What is the Difference Between Salary and Total Compensation?

Salary and total compensation are related but not the same. Your salary is the money you are paid for your job, but total compensation includes more than just your salary.

What Is a Base Salary?

Your salary is the fixed amount of money you get for your job each year, not by the hour. It is what you earn before any taxes are taken out. Having a salary often means you have more freedom in how you work, as you can decide which tasks are most important and work without constant supervision.

What Is Total Compensation?

Total compensation is the overall total of money and extra benefits that an employer gives to an employee. This covers the base salary, additional pay, perks, benefits, bonuses, commissions, lifestyle spending allocations, and gratuities.

• Base Salary

Base salary is what an employer pays to an employee for doing their job. It is the amount of money they receive regularly, excluding bonuses or commissions. The salary is usually calculated yearly and can increase as the employee gets promoted or takes on more responsibilities.

• Additional Pay

Bonus pay is extra money given to an employee on top of their base salary. Companies often give bonuses to employees for doing a good job or for staying with the company for a long time. Bonuses are not required, but many companies give them to show appreciation.

• Employee Benefits

Employee benefits are extra services or perks given to employees in addition to their base salary. These can include health insurance, paid vacations, and stock options. Benefits vary from company to company, with some offering more to attract and keep top employees.

• Perks

Perks are additional non-monetary offerings given to employees. These can include gym memberships, meal plans, or internet stipends. Perks are different from benefits in that they are not services like health insurance.

• Stock options

Stock options are a form of compensation where employees are given the option to buy or sell company stock at a set price. This is usually done to motivate employees to work hard and help the company succeed.

• Commission

Commission is a percentage of sales that employees earn on top of their salary. For example, when an employee sells $20,000 worth of products and earns a 5% commission, they will earn an extra $1,000. Companies often pay lower salaries to employees who earn commission to motivate them to sell more.

• Tips

Tips are extra money that service workers, such as bartenders or servers, earn from customers. Tips are considered taxable income and must be reported to the IRS.

Salary vs. Total Compensation

An employee's salary is the money they receive for their job, often stated as a yearly amount. This amount does not include deductions like taxes. On the other hand, total compensation includes not only the salary but any other benefits the employer provides, such as insurance or tuition assistance. It can include certain types of insurance and funds for commuting that are not taxed.

Total compensation includes both cash (money) and non-cash benefits. For example, bonuses or commissions are part of total compensation but may not be included in the base salary. Contributions your employer makes to your retirement plan or life insurance policy are part of total compensation. Many benefits, such as insurance and paid time off, are not given in cash but are still part of total compensation.

The Importance of Non-Cash Benefits

Total compensation is more than just your salary; it includes benefits that are not cash. While having a salary that covers your monthly needs is important, non-cash benefits can greatly affect your overall financial situation as well.

For example, when your employer offers a health plan with low deductibles and co-pays, it can save you a lot of money on medical costs. Even when you earn an extra $200 a month but must pay $300 for your employer-sponsored health plan, your total compensation is lower. Aside from this, when you pay $100 for each doctor's visit, plus lab fees and medication costs, your medical expenses can add up fast, even for regular care.

Paid time off is another valuable benefit that can improve your life. Having holidays, sick leave, and paid vacation time means you can take a break when you need it or be there for your family without losing income.

Employer contributions to your retirement savings have a big impact as well in the long run. When your employer matches your contributions, it effectively doubles your retirement savings rate. While it may not seem like much now, it can make a big difference in how and when you can comfortably retire.

How To Calculate Total Compensation

To find out how much an employee gets in total, add their base salary to the value of all the extra benefits they get. These extras can be insurance, commissions, bonuses, time off, and perks. Since not everyone gets paid the same, the total amount an employee gets will be different.

For instance, a computer expert is hired by a large financial company. They have a base salary of $80,000 per year. Aside from this, they get health and dental insurance, which costs $150 per month or $1,800 per year. To add more, they receive $1,500 per year to help pay off student loans and have 10 days of paid vacation, worth $3,125. When you add all these together, the computer expert's total compensation is $86,425 per year.

Why Is Total Compensation Important?

Total compensation is important because it helps to keep employees happy in their jobs. When people are looking for a job, they often compare the salaries offered. When two jobs pay about the same, the extra benefits can make one job more appealing. Employers who want to attract the best people know this and often offer good total compensation packages to attract top talent.

How employee benefits affect total compensation

It is important for employers to offer good benefits as part of the total compensation package. Job seekers are attracted to benefits such as discounted health insurance, help with student loans, and support for education because these are the most useful. For example, many young, skilled workers at tech companies have large student loans. Giving them perks like employee discounts may not be as attractive as helping them with their student debt or paying for further education. Providing the right benefits makes employees feel valued and needed, which is important for a positive work environment.

When you are looking for a job, it is important to remember that employee compensation includes more than just your salary. While your monthly take-home pay is important, non-cash benefits can greatly improve your quality of life and make your cash income go further.