Introduction to Total Rewards

Compensation affects both attracting and retaining employees. Compensation is the total of an employee’s pay and benefits. Pay is now the top reason for job satisfaction, overtaking job security as the top driver of satisfaction. Pay is the most important priority to North Americans, Latin Americans, and Western Europeans—so HR must pay attention to fair and equitable compensation for company employees.

Compensation costs are frequently the largest part of total production costs at today’s firms. Because this is the case, management must continually monitor and manage total organizational compensation. This monitoring function usually falls to the HR department. Compensation costs also continue to rise as companies started to face shortages of skilled talent after the latest recession. According to the US Bureau of Labor Statistics, average total compensation costs rose from $31.93 to $35.28 per hour from March 2014 to March 2017.

The compensation system of an organization includes anything that an employee may value and desire and that the employer is willing and able to offer in exchange. There are four basic parts of a compensation system: Base pay is typically a flat rate, either as an hourly wage or salary. Many employees consider this to be the most important part of the compensation program, and it is therefore a major factor in their decision to accept or decline the job.

Wages are paid on an hourly basis. Salary is based on time—a week, a month, or a year. A salary is paid regardless of the number of hours worked.
Wages are common for blue-collar workers, and salaries are common for white-collar professionals and managers. A salary, however, does not make an employee “exempt”; we will cover this in detail shortly.

Also called variable pay, incentive pay is pay for performance, and it commonly includes items such as piece work in production and commissioned sales. Pay for performance, especially in the form of short-term incentive pay, continues to increase as a percentage of employee compensation due to the ability of the employer to shift risk from the company to the individual employee. The use of pay for performance rather than hours worked and giving bonuses are the trend today.

Benefits are indirect compensation that provides something of value to the employee. You need to include benefits in your system, because they cost the company a lot of money even though they aren’t direct compensation to the employee. Benefits are expensive costing employers 25 to 35% of total employee compensation. Benefits may include health insurance; payments to employees if they are unable to work because of sickness or accident; retirement pay contributions; and provision of a wide variety of desired goods and services such as cafeteria service, tuition reimbursement, and many other items.