When it comes to attracting and retaining employees, money talks. 

Compensation is the most significant factor in attracting and retaining employees. A Glassdoor study confirms this, identifying salary as the most important factor considered by candidates when accepting a job offer. 

However, compensation’s significance does not diminish after an employee lands a job. Joblist reports that 73% of employees are considering leaving their current jobs. The leading reason for their departures — you guessed it: money. Approximately 44% of employees quit their jobs in pursuit of higher pay, states OfficeTeam. 

In addition to a base salary, most employers offer various perks and benefits as part of a comprehensive compensation package. These packages often include health insurance benefits, retirement contributions, paid time off, bonuses, equity shares, flexible work arrangements, and more. These elements exist to bolster the employment agreement, serving as benefits or rewards for joining and remaining at a company.

In this article, we’ll examine some of the most common compensation package components, discuss why these packages are so important, and even offer a template for you to use when building a compensation package from scratch. 

What Is a Compensation Plan?

A compensation plan is a detailed strategy that outlines how employees are rewarded for their work within an organization. 

A compensation package generally requires quite an investment from an employer. According to the U.S. Bureau of Labor Statistics, total employer compensation costs for private industry workers averaged $43.11 per hour worked in December 2023. Wages and salaries averaged $30.33 per hour worked and accounted for 70.4% of employer costs, while benefit costs averaged $12.77 per hour worked and accounted for the remaining 29.6%.

While compensation plans may vary by employer, industry, company size, etc., most include a few basic elements, which are listed below.

Direct Compensation

Direct compensation consists of the monetary payments, rewards, and benefits an employee receives in exchange for his or her work. Direct compensation is the most tangible part of an employee’s compensation package. 

Salary

Salary is the backbone of direct compensation. It’s defined as fixed compensation paid regularly to an individual for services rendered. An employee’s salary makes up his or her base (gross) pay. 

Hourly Pay

Direct compensation is generally delivered in one of two ways: through a salaried amount or hourly pay. When paid a salary, employees receive a fixed amount of money per pay period regardless of the hours worked. In an hourly approach, employees are paid based on the number of hours worked. To calculate an employee’s total earnings for a pay period, multiply the individual’s hourly rate by the number of hours worked for that pay period. For example, if an employee earns $20 per hour and works 40 hours per week, his or her weekly pay would be $20 x 40 = $800.

Commissions

A commission is a performance-based incentive typically paid (most often to salespeople) in exchange for exceeding sales targets or quotas. This incentive is not guaranteed and often depends on the individual’s performance against a set of goals. Typically, a commission is paid as a percentage of a total sale. For example, on a $10,000 sale, a salesperson earning a 10% commission would earn $1,000.

Variable Pay

Variable pay is often offered as a reward if and when an employee surpasses a goal or milestone and is most often delivered in the form of a bonus. Employee bonuses may come in numerous forms, including signing bonuses, annual bonuses, performance bonuses, referral bonuses, etc. Additionally, bonuses may celebrate varying aspects of a company’s success, ranging from individual performance to departmental achievements to company-wide accomplishments and more. 

Many bonuses are designed to motivate employees, offering them the potential to earn additional income tied directly to their productivity. For example, some companies are willing to divvy up revenue through a profit-sharing program, rewarding employees for the business’s success. Additionally, if a company is publicly traded, leaders may distribute company stock as an incentive. 

Variable pay often stands as a win-win for both parties. Employees are motivated to exceed goals and milestones in exchange for rewards. And, for employers, this compensation is cost-effective because it’s typically only granted in response to exemplary performance.  

Indirect Compensation 

In contrast to direct compensation, indirect compensation is a nonmonetary portion of a compensation package. This type of compensation is generally presented as a benefit. 

Benefits

Benefits are non-wage rewards provided to employees in addition to their salaries and variable pay. The most common benefit offered as part of a compensation package is health insurance, encapsulating medical, dental, and vision insurance. These assurances offer coverage for medical and surgical expenses, including doctor visits, emergency care, prescription medications, etc. 

Another common benefit is paid time off (PTO), allowing employees to take time away from work while still receiving their regular salaries. PTO policies can vary, but most include some form of vacation time, sick leave, holidays, bereavement leave, or parental leave. 

Retirement Plans

Retirement programs are designed to help employees save for their futures and are yet another perk commonly offered by employers. Employers will often sponsor investment programs, such as 401(k) plans, encouraging employees to place a portion of their salaries into long-term savings accounts. Some employers even offer discretionary matches, further bolstering the value of this benefit. 

Other benefits may include life or disability insurance, wellness programs or gym memberships, flexible work arrangements, professional development opportunities, and more.  

Perks and Allowances

Employers may also offer additional perks or allowances on behalf of employees’ financial wellness. These may include student loan repayment programs, tuition reimbursement, health savings account contributions, commuter benefits, professional development programs, and more. These add-ons may seem like minor additions, but, when it comes time for a prospect to select a position, they may tip the scales in their favor, so it's important for recruits and recruiters to bestow the value of each and every available perk.

Legal Requirements

Most countries, including the U.S., dictate minimum wage laws, requiring employers to pay a certain hourly wage to employees. In the U.S., the current minimum wage is currently $7.25 per hour. 

Additionally, many jurisdictions have laws regulating overtime pay, requiring employers to compensate employees at a higher rate (typically time and a half) for hours worked beyond a specific threshold (40 hours).

Anti-discrimination laws prohibit pay discrimination based on factors like gender, race, religion, age, or disability. Employees performing equally should be compensated accordingly. 

Finally, employers are responsible for withholding various taxes and remitting them to the appropriate government agencies. Accordingly, employees’ hours worked, wages, and tax payments must be recorded and maintained per the rule of law. 

All employers and their compensation packages must adhere to these regulations or expect to face fines and penalties. 

There have been several lawsuits that demonstrate the penalties associated with violating compensation-related labor laws. Examples include EEOC v. Lacey’s Place LLC, in which a gaming parlor chain was sued for discrimination against a female worker; EEOC v. Mechanical Design Systems Inc., which involves a lawsuit alleging an HVAC company had discriminated against female employees, paying them less than their male counterparts; and Elon Musk’s 2018 compensation package that was valued at approximately $55 billion. 

Advantages of a Fair Compensation Package

An exceptional compensation package can have a domino effect on a business’s productivity in numerous ways. The list below examines just a few of them. 

Attracting High Performers: A competitive compensation package is a powerful way to attract qualified candidates. Top-performing employees will be drawn to higher salaries, better benefits, and more PTO. 

Retaining High Performers: Employees who feel they are being fairly compensated are more likely to stick with a company, reducing the cost and disruption associated with employee turnover. 

Motivated Employees: Workers who are fairly compensated tend to be happier and more engaged. Employees fostering these emotions see a clear link between their efforts and the subsequent rewards, leading to a greater sense of satisfaction and ownership. Happy workers are less likely to seek employment elsewhere. 

Cooperative Culture: Fair compensation fosters a sense of trust and fairness. Employees who feel respected and valued are more likely to collaborate effectively and contribute to a positive work environment, minimizing stress for both employees and the organization. 

Examples of Compensation Plans

There are numerous compensation plans available to download online. Here are a few examples. 

• Salary.com – compensation package example
• Academy to Innovate HR – compensation package example
• Carta – compensation package example

The OnTheClock team has created a blank template for you to build your own compensation package. Download our template by clicking here.

The Importance of Tracking Time

A comprehensive time tracking and attendance management tool plays a vital role in the administration and optimization of compensation packages. By providing accurate, real-time data on employee work hours, time tracking ensures compensation practices are fair, compliant, and efficient. 

OnTheClock has emerged as a preferred time tracking option, proven to enhance numerous compensation package elements. This is accomplished through:

Accurate Payroll Management

Precise Time Tracking: OnTheClock automatically records employee clock ins and clock outs, capturing precise work hours, breaks, and overtime. This automated recording eliminates errors that can arise from manual timekeeping and ensures employees are paid correctly for all hours worked.

Accurate Overtime Calculations: OnTheClock’s overtime tool calculates overtime hours in compliance with labor laws and company policies. This ensures employees receive appropriate compensation for any extra hours worked, which is crucial for maintaining legal compliance and employee satisfaction. This is especially important considering the federal government’s recent overtime law changes, which will make salaried executives earning $43,888 or less annually eligible for overtime compensation. 

Productivity and Accountability

Employee Accountability: OnTheClock promotes employee accountability by accurately recording attendance and work hours. This visibility helps reduce instances of time theft and ensures employees are meeting their scheduled hours.

Performance Insights: Managers can use time tracking data to assess employee productivity and identify trends or issues. This information supports performance reviews and helps in making informed decisions about promotions, raises, and other compensation-related adjustments.

Compliance with Labor Laws

Legal Adherence: OnTheClock helps companies adhere to local, state, and federal labor regulations, such as the Fair Labor Standards Act (FLSA). By providing detailed records of work hours, OnTheClock ensures companies can demonstrate compliance with wage and hour laws during audits or legal reviews.

Documentation and Audit Trail: OnTheClock maintains a comprehensive audit trail of all timekeeping records, including changes and approvals, in the cloud. This documentation is essential for resolving disputes and verifying compensation practices meet legal standards.

Integration with Compensation Components

PTO Management: OnTheClock integrates seamlessly with paid time off (PTO) policies, tracking vacation days, sick leave, and personal time. Employees can request PTO directly through the system, and managers can approve or deny these requests, ensuring accurate and efficient management of leave balances.

Bonus and Incentive Tracking: OnTheClock can support bonus and incentive programs by providing reliable data on attendance, punctuality, and work hours. This data can be used to determine eligibility for performance-based rewards, ensuring incentives are distributed fairly.

Enhanced Resource Allocation

Scheduling Efficiency: OnTheClock helps managers create and manage employee schedules efficiently, ensuring optimal staffing levels based on real-time data. This prevents overstaffing or understaffing and helps in managing labor costs effectively.

Cost Management: By providing detailed reports on work hours and attendance patterns, OnTheClock aids in managing labor costs and budgeting for payroll. Accurate time tracking data helps companies make informed financial decisions and optimize their compensation strategies.

Improved Employee Satisfaction

Fair Compensation: Ensuring accurate and timely payment for all hours worked boosts employee morale and satisfaction. When employees trust their time is tracked and compensated accurately, it fosters a positive work environment and enhances retention.

Transparency and Communication: OnTheClock promotes transparency by making attendance and timekeeping data accessible to both employees and managers. Clear communication of timekeeping policies and practices builds trust and reduces misunderstandings related to compensation.

Conclusion

Compensation is a critical factor that speaks volumes to employees and employers. Salary remains the primary consideration for candidates evaluating job offers and is often the decisive reason for employees contemplating a job change. Beyond base pay, a comprehensive compensation package, including benefits, bonuses, and other perks, plays a significant role in attracting and keeping top talent.

A well-structured compensation package offers numerous benefits, from attracting high performers and retaining valuable employees to fostering a cooperative and motivated culture. A time tracking tool, like OnTheClock, enhances the management and optimization of these packages, ensuring accuracy in payroll, compliance with labor laws, and effective resource allocation.

Ultimately, a fair and competitive compensation package is a powerful tool for any organization. It not only helps in recruiting the best talent but also ensures employees feel valued and fairly rewarded, leading to increased satisfaction, productivity, and loyalty. By investing in comprehensive compensation strategies, employers can build a strong foundation for long-term success. Time is money, and we should be as diligent as possible to ensure very little of both goes to waste. 

Maximize your time and productivity with OnTheClock. Join the 157,000 individuals currently utilizing the software by trying it out for free for 30 days at www.ontheclock.com.