Employee compensation - your complete guide to benefits and rewards

Whilst employees compete for the best jobs, businesses compete for the best candidates. Creating an attractive employee compensation strategy is one of the best ways to get ahead of your competition and attract top talent. 

However, employee compensation goes beyond paying people a fair wage for their labour. That’s the basic stuff. Keep reading for our guide to employee compensation, what it is, the benefits, and how you can create an attractive compensation strategy. 

 

How important is employee compensation?

At its most basic, ‘employee compensation’ is the money paid to employees in exchange for their labour. A basic fixed salary is still one of the most commonly used ways to pay employees in the UK, and indeed, when candidates are looking for jobs – it’s the first thing they will check. 

Yes, there are other factors that candidates will look for such as culture, life/work balance, and career progression but the most important aspect of a job advertisement is the salary. 

Whilst it’s clear salary is important and plays a key role in attracting top candidates and retaining talent, it appears UK job hunters do highly value other factors too. A StandOutCV survey found that employees also value: 

• an easy commute (48% of respondents)
• work-life balance (47% of respondents)
• company culture (35% of respondents)

 

What does ‘compensation and benefits’ include?

Whilst employee compensation at its most basic refers to the salary employees are paid, compensations and benefits – or sometimes ‘rewards’, are an attractive package of salary and non-monetary benefits given to employees. 

When looking at employee compensation as a whole, it can be split down into three categories: 

• Salaries – salaries paid directly to employees to compensate for their labour. 
• Indirect monetary benefits – benefits that employees receive in non-monetary form but there is still a cost to the business. 
• Non-monetary benefits – employee benefits that have no monetary value to the employee and don’t cost the business anything (or are very low cost) 

So, if employee compensation can roughly be split into three categories, what do each of those categories look like? 

Salaries 

As mentioned, salaries are usually paid at a fixed rate, but many businesses also now offer variable or personalised salaries. Whilst a fixed salary is just that – a fixed annual salary, or an hourly rate, variable salaries can depend on a variety of factors which include tips, sales bonuses, signing or joining bonuses, commissions, and stock options. Variable salaries can be enticing to candidates seeking a challenge, wanting to progress their career, or those who relish the opportunity to earn more. 

Indirect monetary benefits

Indirect benefits – or just plain employee benefits, can make job adverts stand out and can be the tipping point for some candidates. Depending on personal circumstances, employees will value different rewards so it’s good to have a variety of employee benefits. For example, candidates with children will value opportunities that come with generous childcare considerations. Although employee benefits don’t usually have direct monetary value to an employee, they are still extremely important. Most of the examples listed below are now offered as standard by many top UK employers, the difference is between how generous each business is (because employee benefit schemes can cost businesses a significant amount of money)

Employee benefits can include:  

• Enhanced pension plans
• Paid time off (including parental leave)
• Childcare, travel and home office subsidies
• Free lunches, drinks or snacks 
• Tuition reimbursement
• Paid time for training
• Healthcare insurance packages 
• Wellness schemes 
• Additional holidays such as birthdays 
• Access to discounted services or products
• Discounted or fully paid gym memberships 
• Cycling and bike access schemes 

Non-monetary benefits 

Non-monetary employee benefits are just as important to some employees as salaries. In the aftermath of the COVID-19 pandemic, flexible working has become one of the most sought-after employee benefits. Many businesses and employees have realised that home-working can be extremely beneficial in some cases. When set up correctly, flexible working will cost a business very little but can have huge benefits in terms of productivity and employee happiness. Employee happiness or well-being is on any large businesses’ agenda in 2024 and non-monetary benefits can help contribute. Non-monetary benefits can include: 

• Employee recognition schemes 
• Hybrid work schedules and flexible place of work
• Volunteer schemes 
• Parking (important in city locations!) 

 

The business benefits of an employee compensation strategy

Businesses can choose from any of the above to build an employee compensation strategy, and in today's job market, employers would be wise to cover as many benefits as possible to attract and retain the best talent. That is what employee compensation boils down to – attracting and keeping staff. Those benefits come in the form of lower recruitment costs due to greater employee retention rates, and increased productivity. Happy employees are likely to be more productive and go the extra mile. 

Whilst an attractive salary and benefits package will indeed cost a business more money, this should be offset by loyal employees who bring in more clients, are more productive, and don’t need to be replaced at great expense. 

A business offering good employee compensation packages will also have an edge over its competitors. This can be important in industries such as tech or engineering where the competition for the best candidates can be fierce. 

The benefit of non-monetary benefits shouldn’t be forgotten either – as mentioned, employees do place value on these types of benefits. This is lucky in the current UK climate – with the cost-of-living crisis, many businesses are having to tighten their belts and being able to offer non-monetary benefits to employees and candidates can make up for a shortfall in expected salaries. 

Now we’ve explained the importance and benefits of employee compensation, we’re going to stress the importance of formalising any offerings and producing a strategy. 

Creating a package with competitive salaries and employee benefits isn't as simple as it seems on the surface. Not when you need to work out what combination of salary and benefits go together, what type of employees are offered a variable salary, which employees receive more benefits because they have a lower wage etc. 

Payroll can get complicated too with variable and one-off payments, and HR may end up with a headache trying to keep track of changes. Senior management is also going to want to understand the ROI of expensive employee benefits packages – has employee retention improved, for example. 

Additionally, and perhaps most importantly - paying salaries and funding employee benefits are a huge expense for businesses. For UK businesses payroll plus benefits can account for up to 50% of revenue spending. With employee compensation being such a large expense, it makes good business sense that a compensation strategy is created to keep track of, and control payroll spending. 

How to create a compensation strategy

When creating a compensation strategy, the first question may be where to start? 

A good strategy will be based on thorough research, analysis, and taking your budget into account. Because salaries and benefits are the biggest expense a business has, budget is particularly important. It should be carefully considered what proportion of revenue can be spent on employee compensation and the business still be profitable. 

Next, any employer planning a strategy should consider what type of employer you are and who you are competing with. Do you want to compete with and exceed large companies – ones that often snap up all the best talent because of their compensation packages? Do you want to match what they offer? Or do you want to meet what is standard in your industry? 

For salary ranges, the best place to start is industry standard – what is the minimum and maximum salary for the role you are looking at, within your industry? You will also need to check what key skills, requirements and responsibilities are included for that particular role. 

Calculating employee benefits can be a little bit more complex – but because they have a financial impact, they should be considered carefully as part of your strategy. 

Employee benefits can be used to enhance salaries or compensate where salaries may be lower. For example, employees in less skilled roles may have a lower salary rate, but an enhanced employee benefits package. This would help retain existing staff and attract candidates. 

There are a lot of factors to consider when working on employee compensation, which is why it’s essential that a strategy isn't rushed and everything is carefully worked out. To recap, here is what should be looked at: 

• Assess roles and positions – conduct a thorough review of existing roles and new ones, including what skills, qualifications, and experience are needed for each position. 
• Review company values – consider business values and culture and how they relate to employee compensation. In a nutshell, do your compensation packages reflect what type of business you say you are? 
• Conduct market research – thoroughly research employee compensation within your industry and gather figures you can use to benchmark what you propose. You should also check what your competitors are doing. 
• Check budgets – work out how much the business can spare to spend on employee compensation. 
• Calculate salaries and benefits – these should be based on your market research and budget. 

 All the above will likely require input across various departments – payroll, HR and finance will certainly need to be involved, and senior management, plus direct line managers will be required to give relevant information and feedback. 

It’s also worth considering the involvement of employees – after all, employee compensation is about retaining and attracting staff. Existing employees can provide valuable feedback about salaries and which employee benefits are most desirable. 

 

How to calculate and track employee compensation 

Although creating an employee compensation strategy is a methodical process, here at SD Worx, we understand it can seem daunting. 

It’s also worth bringing to your attention that after a strategy is created and rolled out, there is ongoing tracking and calculations to keep on top of. This will enable you to review the strategy, ensure budgets are not exceeded, and of course, that employees are happy with the system. 

The ongoing impact on payroll and HR must also be considered – there may be extra responsibilities when calculating salaries and benefits, adjusting what each employee is entitled to, and reporting. 

Having in place a system that helps handle everything related to employee compensation could certainly be of benefit. 

Our reward and compensation solution helps businesses not only work out effective employee compensation strategies but also helps them manage and track pay and rewards, long term. 

Our solution takes the hard work out of creating a strategy by enabling you to: 

• Pinpoint market-based compensation practices thanks to our vast database of payroll data. For example, our benchmarking service enables you to gain a parameter-specific overview of total rewards for each position to compare with the salary data of your own employees.
• Work through a reward strategy with input from our experts. This enables you to keep costs under control, ensure legal compliance and allow for employee participation. Together, we add lifelong learning, career opportunities and work-life balance to the mix without losing sight of your organisation’s strategic objectives.
• Access budgeting and calculation tools that let you simulate wage scenarios, budget forecasts, working conditions and much more.

If employee compensation is on your business's radar and you want to understand how you can attract and retain the very best employees, offer them flexible salary packages and employee benefits, and keep your payroll costs under control, please don’t hesitate to contact us.