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compensation management

Everything You Need to Know About Total Compensation Statements

It’s quite common that employees only take salary into consideration when thinking about compensation. Your benefits package might be substantial yet employees may not fully understand the total value of the compensation they receive. These might include “hidden benefits”, which are usually non-monetary, like healthcare, paid vacation days, and many others. 

According to this report, the value of employer-paid benefits in private industries in 2017 was 30.5 percent of the average worker’s total salary. This means an employee perceives his compensation to be only two-thirds its actual value. To show the true value of their compensation package, businesses provide total compensation statements to all employees with the benefits factored in.

What is a total compensation statement?

Most of an employee’s compensation extends beyond the base salary. The total compensation statement (also known as total rewards statement) is a document that communicates the full value of an employee’s compensation package–both direct and indirect benefits. 

It gives employees a broader, high-level picture of the compensation they receive and is usually sent to employees once a year.

Why are total compensation statements important?

By the late 2000s, organizations realized they needed to offer a lot more than the base salary to keep employees incentivized to do great work and offer value. But, offering more perks isn’t enough. You need to make sure that employees are aware of what the business provides. One of the key ways top-performing organizations improve employee engagement and retention is by being transparent and sharing the entirety of their compensation. 

Helps employees understand their contributions

According to employee engagement expert Leigh Branham, “There is no more emotionally charged issue for employees than what they are paid for their contributions. What we make doesn’t just pay the bills—it measures our worth in the most material way.” The total compensation statement empowers employees by giving them a clear picture of their compensation and helping them understand the extent to which the organization has invested in them. 

Increases retention and loyalty

Knowing the full value of their compensation can boost employee morale and loyalty. Total compensation statements can be powerful retention tools.  In fact, CEB research shows that improving total rewards communication can lead to a 50% decrease in turnover risk. 

Improves employee performance

Providing these statements are also beneficial for encouraging high performance because they reiterate the ways in which top-performing employees are recognized for their contributions. When employees feel that their efforts are appreciated, they may be more inclined to contribute their best efforts to the company continuously.

What should you include in the total compensation statement?

Total compensation statements provide a complete break down of all aspects of the job’s benefits. It includes the monetary equivalent of all forms of compensation from the employer. The more detailed your statement is the more beneficial it is. 

The TCS consists of two major sections–direct and indirect compensation. Direct compensation includes the base salary and other extra financial compensation like incentives and bonuses. Indirect compensation includes the dollar value of the employer’s contribution to taxes and other benefits. This summary is often referred to as the hidden paycheck.

The following are the components of a typical total rewards statement:

  • Base Salary/Wages
  • Bonuses and commissions
  • Paid time off
  • Health/Dental insurance
  • Retirement funds
  • Tax contributions
  • Stock options
  • Perks like child daycare, gym membership, commute passes, etc.

Tips for creating effective total rewards statements

Here are some useful tips to keep in mind when creating total compensation statements:

  • Make it visually appealing with charts and graphs
  • Provide comparison with market data
  • Ensure all the data is accurate
  • Don’t double count line items–it’s quite easy to add paid time off on top of base salary
  • Consider adding net benefit amounts i.e. take into account the expenses incurred by the employees for any particular benefit
  • Only add the benefits employees are eligible for

Challenges in creating total compensation statements

PayScale’s 2018 Compensation Best Practices Report says 40 percent of top-performing companies are likely to use total compensation statements, compared to 36% of typical companies. If total compensations were so effective then why are a lot of companies not doing them?

Employee dissatisfaction

One of the main reasons companies refrain from creating total reward statements is because they feel employees might not be satisfied with the benefits they receive. The statement makes it easy for the workforce to compare it with peers as well as market standards.

But, these statements are actually doorways to open communication and career path conversations. If employees feel their earning potential is limited at your company, and not at par with the market standards, it’s critical you explain why that’s the case.

Accuracy of data

Another reason companies avoid these statements is in fear of giving inaccurate data. Accuracy of data is pivotal when it comes to creating any payroll-related statements. Also, the monetary value of the benefits changes with time and your statements need to reflect those.

If employees feel the data provided is not accurate, it may erode their trust in your organization. There might be benefits they are either not entitled to use or indifferent. In such cases, the statement might seem like a ploy to artificially inflate their compensation.

More paperwork

This is one of the most common reasons for organizations not handing out these statements. Creating total compensation statements for all employees can be a lot of work and can take weeks to process. 

How can Compport help?

Total compensation statements are crucial–but creating them manually isn’t the best use of your time or your skills. 

Our easy-to-use solution will help you communicate the full value of the compensation you provide to your employees, helping you drive loyalty and retention. The best part is that you don’t have to spend days and weeks on it. With Compport, you can create total rewards statements for all your employees in just 4 basic steps;.

 1-Upload your data

2- Choose a total rewards statement template from our template library or simply create your own

3- Generate the statements, and 

4- Distribute it to all employees with one click, digitally.

Closing thoughts

A company can invest a lot of money on its employees but if they don’t recognize the value of that investment, the organization is, in fact, wasting money. Helping members of your workforce understand the value of the benefits you offer may make them reconsider taking another job, especially if your benefits package is robust. Ensure the statement is accurate and that employees know where to find it, and it will be that much harder for your top talent to jump ship.

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compensation management

Compensation 101: What Are Long-term Incentive Plans?

When employees reach goals that lead to increased shareholder values, you can reward them with performance shares and special capped options in addition to stock awards. Such reward systems that improve the employee’s performance are called long-term incentive plans or LTIP. In some cases, it may not be even tied to the company’s share price. 

They are a common compensation vehicle in startup companies as a means to attract top talent, employee retention, and to drive performance in the longer run.

Who does Long-term Incentive Plan(LTIP) apply to?

LTIP is specifically designed for executive employees who fulfill certain requirements that contribute to an increase in shareholder value. 

Executives know which factors to focus on to improve the business when the company’s growth plan matches the LTIP. While geared toward their incentivization, it also functions to assist the business’ long-term growth. 

When do employees receive the benefit of the LTIP?

The performance period for the LTIP usually runs between three to five years, before the full benefit of the incentive is received at the end of that pre-defined period. Now, companies can give these payouts either all at once or gradually over a period of time depending on the vesting schedule.

When companies set up LTIP, they decide on a period of time when the employees will receive full ownership of the asset, stocks or retirement funds, that come as a result of the LTIP. It can either be:

Cliff vesting: The employee receives the full benefit at a pre-defined point in the future.

Graduated vesting: The employee gets a certain portion of the reward, usually a specific percentage, over a period of time until the asset is fully vested.

Employees will be able to reap the benefits only if they stay with the company until the vesting date.

Why is LTIP important?

Hiring new employees is incredibly hard. Replacing an executive can cost up to nine times their monthly salary. This cost comes in the form of recruitment and training, in addition to the time spent by senior employees in the company.

The LTIP is a way to stimulate and retain talent in a highly competitive environment. It rewards employees who help the company achieve its strategic objectives. It makes their contributions acknowledged and makes them feel valued. This, in turn, serves as a motivator for the employee and can lead to job satisfaction.

By offering lucrative rewards such as equity, retirement funds, and options, you reduce the turn over of the company.

Types of LTIP

Depending on your goals, business size, and organizational value, you can choose to offer different long-term incentive compensations like restricted stock, performance shares, stock options, retirement funds, and cash awards.

Restricted stocks

In this LTIP, employees are granted unregistered equity shares that are non-transferable and can not be sold until the vesting date. Restricted stocks can be awarded as:

  • Restricted stock units, with no voting rights and immediate ownership
  • Restricted stock awards, with voting rights and immediate ownership

Employee stock options (ESO)

These are some of the most common kinds of long-term incentive plans. Every five to ten years, companies reward best-performing executives with the right to purchase shares at a pre-determined price. It aligns the objectives of the company’s shareholders and the employees; since when the share price goes up, shareholder value goes up and employees get shares at higher prices.

Since there’s no cash outflow, it can reduce expenses. On the flip side, the earnings per share for shareholders can get diluted.

Performance shares

Performance shares are when companies allocate stocks to employees when company-wide performance objectives are met, based on certain metrics, like earnings per share. They’re meant to drive activities that directly impact the shareholder value. They are different from stock options in that the executives receive the actual shares as opposed to receiving the option to purchase shares.

Cash awards

This is a popular option in private companies where stock options are non-existent. When employees achieve pre-defined performance objectives over a long period of time, they become eligible to receive cash awards that reflect the company’s gratitude.

Phantom stocks

Phantom stocks are contractual agreements between the organization and the executive employees that gives the benefit of stock ownership without actually transferring the ownership of shares. Like regular stocks, phantom stocks also follow the rise and fall of the share price and employees are compensated with profits incurred from the shares’ appreciation.

In addition to these LTIP, there are other reward systems like extended vacation days, paid sabbaticals, and more.

What are the drawbacks of LTIP?

Alexander Pepper, in his article on the Harvard Business Review titled The Case Against Long-Term Incentive Plans says companies are better off using that cash to pay larger salaries and annual cash rewards to incentivize desired behavior. There are several theories that suggest LTIPs do not work. 

Here are some of the disadvantages of long-term incentives:

  • LTIPs are so far into the future that it may not actually serve as an incentive.
  • Performance metrics may depend on external, non-controllable economic conditions. This can demoralize executives when things don’t go their way.
  • It can lead to deception, i.e. to falsify reports to cover their own poor performance, such as the infamous VA scandal.
  • Stock options can dilute the profit per share and reduce the number of allocated shares.

Closing thoughts

When designed properly, long-term incentives can be a great vehicle to promote retention and to align the employee and shareholder interests. It’s a win for everyone involved:

  • Employees get rewarded handsomely
  • Company’s performance is improved
  • Shareholder value is increased

There is no one perfect LTIP that’s appropriate to all companies. You need to assess your culture, strategies, and goals to select the right mix of amounts, stocks, and vesting mechanics.