13 Formula | What are The Components of a Total Compensation Package?

Employee compensation clearly describes cash rewards paid to company employees in exchange for specific services they provide. Total compensation is an approach of employees beyond monetary systems such as salary, stock, bonuses (Other items may include 401 k plans, vacation, time off, insurance, these items are treated as direct cost).

Components of a Compensation Package

Compensation Package

Employees are the greatest assets for every company. They are born with the up-down ability. You won’t ever succeed in business if you fail to train up your employees. Every human being has a kind of hidden talent, as a CEO or manager anyhow if you succeed to awaken employees talent. You can take full advantage to grow your business a hundred times more than before.

Employee motivation is a tricky way to create better relations between you and the employee. They generally have high expectations for the organization. They like to get an extra opportunity, extra preferable package items for the purpose of living a happy life. Prove yourself as the best director of business by building a fair and attractive compensation package. Remember to add the following components when setting up an employee compensation package.

Components of Compensation Package

1. Basic Salary and Wages

In the compensation package, this is the first item made up of the single largest components. Salary and wages depend on specific work; as far as I know, the managing director’s salary and supervisor’s salary have many differences. Even then, it is a first chance to engage with work and get a better boost up in salary by showing expertise. Day by day, your skill, experience, value, performance will grow up as well as the subsequent salary increases can happen. It’s a big part of a company’s achievement.

2. Bonuses

Employee’s bonus is a way of performance incentive that may be paid out monthly or annually. Even bonuses can be portioned by giving a fixed percentage on basic salary or in proportion to profitability. There are precise Govt. laws for providing a little statutory bonus for all employees. Managers and employees can also be compensated from sales revenue or profit margin ratio bonus plan. Some companies offer bonus plans upon a piece wage system that actually depends on the productivity of labor.

3. Commissions

It totally depends on target achievement. The commission is allowed for managers and employees that are based on targeted sales revenue or profits. A little percentage is fixed for this package. For tax purposes, a commission is a taxable part of compensation. Your achieved commission may be paid monthly or periodically by the company.

4. Incentives

The incentive is defined as a target-related upfront. In manufacturing wages, piece rates are conventional. Workers will be paid according to the quantity of each product they produce. For a specific number of produced goods, they will get an equal amount. Piece rate wages directly affect productivity positively as well as keep the wage structure favorable. Compensation fairness is based on productivity. Piece rate wages and other related consequences we found in the CANTT productivity plan and Taylor’s wage plan.

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5. Profit-Sharing Payments

Nowadays, Profit sharing is a trendy concept. This little opportunity enhances employee’s competitiveness and productivity. Employees can get the amount through cash payment or ESOPS.

6. Stock Options

Stock options are considered to employees for two reasons

  • Long-Term Interest
  • Organizational Performance to individual Performance.

Generally, stock options are given under three categories:

  • Employee Stock Options (ESOP): 

Assume that ESOPS is provided to employees in the following manner: “A”, is a person who has 2000 shares of Rs.100 (granting price). He can sell 50% of shares in the first 2 years and the remaining shares after 2 years. Assume that the stock price after two years is 110 rupees/- (vested price).

Then the employee actually only gets 1000×10 = 10000/- rupees. In this case, if the stock price drops below 100 rupees, the employees will get nothing. When stock prices continue to rise, ESOP works well. However, when the stock price starts to fall, the relevance of ESOP will decrease.

  • Restricted Stock Units (RSU):

These are different from ESOP. When providing stock to employees, treat it as a zero value. Therefore, regardless of the stock price, employees will eventually make money. To give an earlier example, if the stock price is 90 rupees/- after two years, the employee can still earn 90,000 rupees by trading his options.

  • Employee Stock Purchase Plans (ESPP):

This is more of a benefit. When the company performs well, it provides employees with the option to buy the stock at a discount.

7. Fringe Benefits

Fringe benefits granted to employees include provident fund, gratuity, medical treatment, canteen allowance, hospitalization allowance, accident relief, health insurance, entertainment, vacation allowance, etc.

8. Non-Monetary Benefits

Non-Monetary is a type of benefit that is not in terms of money. It includes recognition of merit, Merit certificate, job sharing, job responsibilities, competent supervision, growth prospects, comfortable conditions, flexi-time, etc. It’s a catchy tactic that enhances employees’ workability more than before.

9. Long-term incentives

It is a part of a competitive package that may include stock grants or stock options as long-term incentives.

10. Health Insurance

Health insurance is part of the compensation that is nearly standard with medium to large-size companies as well as small businesses. Govt. laws say every person is required to apply for insurance. We live in an unexpected world; little insurance amount can help us in many ways. For employees, health insurance is a coverage part for existing or upcoming health issues.

11. Retirement Plan

A retirement plan is commonly a reasonable offer that performs a 401(k) plan that is less expensive than a traditional pension system as well as easy to manage. Employees have more interest in this plan; they like to contribute and invest. Nowadays, small companies continue this trend for the welfare of valuable employees. In the future, they will get a lot of money and live a happy life.

12. Time off

Time off includes holidays, vacation, bereavement, personal days, and sick days. Employers who do not agree to competitive wages and salaries can grab time off packages. Some employers never make any difference between personal or sick days that allow them to schedule time off when they need to.

13. Misc. Compensation

This compensation acts as an employee assistance program that offers legal assistance to psychological counseling or company cars to discounts. Creative companies are added extra perks in compensation, such as weekly visits from onsite baristas to the masseuse.

Final Thought

Above all, a competitive salary, health insurance, 401 (k) are still common offers in every company’s compensation packages and it enables companies to attract and retain highly qualified employees who contribute to their success.

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