guide to employee compensation and benefits.

With the ongoing labor shortage spurred by the great resignation, an aging workforce and shifts in workers’ expectations as well as the growing skills gap, today’s employers are under immense pressure to attract qualified candidates and retain top talent.

For decades, we’ve known that compensation and benefits, also known as rewards, are strong motivators for employees to change jobs. In fact, our latest Randstad Employer Brand Research shows that 61% of the global workforce considers salaries and benefits the top reason for choosing an employer. For employers to remain competitive enough to attract and retain the talent it needs to meet their business goals, they must ensure their company is offering a strong compensation package.

Continue reading to learn more about employee compensation and benefits and obtain tips for creating a compensation strategy.

what are compensation and benefits?

In basic terms, compensation and benefits include a combination of monetary and non-monetary rewards employers give their employees in exchange for labor.

When you think of compensation, however, the first thing that comes to mind is probably wages. This factor is true for jobseekers too. In fact, wages are a key element of the overall compensation package and are typically the first thing candidates consider. According to our research, salaries are also the number one motivator for workers changing jobs.

While it's true that compensation is a form of direct payments made to workers in exchange for labor, it includes more than just basic salaries. When we think compensation, there are usually two distinct components, including:

• fixed pay rates: Fixed pay is the base salary paid to employees, such as an hourly pay rate or salary. These are guaranteed wages that employees receive in weekly, biweekly or monthly pay intervals.
• variable pay: Unlike fixed pay, variable pay is not necessarily guaranteed wages, but rather it's often based on the performance of individual employees or the company as a whole. This type of pay is not based on a fixed rate but is calculated based on a variety of variables, such as performance and years of service. Examples of variable pay include tips, commission, overtime pay, incentive pay, bonuses and stock options.

When calculating an employee's full compensation package, it's important to include the entire fixed pay rate amount as well as an estimated variable pay rate. This breakdown gives employees and candidates a clear picture of how much they can anticipate earning.

On the other hand, employee benefits are indirect payments. Benefits include all other types of monetary and nonmonetary rewards given to employees in exchange for their labor, including:

• pension plans
• paid time off (including parental leave)
• childcare, transportation and home office subsidies
• tuition reimbursement
• employee training
• free lunches
• free or discounted services, such as gym memberships
• health, dental and vision insurance

The non-financial rewards are often forgotten, but are also an essential part of the reward package, such as:

• employee recognition
• hybrid work schedules
• flexible work options
• on-the-job training
• volunteer opportunities

When establishing a complete workers' compensation and benefits package, it’s important to consider a  variety of factors, such as your overall strategy and company values, EVP and what your employees and target candidates want. By making smart decisions about what benefits to include in your overall compensation package, your company can position itself to get noticed by your target candidates and entice your current workers to stay.  

importance of a compensation and benefits strategy

What makes compensation and benefits so important? First, your employees want to be paid — they need to be paid. 

Secondly, salaries and benefits make up a large percentage of the company’s overall budget. For most businesses, labor costs represent anywhere from 15% to 30% of the company budget, but these costs can be much higher for some businesses. Therefore, it only makes sense to have a strategy in place for an expense that represents nearly a third of the budget.

Finally, developing an employee compensation and benefits package is not as easy as only setting wages and adding some benefits. Developing a compensation package requires strategic planning and making smart choices as to what benefits should and shouldn’t be included in conjunction with salaries. Understanding the impact these choices have on your organization as well as your current and prospective talent can help you develop a package to achieve your business goals.

benefits of having a compensation strategy in place

A strategic compensation plan offers numerous benefits, including:

gives the company a competitive edge

Having a comprehensive employee compensation strategy in place can give your company a competitive edge by ensuring it offers the specific salaries and benefits talent in your industry want. Being able to highlight these compensation and benefits packages on your career page and in your job postings can increase your company’s potential to attract and acquire top talent.

builds loyalty

In a recent study, 60% of workers who believe their employers care about their wellness plan to stay at their current job for at least the next two to three years. Offering your employees the types of benefits they really want can go a long way in showing them that the company cares. Over time, this sense of caring can build loyalty among your workers and improve employee retention rates.

increased productivity

Research shows that workers are 13% more productive when they’re happy. Creating a compensation and benefits package that focuses on workers’ physical, mental and financial health can increase their wellbeing, along with productivity.

compensation strategy approach

One approach you can consider when developing your compensation strategy is to determine whether you want to be:

• leading the market: This is an aggressive strategy where the employers decide to set salaries above standard market rates. Taking this approach can give your company a competitive edge and make it easier to acquire talent. You may also offer a lighter benefits package since wages are higher. The downfall is that higher wages mean higher labor costs.
• lagging the market: Lagging in the market means employers set salaries lower than standard market rates. This method is a common practice among non-profits, which can attract workers due to the charitable services they provide. The risk of setting salaries too low is that the company may struggle to attract and retain workers. With this strategy, employee benefits, such as flexible work schedules and paid time off, are even more important.
• meeting the market: Meeting the market is the most common option and requires employers to set salaries close to market standards. Choosing this option allows companies to maintain competitive salaries while staying within budget. With this type of strategy, benefits become an extremely useful tool for attracting and retaining talent.

Keep in mind this is only one way of looking at your compensation strategy, It’s also important to consider what type of company you want to be, how much you want to differentiate from the competition and at what cost. 

how are employee compensation and benefits calculated?

The first step to calculating employee compensation for your workers is to set a salary range for each position. Typically, employers base their salary ranges on industry standards. Most employers use detailed salary surveys to identify average salaries for their respective industries.

Once a salary range is in place, HR teams must determine where the specific pay for each employee falls within the pay range. Typically, employers will look at various data points, such as specific job duties, years of experience, required qualifications and location, when making this determination.

Employee benefits are a little more difficult to calculate per employee. In most cases, employers simply add up all costs associated with benefits and divide by the number of employees. This calculation can serve as a rough estimate to determine total compensation costs for each employee.

Bottom line, having a competitive salary is an important factor to attract and retain talent. However, there are many other benefits that you can offer to your employees without increasing your labor costs. To help with this process, we have compiled a list of the top 10 employee benefits that also help boost employee retention.