For employers and employees budgeting for or comparing employee compensation packages, here’s how to calculate total compensation costs and value.
Total compensation reflects all that employees earn. While it certainly includes salary and wages, it also encompasses much more. Sometimes an employee’s salary only accounts for a portion of everything they make.
Both employers and employees should be aware of total compensation packages so they can fairly evaluate employee pay. Employers must budget for all that’s included within an employee compensation package, and they must also compose competitive offers. That balance can be a challenge, therefore the company’s compensation strategy must be well informed. And employees must be able to accurately compare job offers with different compensation structures. For all this, it’s important to understand what’s involved in how to calculate total compensation.
Base salary or wages
Base pay accounts for the majority of most employees’ compensation. It’s what they earn each pay period, whether that’s calculated from an annual salary or hourly wage. It’s also the figure that’s primarily negotiated when discussing job offers, promotions, and raises.
This is one of the easiest benefits to compare, but sometimes it’s helpful to consider from several angles. Employers and employees might want to:
- Check the total annual salary.
- Calculate a weekly pay.
- Calculate an hourly wage.
For hourly employees, the number of hours worked should be accounted for. Employees might earn much less than a full week’s paycheck if their hours are fewer than 40 per week. Or they might earn much more if overtime is regularly required or available. Employers need to be able to pay employees for all hours worked, and employees need to know weekly pay for their personal budgeting.
Some employees receive substantial additional pay in the form of bonus pay. Bonuses can take several forms depending on industry and position:
- Sales commission pay.
- Quarterly or annual performance-based bonus.
- Special project bonuses.
- Holiday bonus (nonperformance).
Because much bonus pay is performance dependent, the actual amount paid can vary substantially. Employers should budget for the upper range of what they anticipate is possible. Employees should predict what they realistically expect to earn when comparing offers and budget for the lower range of what’s possible when completing their personal budgets.
Equity and distributions
Some companies offer employees equity in the business and/or a share of the business’s profits. Both types of programs can incentivize employees to help the company do well overall.
Stock options are most common with larger, public companies, but select private companies also have stock granting programs. When comparing stock option benefits, both the amount of stock granted and the vesting period should be considered. Most programs require employees to remain with their employer for several years before they can access all stock granted.
Profit sharing is more common with small businesses. These businesses give employees a percentage of the company’s profits each quarter or year. Seasonal businesses usually grant the profit share at season’s end, while year-round businesses might do it quarterly or when the fiscal year closes.
Paid time off
Paid time off (PTO) is one of the largest benefits outside of salary and bonuses. Most jobs include at least some PTO, and many have lots of PTO. Time off benefits can take several different forms:
- Holidays (10 annual federal holidays).
- Vacation time (2 weeks traditionally).
- Paid parental leave (mandatory in some states).
- Sick time (no standard).
- Personal days (no standard).
Employers need to budget for all of the pay that they’ll give employees for time not worked. Employees should primarily consider PTO in the context of how much they want to not work.
An increasing number of employers are offering flexible working arrangements. This too can take several forms:
- Hybrid office or remote work schedules.
- Flex time that adjusts schedules by a few hours.
- Unpaid time off.
- Other flexible work arrangements.
Employers don’t have to pay employees for these benefits, but employees may value these highly. Employers should factor in all flexible working arrangements when determining staffing needs and costs. Employees, again, should factor how much they plan to not work.
Retirement savings options are another major benefit for higher-wage jobs, such as skilled blue-collar and most white-collar work.
The most common retirement plan for employers to provide is a 401(k), but there are other options. The main ones to consider are:
- Traditional 401(k) (simply a 401(k)).
- Roth 401(k) (slowly becoming more common).
- 403(b) (a 401(k) alternative for nonprofits).
- SIMPLE IRA (an alternative for small businesses).
Many employers offer matches on employee contributions or make contributions directly into employee accounts (for SIMPLE IRA). Employers should account for both the cost of any contributions and the administrative costs of offering a plan. Most employers outsource administration.
Employees should consider retirement savings options within the context of their personal finance. Some employees will be able to take advantage of these much more, and thus calculate a higher value for this particular benefit.
Lower-wage employees or those with alternative savings options might not be as interested in retirement savings options. Wherever they do invest, they should factor their contributions, tax implications, and known and/or estimated growth to calculate total potential value.
Health insurance is the 3rd major benefit for most employees. A group health insurance policy is the primary consideration, but there are a few other potential health benefits.
All employers with 50+ full-time employees (or equivalent) are required to provide group health insurance per the Affordable Care Act. Smaller employers can procure a health insurance plan through the SHOP Marketplace and potentially take advantage of the small business health insurance tax credit.
Many employers offer high-deductible health plans (HDHPs), which have low premiums and high deductibles. These can be paired with a tax-advantaged health savings account (HSA) that helps with deductibles and long-term savings.
In addition to group health insurance, some employers also offer other health benefits:
- Flexible spending account (FSA).
- Health reimbursement account (HSA).
- Gym memberships or reimbursements.
Both employers and employees should evaluate health insurance in the context of its value to employees. This includes not only the dollar amount that an employer pays, but also the quality of coverage to which employees have access. Both parties should also factor in any tax advantages that may help offset costs.
Other insurance benefits
In addition to health insurance, some employers offer other insurance benefits. These can include:
- Dental insurance.
- Vision insurance.
- Disability insurance.
- Life insurance.
- Pet insurance (uncommon).
Employers usually pay part or all of the associated premiums when these insurances are offered. Sometimes employers don’t pay premiums, though, and merely offering access to affordable insurance is helpful to a few employees. Again, both parties should factor in costs, value, and any advantage that helps offset the expense.
Depending on the employer and position, additional benefits may be included within employees’ total packages. These tend to be smaller benefits but are still important to include in budgeting and total compensation analysis.
The following are just a few of the many different additional benefits that employers might offer:
- Tuition reimbursement and professional continuing education/licensure costs.
- Childcare reimbursement.
- Company vehicle.
- Parking/public transit reimbursement.
- Free meals/coffee.
- Professional association memberships.
Employees generally don’t have to include employer-paid taxes in their calculations, as all employers pay these. Employers must budget for state and federal government payroll taxes, however. These are based on employee pay:
- FICA: 6.2% for Social Security, and 1.45% for Medicare.
- FUTA: 6% federal unemployment tax applied to the 1st $7,000 in wages paid each employee for the year. Employers who also pay state unemployment tax may be eligible for a credit of 5.4%.
- Additional Medicare: 0.9%.
- State unemployment: varies by state.
Employers should also budget for the additional workers’ compensation premiums that will come with hiring more employees.
How to calculate total compensation
To calculate an employee’s total compensation, their pay and all the benefits offered need to be included. Some of these have quantitative numbers, but others have qualitative value that’s subjective. Employers and employees should do their best to accurately assess the value and cost of each benefit, and then include them all together for a total compensation package value.