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The totality of all payments and benefits offered to an employee by an employer is known as total compensation. It consists of employee benefits, base salary, bonus pay, commissions, and tips. 

Total compensation is used to explain all forms of monetary payments to an employee. In short, it is a comphrensive valuation of all employee remuneration from an employer. 

What is total compensation?

Total compensation refers to the comprehensive valuation of all employee remuneration from their employer. It includes not only the base salary but also additional benefits such as bonuses, commissions, paid time off, insurance, retirement plans, and other perks.

What components make up the base salary in a total compensation package?

The base salary in a total compensation package is made up of several components:

1. Basic salary 

This is a fixed, taxable amount that forms the base income of the employee before any allowances or deductions. The designation and industry primarily determine the basic salary

2. Allowances 

These are partially or fully taxable amounts that an employee receives in addition to the net salary. 

  • House rent allowance (HRA): An amount paid out to employees by companies for expenses related to rented accommodation.
  • Leave travel allowance (LTA): The amount provided by the company to cover domestic travel expenses of an employee.
  • Conveyance allowance: This allowance is provided to employees to meet travel expenses from residence to work.
  • Dearness allowance (DA): A living allowance paid to employees to tackle the effects of inflation.

3. Bonuses

These are additional incentives given to employees based on performance.

4. Overtime pay 

Compensation for hours worked beyond the standard working hours.

5. Commissions 

These are common in sales roles where employees are rewarded for reaching or exceeding their sales targets.

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Who is responsible for determining total compensation?

The responsibility for determining total compensation typically falls to the human resources department, often with input from senior management. In larger organizations, there may be a compensation manager or a compensation committee who specializes in this area. 

They will consider factors such as market pay rates, the value of the job to the organization, the employee’s skills and experience, and the company’s budget and compensation philosophy.

What are some popular total compensation models?

Let’s explore some popular total compensation models

  • Straight salary: This is a fixed amount of money paid to an employee for performing specific job responsibilities.
  • Salary plus sales commission: In this model, employees receive a fixed salary plus an additional commission based on the sales they make.
  • Hourly rate: Employees are paid for each hour of work. This rate may be minimum wage or above.
  • Hourly rate plus sales compensation: This is similar to the salary plus sales commission model, but it’s based on hourly wages instead of a salary.
  • Commission-only: In this model, employees are paid solely based on the sales they make.
  • Territory volume: This model compensates salespeople based on the sales volume in their assigned territory.
  • Profit margin/revenue-based: Compensation is tied to the profit margin or revenue of the company or department.
  • Residual commission: Employees continue to receive commission for sales made in the past

Why is it important to communicate total compensation to employees?

Communicating total compensation to employees is important for several reasons. First, it helps employees understand the full value of their compensation package, which may be significantly higher than their base salary alone. 

Second, it can help to reinforce the company’s commitment to fair and competitive pay. 

Finally, clear communication about compensation can help manage employees’ expectations and reduce misunderstandings or perceptions of inequity. It’s often recommended that employers provide employees with a total compensation statement on a regular basis, which outlines all the different components of their compensation and their respective values.

How does total compensation impact employee satisfaction?

Total compensation can have a significant impact on employee satisfaction. When employees feel that they are being fairly compensated for their work, it can lead to higher job satisfaction, increased motivation, and improved performance. 

On the other hand, if employees feel that their compensation is not competitive or does not reflect their contributions, it can lead to dissatisfaction and turnover. 

Therefore, it’s important for employers to ensure that their total compensation packages are competitive and align with employees’ perceptions of fairness.

Employee pulse surveys:

These are short surveys that can be sent frequently to check what your employees think about an issue quickly. The survey comprises fewer questions (not more than 10) to get the information quickly. These can be administered at regular intervals (monthly/weekly/quarterly).

One-on-one meetings:

Having periodic, hour-long meetings for an informal chat with every team member is an excellent way to get a true sense of what’s happening with them. Since it is a safe and private conversation, it helps you get better details about an issue.

eNPS:

eNPS (employee Net Promoter score) is one of the simplest yet effective ways to assess your employee's opinion of your company. It includes one intriguing question that gauges loyalty. An example of eNPS questions include: How likely are you to recommend our company to others? Employees respond to the eNPS survey on a scale of 1-10, where 10 denotes they are ‘highly likely’ to recommend the company and 1 signifies they are ‘highly unlikely’ to recommend it.

Based on the responses, employees can be placed in three different categories:

  • Promoters
    Employees who have responded positively or agreed.
  • Detractors
    Employees who have reacted negatively or disagreed.
  • Passives
    Employees who have stayed neutral with their responses.

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