Should I Give Employees a Total Compensation Statement?

Learn the pros and cons of providing employees with total compensation statements.

business meeting
Total compensation statements include both direct and indirect benefits received by employees

A growing number of employers are giving their employees total compensation statements, also known as total rewards statements. If you’re wondering whether your small business should follow suit, consider the following questions.

What is a total compensation statement?

A total compensation statement is a document that shows an employee’s total compensation/rewards for the year. Though this may sound like a pay stub, it’s not.

Pay stubs are concerned with gross-to-net wages — meaning the employee’s gross pay, deductions, and take-home pay for the pay period. Moreover, pay stubs tend to focus on direct payments, which are payments made directly to the employee, such as hourly wages or salary, bonus, and vacation pay. They do not reveal most forms of indirect compensation — which include hidden cost shouldered by the employer for providing benefits and perks.

Total compensation statements, however, reveal the employee’s total compensation package, which includes both direct and indirect compensation. Unlike pay stubs, which are produced on a pay period basis, total compensation statements are issued annually.

What does a total compensation statement include?

At all times, the intent is to give the employee a complete view of the annual value of their pay and benefits.

A total compensation statement is a personalized document. Therefore, what should go in the statement depends on the types of compensation the employee receives. At all times, the intent is to give the employee a complete view of the annual value of their pay and benefits.

Examples of items that may appear in a total compensation statement: 

  • Salary, or hourly wages
  • Medical, dental, and vision insurance
  • 401(k) plan
  • Paid leave for sick, personal, vacation, bereavement, jury duty, voting, military, and family and medical purposes
  • Health reimbursement arrangement
  • Flexible spending account
  • Health savings account
  • Dependent care assistance program
  • Employee assistance program
  • Tuition assistance
  • Adoption assistance
  • Disability insurance
  • Life insurance
  • Stock options
  • Bonuses
  • Relocation assistance
  • Accident insurance
  • Pet insurance
  • Legal assistance
  • Onsite childcare
  • Employer-provided meals
  • Financial wellness program
  • Concierge services
  • Discount programs
  • Matching gift program
  • Learning and development opportunities
  • Career-advancement opportunities
  • Mobile phone
  • Company vehicle
  • Company equipment

Although indirect compensation is often associated with voluntary benefits and perks, it also includes mandated benefits, such as the employer’s portion of Social Security and Medicare taxes plus workers compensation payments.

Regardless of which items you offer, the total compensation statement should show the total amounts paid directly to and indirectly on behalf of the employee. When designing the statement, you can create separate headings for “Direct Compensation” and “Indirect Compensation.” Under each of those headings, state (row by row) the name of the compensation and the corresponding value.

Although indirect compensation is often associated with voluntary benefits and perks, it also includes mandated benefits, such as the employer’s portion of Social Security and Medicare taxes plus workers compensation payments.

How many employers offer total compensation statements?

The practice is catching on, albeit slowly. According to Payscale’s 2020 Compensation Best Practices survey, 38% of U.S. companies provide total compensation statements. This is a slight increase from the 36% in Payscale’s 2019 survey.

What are the benefits of a total compensation statement?

Below are 3 potential advantages.

  1. Provides employees with greater access to compensation information

The statement may be able to answer many of the questions employees have about their pay and benefits, thereby reducing reliance on your HR and payroll teams.

  1. Highlights the employer’s true investment in the employee 

Studies conclude that most employees underestimate the value of their total compensation. Often, they acknowledge only direct compensation, not the unseen costs absorbed by the employer.

A total compensation statement serves as an “eye-opener,” revealing indirect payments the employee might have overlooked or didn’t know about. They get to see the magnitude of their employer’s investment, which can in turn increase their appreciation, commitment, and loyalty.

  1. Helps employees to see whether they’re being paid fairly

Research shows that most people do not know whether they are paid fairly. Some individuals, for example, who receive payment above market rate actually believe they are paid at or below market rate.

A total compensation statement helps employees determine whether they receive payment above, at, or below market rate.

A total compensation statement helps employees determine whether they receive payment above, at, or below market rate. It enables employees to take both direct and indirect compensation into consideration (instead of just their hourly rate or base salary) when making the determination.

What are the disadvantages of a total compensation statement?

Next are 3 potential downsides.

  1. Employees may want to know how their statement stacks up against their colleagues’  

The 2019 Payscale report says that “One common concern [among employers] is employees may compare total compensation statements with their peers and not be happy with what they discover.” 

This is a legitimate concern for employers — one compounded by the fact that employers cannot prohibit employees from discussing their compensation with each other (except in limited cases). On the upside, such discussions can be an opportunity for employers to eliminate any pay inequities that exist, and to encourage open dialogue about compensation.

  1. Employees might not trust the statement  

Employees may, for example, believe the statement is the employer’s way of justifying not giving them the pay raise they want. Or, they may interpret it as the employer discouraging future salary negotiations because (in the employer’s eyes) what’s in the statement should suffice.

Employers can mitigate this risk by:

  • Ensuring employees are paid fairly
  • Implementing standard procedures for performance reviews and pay raises
  • Informing employees of the statement’s purpose — i.e. to enhance employees’ knowledge of their compensation (which can help them to make better financial choices)
  • Letting employees know which benefits are voluntary, and that employees have the option to stop those benefits
  1. Employers may worry about making errors on the statements

Total compensation statements demand accuracy. One mathematical error could cause the employee to render the entire document as false. It doesn’t help that the value of certain indirect compensation may be harder to estimate or figure out than others.

Still, employers must make every effort to ensure the statements are correct before distributing them to employees — and this pressure may be too much for some employers to handle.

Should you provide total compensation statements?

If the pros outweigh the cons (for your specific small business), then it may be worth it to offer your employees a total compensation statement every year.

As demonstrated in the previous section, there are ways to overcome the potential downsides. The most important consideration is making sure you have appropriate resources to properly administer the process. And it may not be as difficult as you might think.

As one expert states in a Society for Human Resource Management article, while it used to be hard for small businesses to offer total compensation statements, the technology obstacles have largely gone away. And, according to another expert (in the same article), if you’re not providing total compensation statements, “you’re missing a huge opportunity to foster employee engagement.”

Interestingly, some employers are giving total compensation statements not just to employees, but also job candidates. Along with the offer letter, these employers are sending candidates a total compensation statement displaying the total value of rewards within the company. You don’t necessarily have to go that far, of course. Simply giving the statement to current employees annually is probably enough.

Bookmark(0)

Might also interest you