Compensation Package: A Guide For HR (+ Free Template)

Written by Tess C. Taylor, Miriam Mourad
8 minutes read

In a time when HR professionals are struggling to find, hire, and retain employees, the competition for talent is becoming more challenging by the day. One of the first things employees look at before even receiving a job offer is their compensation package. In fact, 83.4% of employees rank compensation as the top factor in job satisfaction.

With nearly 40% of mid-career professionals prioritizing mandatory paid leave and over 80% seeking comprehensive healthcare benefits, it’s clear that designing a thoughtful compensation package is key to talent attraction and retention.

So, how do you craft a total compensation package that resonates with a diverse workforce? In this article, we’ll look at what makes total compensation packages appealing, provide examples, and outline steps for developing a competitive compensation strategy.

Contents
What is a compensation package?
The importance of a good compensation package
What to include in a compensation package
How is a total compensation package tied to HR strategy?
Compensation package example
Developing a total compensation package in 11 steps
FAQ


What is a compensation package?

Think of a compensation package as a bundle of rewards creatively put together to recognize employees’ contributions and inspire their best work. This is more than an employee’s monthly salary. It includes health insurance, retirement schemes, vacation days, bonuses, equity shares, and additional benefits such as flexible work schedules or educational stipends. Sometimes, it may also offer opportunities for career development, recognition for performance, or contribute to a positive work culture. 

Consider a candidate drawn to a start-up offering below-average salaries. The start-up, however, offers an appealing compensation package with generous stock options, a culture that supports remote work flexibility, and 40 vacation days annually. Collectively, these features make the compensation package highly attractive to the potential employee.

As the new world of work evolves, it’s important to continually refine and adapt these compensation strategies to align with emerging skills and knowledge. It’s about crafting strategies that not only meet legal standards but also foster a culture of recognition and growth. This package is essential for attracting, retaining, and motivating top talent, as well as for developing your employee value proposition.

Employer costs for employee compensation statistics by the US Bureau of Labor Statistics.
According to an analysis by BLS, indirect compensation comprises almost a third of employer costs for employee compensation. That’s why you need a holistic approach when assembling compensation packages at your organization.

The importance of a good compensation package

When employees are motivated and incentivized, your organization thrives. This is one of the main benefits of providing a great compensation package for employees. Here’s how providing an attractive package supports your organization:

  • Attracting top talent: A strong compensation package makes open roles attractive for top candidates, allowing your company to competitively recruit skilled employees that suit your needs.
  • Retaining talent: A good compensation and benefits strategy encourages current employees to commit long-term, reducing turnover and preserving institutional knowledge, saving your organization significant costs.
  • Enhancing employee morale and satisfaction: An attractive total rewards strategy motivates your employees to perform at their peak while fueling a positive emotional connection to the organization.
  • Achieving internal and external pay equity: Fair pay makes employees feel good about their salaries compared to the market.
  • Leverage during union negotiations: Extensive compensation plans show good-faith efforts to support employees, granting leverage when boards seek to give and take with union representatives.

Paying attention to these details when creating your compensation package will foster a culture of appreciation and equality within the business. When employees feel that they’re being appropriately compensated, they feel happier and more productive in their jobs.

Reasons why compensation and benefits is important.

What to include in a compensation package

Creating an adequate compensation package requires a thorough assessment of what your organization can provide. The goal is to showcase to potential and existing employees the complete picture of the benefits they’ll receive by joining your organization.

When this information is effectively communicated to employees or prospective candidates, it highlights your company’s unique offering compared to others. This is especially important when candidates are comparing multiple job offers.

Compensation packages usually consist of both direct compensation (cash) and indirect compensation (non-cash) rewards.

Direct compensation

  • Salary: Offering competitive pay is the number one contributor to attracting and retaining talent. 
  • Retirement savings: Contributions to retirement plans such as the 401(k) plan in the US, are a key factor in long-term financial security for employees.
  • Paid time off (PTO): Generous PTO policies can significantly improve employee wellbeing and productivity.
  • Health insurance: Offering comprehensive health insurance is important for supporting employees’ physical and mental health.
  • Performance bonuses: Bonuses tied to performance metrics incentivize and reward high achievers.
  • Profit-sharing: Sharing a portion of profits with employees can boost morale and promote a feeling of collective ownership.
  • Stock options: Providing stock options aligns employee interests with the company’s long-term success.
  • Travel reimbursement: Covering travel expenses acknowledges employees’ effort and time in business travel.
  • Relocation bonuses: Offering relocation packages will help you attract talent from a wider geographic area.
  • Wellbeing subscriptions: Subscriptions to services such as gym memberships, the Headspace meditation app, Plum online therapy, or Juno points demonstrate a commitment to employee wellness.
  • Home office stipends: Support for remote work setups through home office stipends reflects the evolving work environment. For example, you can provide a lump sum on a virtual card, allowing employees to order what they need. 

Indirect compensation

  • Career development: Opportunities for professional growth are a major draw for career-oriented employees. This can include subscriptions to Udemy, paying certifications, or even in-house company mentorship programs.
  • Flexible work arrangements: Hybrid, remote within the country, or globally distributed remote setups are highly valued options for their flexibility and contribution to improving work-life balance. 
  • Corporate discounts: Discounts on products or services are a tangible perk that employees can enjoy regularly.
  • Employee recognition programs: Recognizing employee’s achievements fosters a positive workplace culture. This can include competitions, bonuses, and promotion cycles.
  • Free meals: Providing free meals at work is a convenient and appreciated benefit.
  • Company car, cell phone, and laptop: Providing essential work tools like a company car, cell phone, and laptop enhances job performance and convenience. 
A total compensation system includes both direct and indirect compensation.

How is a total compensation package tied to HR strategy?

In a recent Forbes Advisory survey, 40% of employers observed that employees often depart their roles in search of positions with more advantageous benefits. Additionally, the survey highlighted that 62% of companies have updated their benefits packages in the last year. These current statistics should be an important note for organizations that are rethinking their employee benefits.

When you are tying total compensation to your HR strategy, here are a few things to think of: 

  • Organizational goals: HR professionals can tailor compensation packages to align with the broader strategic objectives of the organization. For instance, if a company prioritizes innovation, the package might include bonuses for creative contributions or stock options to encourage a sense of ownership and long-term commitment.
  • Attracting and retaining talent: By offering competitive salaries, benefits, and perks, HR can position the company as an employer of choice in the market, which is essential for sustaining a high-quality workforce.
  • Employee engagement and satisfaction: The survey also highlights how employees prioritize life outside of work. Nowadays, they want benefits that provide better work-life balance and professional development. For example, 20% of workers express a desire for employer support in their career advancement, while 51% consider flexible hours a major concern for in-office work.
  • Compliance and equity: You must ensure the strategy applies to legal and regulatory requirements, such as equal pay and minimum wage laws. A fair and equitable compensation package minimizes the risk of legal issues and promotes a positive company culture.
  • Adaptability to market changes: Your strategy needs to be flexible to adapt to changing market conditions, such as the current economic shifts or changes in industry standards. A dynamic compensation strategy allows a company to remain competitive and responsive to external factors. For example, if you feel that the budgets need to be cut, ask employees what they prioritize and make the change according to that.

Compensation package example

To illustrate how a comprehensive compensation package can be structured, let’s take a look at this theoretical example. This compensation package Excel template showcases a variety of compensation elements, giving a clear picture of what a great package might look like.

Compensation package example in Excel.

Developing a total compensation package in 11 steps

Developing a total compensation package involves several key steps, as highlighted in the Harvard Business Review article “Linking Compensation Design and Outcomes.”

  1. Align with strategic goals: Ensure the compensation package aligns with the organization’s strategic objectives. Misalignment can lead to unintended outcomes, such as encouraging short-term gains at the expense of long-term risks.
  2. Tailor to specific objectives: The approach to compensation should vary depending on the company’s strategic goals, which may focus on growth, turnaround, business transformation, competing as a private organization, or aligning with owners in the absence of equity options.
  3. Choose appropriate metrics: Select metrics that reflect the business strategy and current circumstances, and regularly review and adjust these metrics to maintain relevance.
  4. Set clear targets and incentives: Establish specific numerical targets for key metrics and implement a payout curve that allows for various outcomes, ensuring flexibility and fairness in rewarding employees.
  5. Incorporate companywide objectives: Base compensation plans on achieving overall organizational targets, with potential adjustments for individual performance.
  6. Balance short-term and long-term incentives: In situations like turnarounds or aggressive growth strategies, balance the need for immediate results with long-term sustainability and growth.
  7. Adapt to business changes: Be prepared to adjust compensation plans in response to changing business conditions, such as market fluctuations or internal challenges.
  8. Consider alternative incentives: Explore different forms of compensation, especially in private companies, such as above-market cash compensation, phantom equity, or multiyear cash incentives based on cumulative performance metrics.
  9. Foster long-term orientation: For companies where traditional equity isn’t an option, use alternative methods like profit-sharing or economic-profit-sharing programs to align employee interests with long-term company goals.
  10. Address contemporary challenges: Adapt executive compensation to address current business challenges, focusing on areas like employee health and safety and company liquidity.
  11. Revisit and adjust: Continually review and update the compensation plan to ensure it effectively serves broader stakeholder interests and remains aligned with evolving business strategies and conditions.

On a final note

It is clear that creating an excellent compensation package is much more than just deciding on salaries. It’s about aligning pay and benefits with the company’s main goals, finding the right mix of immediate and future rewards, and always staying within the law. The real magic happens when a compensation plan not only draws in top talent but also speaks to what employees want and need. By keeping the project up-to-date, making it easy for everyone to understand, and tailoring it to different roles, companies can build a skilled, committed, and satisfied workforce.


FAQ

What is a compensation package?

A compensation package is a tool that blends the total remuneration and benefits offered to employees. It’s designed not only to provide fair financial compensation, such as salaries, bonuses, and commissions, but also to include benefits like health insurance, retirement plans, and perks that enhance employee satisfaction and productivity. It reflects your company’s values and commitment to its employees.

What determines a compensation package?

When creating a compensation package, it’s essential to consider various factors. These include the company’s financial position, industry benchmarks, the specific role and its importance to the company, the qualifications and experience required, and competitive market dynamics. Legal considerations, such as compliance with labor laws and industry regulations, are also critical.

What is a fair compensation package? 

A fair compensation package includes a salary and benefits that are competitive and equitable within the context of the company’s sector and location. It involves balancing budgetary constraints with the need to attract and retain talent. A fair package is one that not only meets legal and industry standards but also recognizes and rewards the unique contributions of each employee, supporting their professional development and overall wellbeing. 

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Tess C. Taylor

As a veteran of the Human Resources and professional development industries, Tess C. Taylor, SHRM-CP, PHR, CCC, CPC; Founder of HR Knows, is known for making the complex simpler to understand when it comes to HR and learning topics.

Miriam Mourad

Miriam Mourad combines her expertise in the SaaS industry and Learning Development to craft impactful learning solutions and content. Miriam has crafted 10+ online courses, empowering employees and job seekers in the ever-evolving world of remote work. As an active thought leader, she regularly shares insights on work-life balance, career development, and the future of work, inspiring professionals everywhere.

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