Total compensation refers to the comprehensive package of rewards and benefits that an employee receives in exchange for their work. It encompasses more than just a base salary, taking into account variable pay such as commissions, bonuses, stock options, and non-financial perks like health insurance or retirement plans.
In the context of sales, total compensation becomes a vital component in driving performance and motivating sales teams. By aligning incentive structures, such as commission or bonus structures, with sales goals and targets, total compensation serves as a powerful tool for attracting top talent, setting clear expectations, and rewarding achievements. It acts as a driving force to inspire sales professionals to maximize their efforts, achieve quotas, and ultimately contribute to the success and growth of the organization. Read on to learn the ins and outs of total compensation, and what you can do to ensure you create compensation packages that keep you ahead of the competition.
What Is Total Compensation?
An employee's total compensation is their entire pay package. It certainly includes base salary, but it usually goes far beyond that. The benefits and incentives typically included in total compensation are:
- Paid time off (PTO). This can include paid holidays, vacation time, sick days, bereavement leave, and personal days.
- Bonuses/SPIFFs. A way to reward employees for special performance and/or for time at the company.
- Insurance. Providing medical, dental, and vision care insurance are commonplace, with some offering disability and life insurance to employees.
- Commissions. Sales employees often receive a percentage of the monetary value of the sales they make as an incentive to meet sales goals.
- Profit-sharing. Distributing a portion of corporate profits among employees on a regular basis.
- Tuition reimbursement. Cover all or part of tuition to encourage employees to earn degrees or certificates. Some companies may also help employees pay off student debt.
- Retirement plans. These can include 401(k) and Roth IRA matching plans and other defined retirement contributions.
- Childcare. Offering childcare facilities on-site or helping employees pay for private childcare.
- Stock options. This equity compensation lets employees buy or sell company shares at a pre-negotiated price.
- Flexible schedules. Allowing employees to control their own work hours.
- Remote work. The opportunity to work from home is an increasingly sought-after benefit.
- Employee assistance programs (EAPs). Offering employees access to free legal advice, psychological counseling, housing assistance, job coaching, and other types of programs.
- Gym memberships: Offering an on-site gym or reimbursing part of or all of an employee’s gym membership.
- Gratuity/Tips: Popular in the service and hospitality industries, these are additional monies given by patrons of the business.
These benefits and incentives can increase total compensation significantly. A job that offers a higher base salary may actually be less attractive when compared to one that offers more in the way of retirement contributions, health insurance, and PTO.
Total Compensation vs. Salary
Salary is the money an employee is paid for the work they do for an employer. The base salary is typically a fixed amount. Total compensation, on the other hand, includes the base salary as well as the benefits a company provides to its employees (such as health insurance and retirement contributions) and any nontaxable items (such as tuition assistance or PTO). In addition, total compensation includes any contingent compensation, such as commissions, bonuses, and tips—all of which may vary widely from year to year.
Why Is Total Compensation Important?
Total compensation matters to employees because it can add substantially to the amount of money they take home every year while also improving their overall quality of life. Employee-paid benefits such as health insurance can add thousands of dollars to each employee's overall annual income, while retirement contributions can add a significant amount of money to help them enjoy a pleasant life when they're through with working. Ample PTO can help workers enjoy vacations or help their families during crises.
Total compensation is a vital tool for you as an employer or sales manager because it helps you attract and retain valuable employees. Employers can use total compensation packages to foster pay equity across the company.
Total Compensation for Sales
Because sales compensation typically includes commissions and other incentives, it's crucial that companies design total compensation packages that account for variable pay (commission) to encourage high performance. These can take a variety of forms.
Often, salespeople are paid a base salary plus a commission(see if your plans measure up to the competition in Xactly's 2024 Sales Compensation Report!)The balance between salary and commission is typically based on the complexity of the sales cycle, with a typical split consisting of 50% salary and 50% commission. Sometimes, sales reps also receive performance-based bonuses for hitting or going beyond their predetermined sales targets. Sales teams who work together may also earn commissions based on their sales territory.
In some companies, salespeople are paid by commission only. They may be paid a percentage of their total sales, or paid based on reaching certain goals or quotas.
How to Calculate Total Compensation
This formula can help you calculate total compensation when you're preparing an offer to candidates:
- Identify the base salary: This is the total amount earned per year before taxes and deductions, as paid in a regular paycheck.
- Add in PTO: Calculate the daily rate paid by dividing the base salary by the number of days worked. Use that figure to calculate all PTO, including vacation time, paid holidays, sick days, and any other types offered.
- Calculate the value of employer-provided insurance: This includes health insurance,vision care, dental insurance, and any life insurance. Don't forget to include unemployment insurance, workers compensation, and disability insurance. Include only the portion of the costs paid by the company.
- Add in commissions and bonuses: You may have to estimate these based on past performance (if you're assessing a job offer, ask for average commissions earned by current employees).
- Add the value of other benefits: Add the numbers for all other benefits and perks offered. For instance, if the company provides childcare, calculate what private childcare would cost. Do the same for tuition assistance, parking permits, gym memberships, and any other promised benefits.
Once you've added up the total compensation, you should have a clearer picture of what this job is worth. Take a look at a sample total compensation statement for a sales rep who earns a base salary plus commissions.
PTO (24 days),$5,538
Value of additional benefits (childcare, gym membership),$17,900
As you can see, the total compensation is much more than the base salary alone, making the position much more attractive.
Designing Total Compensation Packages With Xactly Incent
Xactly’s incentive compensation management solution makes it easy to design total compensation packages that fit within your budget while taking note of variables. It provides 99.8% accurate payments while drastically reducing overpayments, and it provides an impressive 328% ROI over 3 years. The ability to automate and manage compensation calculations allows revenue teams to focus on the things that really matter — and your sales team members will appreciate the ability to know commissions they can expect with accuracy and reliability. Contact us today to see how we can help streamline this important part of your strategic planning.