs. The final step to calculating the total cost of an employee is to include indirect compensation, such as healthcare benefits and paid leave. You want to consider all compensation. Remember: The cost to correct these mistakes can be expensive and throw off your budget.
In talent acquisition, knowing how much an employee costs a company is beneficial when determining compensation packages or negotiating salaries with a job candidate. Hiring managers and compensation managers also need to know the total cost of an employee as part of their benchmarking and budgetary processes.
Performing a compensation analysis comes in handy for external and internal recruiters, hiring managers and compensation managers. For recruiters, having accurate data on compensation and employment conditions can help with advising both hiring managers and job candidates on salary or hourly wages. Hiring managers, on the other hand, can be confident that compensation offers are competitive for attracting and acquiring talent, while also competitive in retaining current employees. Compensation managers can confidently forecast compensation costs and assist talent acquisition staff with setting pay ranges and headcount budgets.
Leveraging talent intelligence software can help you identify pay gaps, new markets with qualified talent and what others in your space are paying for talent. Conducting regular compensation analysis will help organizations plan strategically for future growth.
- Competitive compensation for a specific role based on your requirements
- Compensation benchmarking comparisons based on accurate, validated compensation data
- Available talent supply for specific occupations or roles
- Employment conditions in local job markets
- Current and forecasted industry performance
Compensation is often a deciding factor for people choosing to accept a job offer or to remain with an employer. Knowing how to properly calculate the total cost of an employee, determine a salary offer or keep wages competitive for current employees can make you valuable to your company and its bottom line.
LaborIQ by ThinkWhy reports, forecasts and advises on employment conditions and the impact to jobs, industries and businesses across all U.S. cities.