The pay you receive for the work you perform is known as your salary. It is important to understand the difference between a salary and the total compensation offered for a specific position. Different components go into your total compensation that are not necessarily included in a salary. In this article, we discuss the differences between salary and total compensation.
What is base salary?
A base salary is the money paid to an exempt employee for performing their job. An exempt employee is someone who receives a set amount of money, typically on an annual basis, rather than being paid an hourly wage. To qualify for a base salary, an employee usually needs to hold a position that allows them to exercise independent judgment in the work they perform. They can prioritize critical tasks and work without being directly supervised. This type of employee's base salary is expressed in terms of gross income, which is before any taxes are withheld.
To qualify as an exempt employee, an individual must meet certain criteria set forth by the federal government. The U.S. Department of Labor has an established minimum base salary for an exempt employee who is not eligible for overtime pay. If the employee does not earn more than the amount set by the threshold, they would likely need to be reclassified as non-exempt and receive overtime pay for any hours worked beyond 40 in a week.
What is total compensation?
Total compensation is expressed in the same way as a base salary, which is in terms of gross income on an annual basis. However, it includes more than just the money paid to an employee. Total compensation includes the base salary, but it also includes the value of any benefits received in addition to your salary. Some of the benefits that are most commonly provided within a total compensation package include:
- Paid time off (vacation days, sick days and holidays)
- Profit-sharing distributions
- Insurance (medical, dental, disability and/or life)
- Tuition assistance
- Childcare assistance
- Retirement plans
- Employee assistance programs that offer legal advice, counseling and other services
- Gym memberships
When a company provides any benefits in addition to the base salary, it may generate annual total compensation statements that outline the total amount paid to employees. An employee often knows what they are paid as the base salary, but may not know the dollar value of the additional benefits received. Providing this type of statement can help an employee understand what they receive in total compensation.
Some companies use total compensation statements as retention tools to help employees understand their value and feel appreciated. An employee who may be looking elsewhere for employment might base their salary comparisons on base salary only, without realizing how many additional benefits they are receiving and the value of those benefits. When comparing positions, it is important to compare the total compensation package rather than just the base salary.
Salary vs. total compensation
An employee's salary typically includes only the money they are paid for the work they do in a position. This is usually expressed as an annual amount, rather than an hourly rate, and does not reflect any taxes that must be withheld or any other withholdings. Total compensation differs in that it includes any benefits paid for, either in full or partially, by the employer. It also includes any nontaxable items given to employees, such as certain types of insurance coverage, tuition assistance and most funds provided for employees to use toward commuting costs.
The items included in total compensation are often referred to as non-cash benefits, although some may be paid in cash. For example, an annual bonus or a commission would be included in your total compensation but may not be reflected in your base salary. Any funds paid by your employer toward a retirement plan or life insurance policy would also be included in your total compensation. Many of the benefits are not paid in cash, including insurance, paid time off and any fringe benefits.
How to determine total compensation
To determine your total compensation, you can follow a series of steps to figure out exactly what your employer provides to you in exchange for the work you perform:
1. Start with your base salary
The first step in figuring out your total compensation is knowing your base salary. You can determine this by reviewing your pay stub, as it will show how much you earn. If the total annual salary is not included on your pay stub, simply calculate the gross amount by the number of pay periods and you will have your gross base salary figure.
2. Add time-off benefits
Most employers provide time-off benefits to their employees. This may be offered in various options, such as sick time, vacation time and/or holiday pay, or it could be offered as a lump total of paid time off. To calculate your total compensation, you will need to assess the value of the paid time off you receive in a year. Multiply the number of days off you have, across all paid time off buckets, by the amount of money you are paid for a day of work to get that total.
3. Figure out insurance costs
Full-time employees are usually eligible for insurance benefits through their employers. Providing insurance is actually a requirement for employers with a certain number of employees. The employer-paid portion of any insurance benefits given to you should also be included in your total compensation assessment. You will need to add the value of health, dental, vision, life, disability, worker's compensation, unemployment and any supplemental insurance policies to get the total.
4. Calculate any applicable commissions and/or bonuses
Some employees are paid commissions, which are additional funds paid based on job performance. A sales employee might receive commission pay if they reach certain goals. Commissions are especially common in sales positions, as their responsibilities are most closely tied to revenue goals. However, others that may receive commission pay include recruiters, account managers and real estate professionals.
In some cases, commission pay is in addition to a base salary, while in other positions, it is the majority of the compensation provided. Any commissions you receive should be calculated and included in your total compensation. The structure for calculating commission pay depends on your individual setup.
For example, if your salary is $100,000 and 50% of that is based on performance, you would be guaranteed to earn $50,000 in a year and could potentially earn another $50,000. Your total compensation amount should also include any bonuses you are eligible to receive.
5. Assess any other benefits you receive
Most employers provide some type of retirement benefit, which allows employees to contribute to a retirement savings account to prepare for this stage in their lives. If your employer matches your contributions or puts any funds toward your retirement, this amount should be included in your total compensation. Additional benefits could include tuition assistance, gym memberships, parking or commuting, or childcare assistance.