Compensation Philosophy: Total Compensation or the Whole Enchilada

Several months ago I was working with a group of employees in a large organization.  As they discussed their concerns with their organization’s policies, managers, and improvement efforts, the discussion turned to compensation.  Like in many organizations, employees had not received a raise in several years and it was starting to hurt morale.  Employees expressed concerns that most consumer goods have increased in the price in the last two years, but pay had remained constant.  Moreover, there was a general level of concern about the future the organization and how things were going to improve.  As we discussed the relationship between and preferences for salary, benefits, and other intangible benefits, a man turned in his chair to face the audience and said “it is really simple, we just want the whole enchilada. A taste just won’t do.”  In many ways, his comment sums up the opinion of most employees everywhere:  we are owed certain things and we would like to continue to receive them.

A weak economy, more focus on improving performance, and greater awareness of human resource principles have increased interest in total compensation or rewards among employees and managers alike.  As a result, greater numbers of professionals are developing compensation philosophies taking into account total compensation and not just salary and wages.  Although it is critical to clearly define and communicate the monetary portion of compensation, the cost and relative importance of other benefits necessitates including the organization’s approach and position for non-monetary benefits as well.

What is total compensation?  A basic definition of total compensation is the sum of all monetary and non-monetary benefits that an employee receives as part of employment.  The major categories usually include:

• Wage and salaries
• Benefits
• Work-life balance

Wage and salary is the largest expenditure category and typically makes up 60 to 75 percent of the actual value of total compensation.  It is the most complex since it can be administered through numerous approaches and tools and requires careful management to ensure fairness and consistency.  Benefits have grown in importance and cost over the last few decades.  The employer remains the primary source of health insurance and the conduit even if not the source for most retirement funding. Work-life balance (relative demand and flexibility of work compared to non-worked time) has grown in importance over the last two decades and will remain critical in the next several decades.

Figure 1: Importance of Total Compensation by Element

Although it might be simple to assume that all good things are desired at the same level by employees, preferences and needs vary by the age of the worker.  Figure 1 captures the percent of importance each element by ten year age group.  Not surprisingly, wages are most important when an employee is young.  However, as an employee ages benefits play an increasingly important role with family responsibilities and personal health needs. Work-life balance starts off very important in the early work years then diminishes slightly before becoming more important at retirement age.  This data is based on different generations, but should be predictive of the future.

As we discussed in the last post, successful compensation programs are clearly designed and articulated to ensure employee support and desired outcomes.  Moreover, as the labor market improves, your total compensation philosophy will become more critical.

So, how can we integrate total compensation with your compensation philosophy?

• Account for all of the elements of total compensation.
• Profile the needs of each group based on preferences and available resources.
• Clearly define the scope, structure, process, and terms of each program or element.
• Determine the competitive position of your organization in each area.
• Develop summaries or communication for each program or element.
• Use the total offerings to better position your organization in the marketplace.