Compensation vs. Salary: Make the Difference Work for You

February 7, 2023・6 mins read
Compensation vs. Salary: Make the Difference Work for You
After you have selected the perfect candidate for a position, it’s time to offer the compensation package. This package commonly includes both annual compensation and annual salary. This is all relatively straightforward, but the distinctions between compensation vs. salary are meaningful for both employee and employer. For tax benefits, financial planning, and retirement savings, it is important for employees to leverage compensation and salary benefits to their advantage. For employers, these measures are two different ways to understand what employees are costing the company.

What is the difference between salary and compensation?

Salary is the amount paid to an employee over the course of a year for the work they perform. The employee receives the same salary regardless of how many hours are worked each week. This is the gross number that employees receive before taxes are taken out, as opposed to their net income. Compensation is also expressed in gross, annual terms, but is more comprehensive. It includes any non-cash benefits that an employee receives in addition to their salary.

What is base salary?

Base salary is the gross dollar amount paid to employees for performing their job duties. These workers are sometimes called exempt employees, because they are exempt from federal government requirements for overtime pay and minimum wage. They are often managers or supervisors. Exempt employees are paid a fixed yearly amount, or base salary. When hourly employees, or non-exempt employees, work more than 40 hours a week, they are eligible for overtime pay. Federal law requires that overtime must be at least 1.5 times the normal hourly rate.

What is total employer-provided compensation?

The total employer-provided compensation is a combination of base pay, whether it be salary or hourly wages, and additional benefits of financial value provided by the employer. These benefits may include:
  • Paid time off (vacation days, sick days, and holidays)
  • Profit sharing distributions
  • Insurance (medical, dental, disability, and/or life)
  • Tuition assistance
  • Child care assistance
  • Retirement plans (401k matching, Roth IRA)
  • Employee assistance programs (legal advice, counseling, etc.)
  • Gym memberships
The company pays for these benefits, but sometimes employees are unaware of the actual dollar amount they are worth. It can be beneficial to provide employees with annual total compensation statements to help them better understand everything they are getting in addition to their base salary. Clearly quantifying and identifying their benefits helps employees see the value of their employment. It also enables them to better perform their own compensation comparisons. Total compensation statements typically list base salary along with other cash bonuses and commissions. It also includes the dollar value of any benefit or part thereof that the company pays for. Employees are sometimes pleasantly surprised to learn about everything they are receiving from their employer. Most employees know full well how much is deducted from their pay for health insurance coverage, disability insurance and other benefits, but might not realize that the company is paying much more toward those benefits each pay period. Providing such information can help the company with retaining talent and should be part of its compensation plan.

How to weigh compensation vs. salary

Salary and compensation work in tandem to make employees feel valued by their employers. Let's look at some of the ways salary and non-cash compensation are used in combination to the benefit of employees and employers.

Tax consequences

While any kind of pay is taxable, such as paid time off and bonuses, some fringe benefits listed under total compensation are non-taxable. Some of these nontaxable items include health insurance and tuition assistance under $5,250 per calendar year. If your company pays for life insurance policies up to $50,000, those payouts are not taxable. However, anything above this threshold is taxable and should be included in an employee's total compensation on their W2. Incentives like encouraging employees to commute using public transportation, biking, or walking are often excluded from taxable income as well. Infrequent perks or small gifts given to employees, like donuts and coffee at a morning meeting or a company dinner, are considered nontaxable. Known as de minimis benefits, these are non-cash items provided for employees on an infrequent basis. Gifts like gift cards however are considered taxable. When employers are making a job offer, they can point out how other compensation can benefit an employee far more than just the base salary. Likewise, someone about to take a new job can negotiate by focusing on the total value of the compensation and the best possible mix.

Long-term goals

Having a thorough understanding of both your compensation and salary is incredibly important for employees to plan for the future. Some retirement plans, which provide a form of deferred compensation, base their contribution limits on your total compensation package. For example, they will match contributions up to a certain percentage. The IRS also places annual caps on contribution amounts based on an employee's total compensation. Understanding guidelines like these is crucial to planning for retirement, as well as investing for the future. This enables you to maximize the amount you can get from your employer and enable your investments to grow more rapidly over time. Employers can address certain long-term goals by balancing what they offer in salary and other types of compensation. One company might put a premium on offering gym memberships because it promotes employee health and vitality. Another’s compensation strategy might feature stock options to promote employee engagement. A third company might work hard to craft creative compensation packages to compete for talent or because of budget restrictions. To learn more about compensation management strategies and how to better implement software, check out this guide on creating a strong compensation plan.  
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