Ensuring fair pay in the workplace is the key to employee happiness, retention, and even productivity.
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 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:
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:
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.
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 (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:
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:
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:
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:
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.
In addition to health insurance, some employers offer other insurance benefits. These can include:
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:
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:
Employers should also budget for the additional workers’ compensation premiums that will come with hiring more employees.
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.
Once you’ve calculated total compensation, you can use this information to build fair pay grades and salary ranges for your employees.
When people are looking for their next career move, compensation is a top consideration. Your company should have a plan to figure out equitable, fair pay for all of your employees. Being transparent about your company’s salary ranges is beneficial for you and your employees. It can reduce turnover, your employees will work harder, and transparency protects them against wage discrimination.
Your employees will no doubt discuss their pay with each other (which is completely legal). Being transparent about compensation will eliminate any suspicions that they’re being underpaid (a common assumption when pay is kept a secret).
In this article, we cover:
It’s essential to understand what it means to provide fair pay in your organization because “fair” can be subjective. When it comes to pay, “fair compensation” means rewarding your employees according to their performance, skills, experience, and the industry and location in which they operate.
The goal would be to create a plan to determine pay grades that consider all these variables while also accounting for compensating exceptional employees you want to retain.
Transparency is also crucial here, and making your pay grades more transparent can help your company reduce turnover: People who left their jobs this year saw their pay jump by nearly 7%. By being transparent and forthcoming about salary ranges, employees will know what to expect for their next raise or promotion internally. This may help them feel less compelled to look elsewhere.
Before creating a plan with concrete numbers and salary ranges, your compensation structure starts with answering these 3 questions:
This question explores your company’s position on pay. It also provides a framework for competitive total compensation packages and fair pay for employees. While your company’s philosophy will be uniquely yours, we strongly recommend adopting a Fair Pay philosophy. This simply means you pay people for their skills, experience, and performance, and pay remains unbiased of gender, age, religion, etc.
This question explores:
It helps to relate talent needs to your business goals. At Workest, we offer a step-by-step guide to help you with this, which includes ranking company goals based on priority. For example, suppose you operate in a business primarily driven by technological needs (i.e., web developers). In that case, you might consider having a higher budget for recruiting top development and engineering talent (one of the most major HR challenges of 2021).
This question explores how much your company can afford to pay each employee, including bonuses and raises and any other incentives.
Your budget helps define:
Now that you’ve explored your company’s philosophy, goals, and budget, you’ll have to look at the market and various benchmarks to determine what your company’s pay grades and salary ranges should be.
Several tools offer real-world salaries, including Zenefits, LinkedIn, and Glassdoor. These benchmarking tools help you understand where your company’s wages should land based on title, location, and industry.
One important consideration is that smaller companies likely cannot compete with larger firms when it comes to pay, but that doesn’t necessarily mean you’ll lose out on talent. Post-pandemic, work is not just about compensation anymore. While equitable and fair pay will always remain a top consideration, people are also looking for:
After looking at the market data for the jobs in your company, group them, and assign them pay ranges. For example, if you are working with developers and project managers, you would group them (group A is developers, and group B is project managers) and then determine an appropriate salary range based on the level of responsibility within each group.
For example, in your group of developers, you might have junior, intermediate, and senior, and the range for that entire group is 50k-120k. So your junior might fall somewhere between 50k-70k, your intermediate between 70k-100k, and your senior between 100k-120k.
Both large and small companies should have a performance review process in place. Further, these performance reviews should be tracked and documented so that when annual raises are discussed, there is a fair paper trail for why someone will or won’t get a raise.
While you might have performance reviews 3 times a year, you likely won’t give raises that often, so it’s important to establish precisely when during the year your employees are eligible for a raise and the minimum time of employment before they’re eligible. This transparency is vital because if your company decides only to give raises in December and decides an employee needs to be in their position for at least 6 months, it’s clear to employees who started in July or later that they won’t be eligible for a raise.
Finally, after your fair pay grades and salary ranges are put in place, your company should:
As noted, it’s important to keep in mind that while smaller companies can’t always compete when it comes to pay, people also highly value companies with empathy, are looking for a work-life balance and growth opportunities.
Do your employees understand what’s being deducted from their paychecks, and are they maximizing their take-home pay?
Many first-time workers are surprised to find out if they work 10 hours for $10 per hour their paycheck does not come to $100. That initial payroll “sticker shock” can be jarring. Before employees even cash their checks, deductions have been made to the government and other entities, diminishing earnings and causing workers to rethink their budgets.
Gross wages are the amount earned before taxes and deductions. This is the amount an employer offered either as an hourly wage or annual salary. The amount can be no less than the federal minimum wage, currently $7.25 for most workers, or a state or county’s minimum wage.
Gross pay is the amount agreed upon to accept the job, promotion, or transfer. Workers with multiple jobs may have multiple gross pay amounts, but the net amount they earn with every paycheck is much lower.
Net wages are the amount received once all necessary deductions have been made. Many employees refer to net pay as “take-home pay” — the amount you actually get to take home. Take-home pay is impacted by the amount of legally required deductions an employee has, as well as optional deductions they may choose.
In 1913, the federal government enacted an income tax, requiring workers to pay a portion of their wages to fund government spending. In the 1930s, a portion of those taxes was used for the new Social Security Act fund.
Originally, workers paid taxes the following year in quarterly installments; the Current Tax Payment Act in 1943 changed this. Taxes were then deducted and paid with every paycheck, shifting the burden of payments to employers. Ever since then, taxes have been withheld before employees have access to their earnings.
Many different deductions impact an employee’s net — or take-home — pay. Some are required by law, others are optional.
Whether employees agree to it or not, taxes are withheld from every employee’s paycheck and FICA (Federal Insurance Contributions Act) deductions are also taken from each paycheck.
The IRS requires employers to make the deductions and remit the deducted amounts. These taxes are calculated when employees sign their W-4 withholding form, and they remain in place unless it’s updated. Only independent contractors are exempt from withholding taxes with each paycheck, but these workers are required to make the appropriate contributions to the correct agencies on their own.
Wage garnishments are court-ordered deductions that need to be withdrawn from an employee’s pay and sent to the company or person who has prevailed in a civil lawsuit. These deductions are legal in every state except Texas, North and South Carolina, and Pennsylvania.
All states (even those 4) allow mandatory wage garnishments for:
The remaining 46 states allow garnishments for credit card or medical debt or other defaulted payments. Federal and state laws cap the amount of wages that can be garnished, typically 25% of earnings after taxes, or 30 times the current federal minimum wage — whichever is less.
Union dues may be withheld if the employee is covered under a collective bargaining agreement. While no employee is legally required to join a union, even if their employer or trade participates, deductions may still be required at a lower, administrative rate. These “agency fees” are withheld if workers get assistance from the negotiated contract in the form of wages and other benefits; they do not have to be a member of the union for this to happen.
In limited cases, an employer may deduct the cost of items that are “primarily for the benefit or convenience of the employer” under federal Wage and Hour law. This can include deductions for uniforms, uniform rental/cleaning, tools, etc. But if the deduction lowers the employee’s pay below federal or state minimum wage, it is not allowed to be made.
Employers under an Affordable Care Act (ACA) mandate to provide healthcare coverage for staff members may withhold part of the cost of coverage from an employee’s paycheck. Since the ACA individual mandate was repealed, employees are not required to accept healthcare coverage, although employers with 50 or more full-time employees are required to offer it to staff.
Flexible spending accounts are another deduction employees may opt to take from their pay before they cash their check. These can fund caregiver savings or medical accounts, providing staff members with pre-tax savings to cover specific expenses they incur during the year.
Retirement savings accounts and pension plans are popular deductions that impact net pay. Savings plan contributions may be deducted from pay on a pre-tax basis for employees to use when they hit retirement age. Some early withdrawals are also allowed, such as for purchasing a first home.
Other health and wellness deductions may be chosen, for long- and short-term disability, life, or supplemental insurance coverage. Some companies set up savings plan deductions for their staff members to set aside vacation or holiday funds throughout the year.
Voluntary wage garnishments, sometimes called wage assignments, may be requested by an employee to help them make support, credit, or other payments before they get their check. These need to be agreed upon in writing in advance and may be rescinded by the employee at any time.
Employees preparing for college tuition and expenses may opt for deductions made to a 529 plan. These “qualified tuition programs” allow anyone, including the employee, to set aside funds for their own or another’s future college tuition, fees, and other expenses. These plans allow for tax-free withdrawals as long as the funds are used for qualified purposes.
Many employers are providing 529 plan options to staff members planning for their children’s educational needs: some even offer matching contributions. 30 states offer some form of 529 Plan tax incentive to encourage employers to help staffers plan for college.
For many employees, the sticker shock of gross versus net pay can be significant. Employers can help staff members get the most net pay possible under regulatory guidelines by suggesting they carefully assess the information they include on their W-4 payroll tax form. The new tax form for 2020 allows employees to more easily and accurately calculate deductions for the coming tax year that are in accordance with the new tax guidelines.
Too many employees sign tax forms when they first join an organization and forget about them for the duration of their career. They don’t take into account their life situation may have changed — with marriages, divorces, births, and children coming of age.
Businesses should encourage employees to review their W-4 annually to make sure their deductions are accurate and reflect their current situation. This can help workers make the most advantageous choices and may provide a larger portion of their wages as net, or take-home, pay.
You’ve probably run across the term “per diem” at least once in your career, but what does it cover and how do you get reimbursed?
Per diem is a Latin phrase that translates to “by the day.” The term also refers to the amount of money paid to employees for 2 different types of “day” scenarios
The most common use of the term per diem refers to expenses a company reimburses an employee when they travel on business. Another type of per diem is for employees who receive a set amount of pay for a single days’ work. Each has a set of guidelines that must be adhered to in order to be compliant with the law.
Per diem reimbursements pay an employee back for the expenses they incur while traveling on business. If the employee does not have access to a corporate credit card to charge expenses, they typically pay out of pocket.
For these expenses, per diem sets a maximum amount the employee can spend on lodging, food, and incidentals, as well as a partial reimbursement for the first and last day of travel.
When employees are issued a per diem for business travel, they are reimbursed up to the amount of the per diem allotment without having to submit individual receipts for meals for reimbursement.
The federal government sets maximum rates for per diem payments in 3 categories:
There is a standard rate per diem set by the General Services Administration (GSA) for each of the categories at the federal level, however, states and cities can allow for higher (not lower) per diem payments.
The standard per diem rate for lodging, effective January 2020, is $96 per day. This does not include any taxes paid on the cost of lodging.
For meals and incidental expenses (M&IE) expenses, the standard rate per day is $55 total.
The government breaks meals down by what it should cost for breakfast, lunch, and dinner.
The standard rate for “incidental” expenses per day is $5. These include fees and tips the employee may give to hotel staff or baggage handlers.
For employees’ first and last day of travel, the federal government allows a portion of the per diem payment to be made.
In most cases, the allotment is 75% of the normal expense, based on the assumption the employee will not need all their meals/incidentals reimbursed.
For a standard $55 M&IE payment on the first or last day of travel, the amount to be allocated to the employee would be $41.25.
For 2020, a self-employed person can only use per diem for the meal costs they incur while traveling on business. For all businesses, per diem reimbursements are not taxable income to the employee if the payment is equal to or less than the federal per diem rate.
To comply with tax code set by the GSA and IRS, employees must submit an expense report to verify the per diem payment is not taxable.
The report includes:
Reports should be submitted within 60 days of the travel. If the report is not submitted, per diem payments are considered taxable income for the employee.
If an organization allows more than the standard rate for their area (or the federal rate if no rate is designated in their city, county, or state) any additional funds allocated to the employee are considered taxable income. Per diem payments at or below the standard rate are not reported on an employee’s W-2 form. But for anything over the standard rate, the employer will have to report the payments as income and pay the necessary and appropriate taxes.
Some employers issue per diem checks before an employee embarks on their trip so they have the funds necessary for travel. Others reimburse after the trip with a separate check that does not include tax and FICA payments.
For business, per diem payments cut down on the paperwork necessary to verify business travel expenses. The employee has an allotment per day to spend without having to submit receipts to their employer for reimbursement.
The federal guidelines suggests these rates for daily expenses:
Employees who dine at a lower cost are able to keep the additional funds without any tax implications, and employers rarely ask for any funds not used to be returned.
The other business application of the term “per diem” is for employees who work on a daily basis. Organizations set a day rate and hours to be worked in advance. If the employee is called in, the per diem rate is paid, generally irrespective of the amount of hours worked, but there are some limitations.
One of the most common types of per diem worker in the U.S. is the substitute teacher. With contracts negotiated in advance, these teachers are paid a flat rate for every day they step in to fill an absence or vacation vacancy. Many industries, outside of education, also use per diem workers.
In healthcare, travel nurses are commonly used on a per diem basis. Many healthcare providers pay per diem nurses a higher rate than staff nurses, as an incentive to get help quickly when staffing levels are low. Other industries, some that run 24/7 or have production peaks and valleys, use per diem employees to help when extra hands are needed.
Per diem employee rates are generally agreed upon in advance — the number of hours may fluctuate somewhat, but the day rate typically remains the same. For business, knowing the flat rate it will cost to bring in another staffer for the day helps manage expenses and costs. But there are things to consider when looking at per diems for your organization.
Per diem employees are not exempt from the law. No matter what day rate you agree upon, if the employee’s total hours versus wages calculate to less than the federal or local minimum wage, the rate will need to be adjusted to meet the minimum.
Alternatively, if employees’ hours meet overtime requirements, either locally or by federal guidance, they will need to be paid the appropriate hourly rate for that time.
Per diem employees typically do not receive the standard benefits employees are entitled to, like healthcare coverage, sick and vacation time. Because they only work on a day-to-day basis, most employers do not provide fringe benefits to these staff members. Optionally, if their plan provider allows, businesses may provide healthcare coverage as a further incentive to attract per diem staffers.
Most employers provide annual performance reviews for per diem staffers (with wage increases, if appropriate) to assure the ongoing relationship stays mutually beneficial. These can be helpful to make sure the work is being performed correctly and the worker is satisfied with the arrangement.
Employers must take care not to classify workers as per diem if they are consistently and regularly scheduled to work. If a per diem staffer is used regularly, they should be moved to full- or part-time status to avoid any compliance issues.
Per diem payment reimbursements manage travel expenses for business and employees by cutting down on paperwork. These help business pre-set costs for meals and travel expenses while staffers can plan for costs while on the road for their employer.
Per diem workers can help businesses maintain coverage or meet demand. These specialized on-call workers fill in when needed or help organizations complete tasks beyond the reach of their regular staffing levels.