Total Compensation vs Salary: When the Icing is as Important as the Cake

Adding a layer of explicit benefits and unspoken delights to the salary can make for an irresistible total compensation package that attracts and retains the best talent for your organization.

As an employer, how can you make an offer job candidates can’t refuse? As a jobseeker, how can you ensure a satisfying take-home even when the base compensation amount is modest? 

The answer to both lies in total compensation, a concept people often confuse with salary. The two aren’t the same. Salary is a part, a subset, of total compensation. To an employer, total compensation is the overall pinch (cost) to company the offer email may not divulge. For employees, it is an expression of their worth to company their biodata may not always reflect. 

Spotify sponsors employees to epic concerts. Google provides free (paid) time to its workers to pursue passion areas. The Bodyshop provides generous discounts on its products to employees.

Atlassian pays employees to volunteer at charities. Goldman Sachs increased its retirement matching contributions. Squarespace covers fertility treatments for their workers. If you’re working for Uber, you’ll get delightfully discounted rides. 

All these organizations (and several others like them) are clearly onto something. It’s no secret, of course. It’s simply this: If usually takes more than money to keep employees happy, loyal and ticking.

Psychologists will agree: It’s never the cake, really, it’s the icing. That’s the bit that provides security, esteem, well-being.  The first, we take for granted. The second, is the massage our ego craves.   

Understanding the salary

A salary is a fixed and consistent compensation amount that is paid monthly or in regular intervals to an employee and is expressed as an annual sum. It is usually decided early in the recruitment cycle and calculated as a function of several factors like qualifications, designation, experience, tenure, market value, geographical location, special parameters (hazardous conditions for example), company policy, financial stability of the organization and impact generated by employee (performance and contribution to company), amongst others. 

As the most fundamental and visible sliver of a worker’s remuneration hamper, salaries act a baseline for the larger financial superstructure. Employees receive a gross salary from which deductions for benefits, social security payments, provident fund contributions and allowances are made. The remaining figure is referred to as Base Salary.

Businesses use salary bands to set pay ranges, which adds structure to their compensation model. Most salaries have certain common characteristic traits. For example: Overtime is not counted as part of a salary package (unless the employee is ‘Non Exempt’). Equal opportunity recruiters try their best to keep gender, age and race out of the salary equation. And earnings of gig workers and wage earners who are paid by the hour do not technically qualify as salary.

Understanding total compensation

A salary is often not an accurate representation of the professional correlation or interdependency between an employer and an employee. The equation may involve additional pay that’s hard to assign a numeric value to.

Total Compensation attempts to close the gap by quantifying the full remunerative value of an employee’s engagement with the business.

Attempting to arrive at the ‘truth’, it goes beyond an over-simplified and one-dimensional monetary arithmetic. Total Compensation reveals the overall expectation by employee, or owed disbursement to employee, that is not necessarily disclosed in a salary statement.

Total compensation is base salary + additional monetary and non-monetary compensation.  

Total compensation typically includes direct and indirect cash payments, along with direct and indirect non-monetary remittances, reimbursements and rewards. Some of these ‘extras’ may be mandated by labor and other laws, while others are voluntary in nature, and dispensed at the discretion of the employer.

Bosses, for instance, may surprise employees with tickets to a marquee match, or send the latter’s family on an all-expenses paid holiday, to express their gratitude. The gesture will not be mentioned in the recruitment proposal but make no mistakes: It will land straight where it’s meant to: The heart. Warming it instantly and counting no less than the monthly salary. 

As the name suggests, total compensation is a collective macro package: An all-encompassing ‘in-cash + in-kind’ outer aggregate that accrues to employees in lieu of service rendered, or value delivered. Unlike salary, total compensation is an elastic and variable concept – a figure that may expand and evolve over time.

Total compensation can significantly enhance the financial earnings of a base salary, while delivering a whole range of non-financial and fringe advantages as well. Many of the fringe benefits are taxable, while some are not.

Salary vs total compensation: Differences at a glance

What is the compensation of a total compensation package?

When it comes to an employee’s total compensation amount, the salary may be just the tip of the iceberg. Here are some of the elements that go into a total compensation calculation.

1. Direct compensation

• Grundgehalt

The fixed, monthly component received against work. On-Target-Earnings and Pay-For-Performance earnings such as commissions received for achieving quotas and cracking milestones.

• Bonus pays

Such as sign-on bonus, year-end bonus and performance-based bonus where the reward is linked to individual performance, organizational performance, or both.

• Profit sharing

When the company shares a slice of its pie with employees, typically as a percentage of earnings, in addition to the salary.

2. Indirect compensation

• Benefits

Such as life insurance, health insurance (vision, dental, accident, life), retirement plans.

• Protection programs

Comprises social security, pension, disability income, and others.

• Perks

Such as recreational facilities, car parking, free meals, financial planning, legal advice and various others.

• Paid time off work

For illness and sick days, jury duty, holidays, religious dates and special occasions.   

• Stock options & ESOP

This can be a part of the bonus package or may entitle purchasing stocks at a discount.

• Profit sharing

A portion of the company’s profits are given away as rewards to align everyone closer with the organizational journey.

• Relocation assistance

This covers costs of relocating and acclimatizing to a new location such as travel, immigration charges, packing & moving services, and so on. 

• Maternity leave

Time allowed for to-be mothers during pre and post pregnancy periods.

• Disability insurance

Takes care of temporary absence from work where employees continue to receive (a portion of) their compensation till they are fit to resume work.

• Training & development

This sponsors learning, upskilling, coaching and mentor connect, courses, cross-training, lending library memberships, peer bridge programs and various other career development avenues and opportunities. 

• Workplace environment

Ergonomic spaces, walking desks, better natural light & ventilation, pet-friendly policies, Zen zones, armchairs & hammocks, disability-friendly workstations, casual dress codes and D&I (diversity & inclusion) programs are some measures that may be adopted by recruiters to address specific employee needs.  

• Child's education

Some recruiters offer to pick up the tab for the private tuition of their employees’ children.

• Childcare

On or Off-site childcare support and resources – such as daycare, babysitter or nanny – that allows employees to drop off their child during work hours.

• Work from home (WFH)

A growing number of organizations are letting their employees work remotely, or via hybrid format that combines WFH with office-time.

• Health & fitness

Some companies will also pay for gym and health club memberships, therapy sessions, meditation, group walks, video exercises, etc to foster holistic wellness.

•   Meals

Some recruiters offer cards, coupons, canteen tickets, or digital wallets covering cost of food during regular hours, travel or overtime work.

• Fun at work

Activities that help employees take a reinvigorating break – such as ping-pong, video games, dance sessions, indoor golf, massage and others.

• Outings

Offsites, conferences, group hikes, community volunteering and other experiences that bring people together and strengthen company culture may also be sponsored.

• Socializing

Coffee mornings, movie nights, cooking sessions, collaborative projects, art classes, book clubs, sculpting and handicraft, happy hours, lego building, board games and team sports are ‘mojo rebooting measures’ some bosses are happy to pay for.

• Tips

While more prevalent in-service driven jobs, there are some professions where even salaried employees may something money directly from customers.

• Eldercare

Companies may provide monetary assistance to employees to take care of ageing or ailing ‘senior citizens’ in the family. 

• Car & conveyance

Some employees may be entitled to the company’s car or vehicle for professional or personal use. And some employers may hand out public transportation instruments like metro / tube passes and bus cards, amongst others.

• Time savers

Outfit & clothing services, haircut & grooming, dry cleaning, home cleaning, cooking, car wash, tax planning and other chores may be taken care of by a company to save their employees’ work time.

• Entertainment

This covers entertainment bills for employees and their clients, such as for food & beverage, hotel stays, tips, shows, games, concerts and other similar.

• Rewards

Rewards bring a dual edge to the table: They are highly popular and effective mechanisms for not only (A) acknowledging and compensating for output, but also for (B) motivating performance and elevating outcomes.  

• Retirement programs

Provident fund, superannuation fund, pension plans, leave encashment, gratuity and social security, amongst others, allow employees to sustain themselves beyond the normal working age.

Why is total compensation important?

• By clearly articulating the aggregate cost-to-employees and factoring in hidden spends on paper, total compensation helps the company plan its annual budgets and forecast quarterly expenses.  
• Designing the total compensation packet diligently can help organizations stay compliant with pay laws, tax regulations and related statutory considerations.
• Total compensation captures the organization’s talent philosophy and commitment towards its employees’ welfare.
• In the age of talent wars, a great compensation strategy can transform the organization’s recruiter brand. Responsibly promoted, it can attract and retain top employees, boosting competitive edge.
•   Employers sometimes use their total compensation framework to quantify, demonstrate and help employees understand how much they are really appreciated for their loyalty and contributions, something a one-dimensional salary amount will fail to achieve.  
• For employees, the total compensation package is a way to understand a job offer in its true spirit and in totality.
• It helps employees negotiate better at the job interview by informing them about the true picture of their remuneration, and how much they will be cherished and valued by the employer.
• Taking due cognizance of total compensation can help professionals take a more strategic career decision and plan their financial journey with certainty.
• The right compensation structure will keep employees engaged, culture moral high and business productivity booming.

How to calculate total compensation?

Step 1: Curate data on direct cash outflow

List out all direct monetary payouts that are being made to the employee.

Make sure to include both the fixed component (base salary) and the variable component (commissions, bonus and other OTE’s and Pay-For-Performance figures).

Step 2: Curate data on indirect compensation

Part A

Sniff out, identify, trace and list all non-cash and non-monetary gestures ‘paid out’ to the employee such as stock options, health benefits, retirement plans, perks and others. Overtime for non-exempt employees will also go into this bucket.

Part B

Try to quantify and translate Part A into equivalent monetary value.

Step 3: Add 'em up

The sum of step 1 and step 2 is your total compensation corpus.

Tips (no pun intended) on how to design a great compensation package for your organization

Employers invest significant amounts of thought and resources behind their compensation package, hoping it hits the spot for all parties concerned.

Here are some best practices, proven pointers and cues that can help design one for your organization that does.

• First things first. Remember, the better you understand the intrinsic and extrinsic motivational triggers driving your employees, the better you will be able to design a compensation package they find truly attractive.

• Get innovative and make sure your package features benefits and perks that are unique, compelling and help you stand out as a recruiter who’s ‘woke’.
• Keep it flexible, invite employee suggestions while building it, and give them some leeway to adjust and shuffle it on-the-go.  
• Standardize and document your compensation plans across business lines – clearly demarcating the distinct pieces in them - and share with department heads and employees at the time of onboarding.
• Many benefits tend to get wasted over time - sometimes, simply forgotten - due to lack of visibility, clarity or access. Communicate their advantages with your employees and track their utilization regularly to ensure their true potential is unlocked and their intended purpose is met.
• Use industry surveys, feedback and sentiment trackers to benchmark and update your compensation package from time to time. Some factors to crunch while reviewing your package are:

o   Industry trends

o   Competitor practices

o   Evolving nature and complexity of the job

o   Performance, passion and involvement of worker 

o   Value (or shortage) of the skill 

o   Cost of living

o   Employee opinion

o   Employer viewpoints

Go ahead, bake some loyalty into your package

Add a sticky icing of perks, bounties and bonuses to your salary, and keep your rockstars delivering happily, ever after.