How To Calculate Total Compensation: A Step-by-Step Guide

In today's job market, knowing what you're really worth goes beyond your paycheck. Total compensation is everything an employer offers you—from your salary to bonuses, benefits, and more.

Understanding your total compensation will help you compare job offers fairly and see the true value of your current role. For employers, it's key to staying competitive and keeping their best people.  

Our handy guide explains total compensation, breaks down its components, and provides a clear method to calculate it accurately, so you can see the big picture of your pay.

What Is Total Compensation?

Total compensation isn't a one-size-fits-all concept. It encompasses all forms of monetary and non-monetary rewards provided to an employee in exchange for their work. These include:

• Base salary
• Overtime
• Bonuses
• Benefits (e.g. health insurance)
• Other perks (e.g. gym membership)

Here's why understanding compensation matters:

Consider two job offers with similar base pay. One offers a $46,000 salary with great healthcare, generous retirement contributions, and stock options (worth $14,000 total). The other offers a $48,000 salary but only $2,000 in benefits. Most people would agree the first offer is much better—by about $10,000!

Understanding the full scope of a compensation plan helps employers and employees appraise a role's true value. In today's competitive job market, this knowledge is crucial for making smart decisions about job offers and negotiations.

What Are The Components Of Total Compensation? 

Let's break down the many components of modern compensation plans.  

Direct compensation

Base salary: This is the fixed annual amount paid to an employee for their role.

Commission: Usually based on sales.

Bonuses: Additional earnings based on meeting performance measures or sales targets. Research shows that employees perform better under incentive plans as opposed to working for their base salary.

Bonuses encompass:

• Performance bonuses: Awarded for achieving certain metrics, like completing a project under budget or exceeding a sales target by 20%. Performance bonuses can be individual and company-wide.
• Profit sharing bonus: A bonus that eligible employees receive over a set time period based on the profitability over that period.
• Signing bonus: New employees, usually more senior or well-networked candidates, often receive a signing bonus when joining a new company.

Overtime pay: This compensates employees for working over the standard hours stipulated in their contract.

Indirect compensation

Benefits package

Core benefits include:

• Health Insurance: This is the employer's contribution to medical, dental, and vision plans. Around 72% of US workers access healthcare benefits in the private sector, showing just how valuable and in-demand they are.
• Retirement plan: Retirement benefits allow employees to contribute to a retirement savings account or 401 (k) with added employer contributions.

Paid Time Off (PTO)

PTO is the monetary value of vacation days, sick leave, and personal days. It can include parental leave and even a sabbatical period. According to the Bureau of Labor Statistics, this benefit usually increases with longer service and is greater in larger companies.

Equity and Stock Options

• Equity: Employees are given stock at a reduced cost (common in startup businesses).
• Stock options: The right to buy company shares at a predetermined price.
• Restricted stock units (RSUs): RSUs refer to stock or equity awarded based on strong employee performance or business success.
• Profit-sharing: Employees qualify for an agreed share of annual profits.

Other perks and fringe benefits

These include:

• Life insurance
• Disability coverage
• Tuition/ student loan assistance
• Childcare support
• Wellness programs  
• Gym membership
• Company car
• Fuel allowance and travel reimbursement
• Remote work allowance
  

How Do You Calculate Total Compensation? 

To calculate total compensation, add the employee's base salary, variable pay (like commissions, bonuses, and overtime), and the monetary value of all their employee benefits (including health insurance, retirement contributions, paid time off, and stock options). The calculation is the total of both their direct and indirect compensation. (Featured snippet)

Let's walk through an example calculation step-by-step.

Step-by-Step Calculation

1. Determine the base salary
   • Example: Assume the employee has a base annual salary of $75,000.
2. Calculate the value of bonuses and commissions
   • The employee's annual performance bonus is $5,000.
3. Assess employer-paid benefits
   • Health insurance: The employer pays $500 monthly, totaling $6,000 annually.
   • Retirement contributions: The employer contributes 5% of base salary ($75,000 x 0.05 = $3,750).
   • Paid time off: The employee receives 15 days of PTO. Daily salary is $75,000/260 workdays = $288.46. The total PTO value is 15 x $288.46 = $4,327.
4.  Add equity compensation
   • The employee is granted stock options worth $7,500 annually.
5. Include professional development allowance
   • The employer provides a professional development budget of $2,000 annually for courses, certifications, or conferences.
6. The sum of all components
   • Direct compensation: $75,000 (base salary) + $5,000 (bonus) = $80,000.
   • Indirect compensation: $6,000 (health insurance) + $3,750 (retirement) + $4,327 (PTO) + $7,500 (stock option) + $2,000 (development allowance) = $23,577.
   • Total compensation package: $80,000 + $23,577 = $103,577.

Tools And Resources For Calculating Total Compensation

There are various reliable resources to help employees and HR teams calculate total compensation. Here are some of the most widely used.

Online calculators

These are interactive apps designed to get behind the curtain and provide the true value of total earnings. Users input the relevant variables and the tool performs the calculation.

Three popular calculators are:

• Paychex Total Compensation Calculator
• The Salary Negotiator's Total Compensation Calculator
• CalcXML Employee Total Compensation Calculator

Compensation management software

Specialized compensation management software helps organizations manage employee compensation by:

• Helping HR teams create and manage salary structures based on roles, performance, and market benchmarks.
• Tracking various compensation components (e.g. equity plans and stock options), ensuring accuracy and compliance.
• Automating the calculation and payment of performance-based bonuses.
• Providing insights into compensation trends and pay equity.

ShareWillow's advanced profit-share software has helped hundreds of business owners manage profit-sharing effortlessly. The system allows each employee to see their profit share award and their historical payouts. Signing and accessing agreements in one place makes the process seamless for all parties.

Get in touch with our team to learn more about managing incentives with ShareWillow.

Professional consultation

Many HR professionals specialize in compensation and provide valuable expertise in the area. Besides advising on compensation best practices (including pay communications and transparency), professional consultants provide guidance tailored to:

• Industry standards and expectations
• Your organizational structure
• Workplace demographics. For instance, a Gen Z team has different financial and lifestyle goals from a predominantly Millennial or older workforce.

Importance Of Understanding Total Compensation 

It's important for both sides of the employment contract to understand total compensation.

For employees

A comprehensive understanding of total compensation allows employees and job seekers to properly and accurately assess job offers. This helps them choose roles that fit their financial and lifestyle needs.

When employees clearly understand their total compensation package, they can:

• Make a case for a salary raise.
• Negotiate better benefits such as flexible work hours, higher bonus structures, or additional PTO.
• Identify gaps in their package and talk to their boss about possibly restructuring their rewards.
• Appreciate how benefits like retirement contributions, equity, or stock options compound over time. This empowers better long-term financial decisions.

In addition, employees who recognize the full scope of their compensation are more likely to feel valued and satisfied in their roles.

For employers

Employers offering comprehensive, progressive, and flexible compensation packages enjoy several advantages.

Competitive edge:

• These companies can attract top talent that appreciates a rich choice of rewards.
• They create a positive corporate image among talent, clients, and other stakeholders who value employee-friendly organizations.

Positive employee relations:

• A good transparent compensation package encourages loyalty and reduces staff turnover. Employees are less likely to leave when they know they're properly rewarded.
• Research shows employees are 50% more likely to leave if they believe they are paid below-market (even if they aren't).
• Employees who feel valued through competitive compensation are more likely to be motivated and productive in their jobs.

Financial planning and management:

• Employers who calculate compensation accurately can predict annual expenses more reliably.
• Companies that forecast the growth of compensation costs (such as rising healthcare premiums or matching retirement plans) plan better for the future.
• Proper understanding helps to identify and address under-compensated roles, ensuring fair pay across the organization. It also supports strategic decisions about workforce restructuring.

FAQs

Are non-monetary benefits part of total compensation?

Certain non-monetary benefits like flexible work schedules and remote work options might not have a definitive value. However, these work-life balance perks are valued by employees and are typically incorporated into the total package.

How do you calculate the value of non-monetary benefits?

To calculate non-monetary benefits, assign a monetary value to benefits like paid leave, insurance premiums, and perks, based on their cost or market value.

What are examples of fringe benefits that can be included in a total compensation package?

With a little imagination, employers can come up with a long list of fringe and additional benefits that their teams might love. These include:

• Free company products
• Tickets to sporting and entertainment events
• Restaurant, spa, and shopping gift cards
• Gadgets and devices (e.g. headphones, cell phone)
• Wellness retreat weekends
• A new company laptop
• A regular afternoon off
• Company-branded merchandise

To Sum Up

We've seen that total compensation goes well beyond just base salary, bonuses, and overtime. By including a wide range of compelling rewards and benefits, leading modern organizations design innovative and attractive packages to inspire their teams and engage top talent.  

A clear and thorough understanding of total compensation is crucial for both employers and employees. When both sides recognize its importance, it creates the foundation for healthy, productive, and mature employment relationships.

Contact us to learn more about ShareWillow's next-generation profit-sharing tools or chat about great employee incentive ideas.