What Exactly is Compensation?

Compensation is often the biggest question mark for small business owners looking to expand their team. Let's clear the air.

Carpenter working in joinery
Author By the Roll Editorial Team on June 10, 2024
Reading Time 4 min read

Hiring your first employee is a thrilling milestone, but it also brings a whole new set of questions. Suddenly, you're not just running a business; you're an employer, which means figuring out how to compensate your team.

Let's cut through the confusion and get straight to the answers.

What exactly is compensation? 

Compensation is the total reward an employee receives for their work. It includes:

  • Base salary: The fixed amount paid regularly (hours, weekly, or monthly)
  • Additional pay: Think bonuses, commissions, profit-sharing, tips or overtime.
  • Benefits: This is where it gets interesting. We're talking about health insurance (medical, dental and disability), retirement plans, paid time off (PTO), and even unique perks like gym memberships, travel allowances, and employee assistance programs.

How do I determine what should be included in a compensation plan? 

Creating a compensation plan isn't just about deciding a salary. It's a strategic process that should align with your business goals, budget, and expectations for your hiring role. Here are some key considerations: 

  • Internal Equity: Ensure that your compensation is fair and equitable across similar roles within your business. 
  • External Competitiveness: Research what other businesses in your industry and location pay for similar roles. ADP, a leader in payroll and HR, has some of this information readily available for small business owners to review on its Pay Trends Page.
  • Legal compliance: Be aware of federal, state and local laws regarding minimum wage, overtime pay and benefits. 
  • Budget: Your compensation plans need to be financially sustainable for your business.
  • Company Culture: Your compensation should reflect your business values and the employees you want to attract.

What's the difference between base pay and compensation? 

Base pay: This is the core of your compensation package. It's your employee's fixed salary or hourly wage for their work. Think of it as the solid foundation upon which all other compensation elements are built. It's the amount you can rely on receiving consistently, regardless of performance bonuses or changes in company profit. 

Total compensation is the whole package, including base pay, any additional pay (bonuses, commissions, etc.), and the value of all benefits (health insurance, retirement plans, PTO). It gives a more complete picture of an employee's earnings.

For example, if you pay your employee a $50,000 salary plus a $5,000 bonus and provide benefits worth $10,000, their total compensation is $65,000. 

What is the compensation cadence, and how often should I pay employees? 

  • Compensation cadence refers to how often you pay employees. The most common options are: 
  • Weekly: Paid every week on a specific day.
  • Biweekly: Paid every other week, often on Fridays.
  • Semi-monthly: Paid twice a month, typically on the 15th and the last day of the month.
  • Monthly: Paid once a month, usually on a specific date. 
  • The best cadence for your business depends on factors like your industry, cash flow and employee preferences. Make sure you communicate the pay schedule to your employees.

What are some trending compensation perks?

In addition to traditional benefits, many companies are offering unique perks to attract and retain top talent. Some trending options include:

  • Flexible work arrangements: Remote work, flexible hours, or compressed workweeks.
  • Unlimited PTO: Allowing employees to take as much paid time off as possible within reason. 
  • Professional development stipends: Offering funds for training, courses, or conferences.
  • Wellness programs: Gym memberships, meditation apps or mental health resources. 
  • Student loan repayment assistance: Help employees pay off their student loans.
  • Pet-friendly workplace: Allow employees to bring their furry companions to the office. 
  • Commuter benefits: Help employees subsidize transportation costs to and from the office.
  • Charitable donation matching: Match employee donations to their favorite charities. 
  • Fertility benefits: Cover fertility treatments or adoption assistance.
  • Identity theft protection: Help employees protect themselves from fraud.

Creating a competitive compensation package is vital in attracting and retaining the best talent for your growing business. By understanding the key components, conducting thorough research, and offering a mix of competitive pay and attractive benefits, you'll set your business up for success. Remember, your employees are your most valuable asset, and a well-designed compensation plan is an investment in their future and yours. 

Business Basics • Small Business
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