Employee compensation

How much is an employee worth to a company?

Compensation is what you pay employees in exchange for their time, work or services. While it sounds simple enough, compensation quickly becomes complicated. Getting comp wrong or failing to properly invest in your employees can be the difference between a thriving company and a failed startup.

Understanding the different types and ways to structure compensation and developing a strong plan doesn’t just fall  to the human resources department. Figuring out compensation should be at the top of every founder’s to-do list. In this article, we’ll guide you through the basics of employee compensation.

Types of compensation & compensation examples

Compensation, also called “direct compensation,” is strictly salary, bonuses and equity. “Total rewards” encompasses compensation plus benefits. You may hear total rewards described as “total compensation,” but since benefits aren’t strictly compensation, that’s less accurate.

Direct compensation

Here are some considerations to keep in mind when determining direct compensation:

Base pay

Base pay or base salary is often the foundation of any company’s total rewards. Salaries can either be standardised, regardless of location, or they can be based on an employee’s specific region. For example, to stay competitive in local markets you may choose to pay employees in London more than employees in other areas of the UK, based on the cost of living. That’s where competitor and market research comes in handy.

Overtime pay is additional pay (on top of a regular salary or hourly wage) for the time an employee works beyond their normal hours, as stated in their employment contract. Although it’s not a legal requirement in the UK, some employers choose to pay employees for overtime.

Bonuses

Variable compensation is typically a performance-based payment and is therefore subject to change between payout periods. An annual company bonus or a sales commission are examples of variable compensation given to employees on top of a base salary. Bonuses may be part of an employee’s overall compensation and paid out routinely every year (or more frequently), and they usually depend on factors such as the company meeting its business goals.

Equity compensation

Many startups offer equity to employees as part of a compensation package. Share options, restricted stock units and growth shares are all types of equity compensation. By giving your employees a piece of the company, they share in its success and are motivated to stay for longer. Details of equity compensation – including the type of equity being granted and any applicable vesting schedules – should be provided to an employee as part of their job offer. Vesting determines when an employee actually earns the equity granted to them. 

Total rewards (indirect compensation)

Employee retention generally comes down to more than just compensation. It often takes into account benefits, development opportunities and company culture – all of which fit nicely into a holistic total rewards approach. Those benefits, also known as indirect compensation, can include a wide range of perks, depending on your company’s philosophy and mission. 

Employee benefits packages

Employee benefits packages are flexible and tend to align with a company’s overall philosophy. Examples of these benefits include:

• Medical insurance (healthcare)

• Dental and vision coverage

• Retirement benefits

• Wellness benefits (such as gym reimbursement)

• Educational incentives or continuous-learning stipends

• Well-being benefits (coaching, meditation or therapy)

• Volunteer opportunities

• Flexible work opportunities (hybrid work)

• Paid time off (PTO), sick leave and paid holidays

• Life insurance and disability insurance (DI)

• Company equipment (such as a laptop)

• Reimbursement for childcare expenses

• Relocation stipends or housing options

• Reimbursement for work-from-home costs

• Commuter benefits

Each company is different and some leaders choose to prioritise direct compensation over benefits.

Developing a compensation strategy & plan

A compensation strategy outlines how you'll achieve the foundational principles in your company's compensation philosophy. The compensation plan details the specific methods and structures to implement the strategy. Together, they ensure a cohesive and effective approach to employee compensation.

A compensation plan is built on four pillars: compensation philosophy, job architecture, performance management and incentives. 

Compensation philosophy

Creating or updating any compensation programme starts with a clear philosophy. A compensation philosophy is your company’s overall position on employee compensation –for example, prioritising direct compensation over total rewards, adhering to strict compensation guidelines or going the extra mile for exceptional employees. Aligning your compensation philosophy with your business strategy can help you hire, retain and reward top talent. 

Job levelling structure

Job levelling structure is how you define roles and levelling. Also called job architecture or job structure, this refers to the hierarchy of roles and levels within your company. Having a clear map of job roles and responsibilities is important for setting accurate compensation levels.

Employee performance management

The guidelines your company uses for performance evaluations are part of performance management. This helps managers assess employees’ work and track their progress so they can receive ongoing feedback and advance their careers. For employers, performance management provides a framework for determining whether an employee merits an increase in compensation.

Incentive compensation

Incentives like cash bonuses and equity  can boost employees’ performance and  productivity. Some companies make this a key part of their compensation philosophy, seeing it as a way to attract, retain and incentivise talent. 

Regularly review

Regularly reviewing your comp plan based on factors like the market value of specific roles and inflation will help you to stick to your compensation philosophy, hire quickly and successfully, reduce employee attrition and address issues of employee equity. 

Compensation packages: terms to know

A compensation package is what you offer or present to employees and candidates, typically in the form of a total compensation or total rewards statement.

Total compensation statement

A total compensation statement shows employees the full current and future value of their compensation package. The overall value of working at your company becomes more tangible when you can demonstrate when and how bonuses, pay rises or equity award vesting occur. The increased transparency can help you stay competitive in local markets and reduce employee attrition.

Compensation bands

A compensation band is an upper and lower range of salary that you would be willing to pay someone in a specific role. Comp bands can be structured in two ways: traditional or broadband. 

A traditional salary range is common at larger companies. This structure has smaller differences between the minimum and maximum comp bands, placing more emphasis on promotions. A broadband salary range is much wider and is more common at smaller companies with fewer employees because it allows for more flexibility.

Salary benchmarks

Salary benchmarks are a standard way to measure ‌market rates for given roles. They can be useful in determining whether your employees are being paid competitively for their position. The type of benchmarks that your company uses should reflect your overall compensation philosophy.

Pay transparency

Setting comp expectations avoids wasting employers’ and candidates’ time during interviews and negotiations. Over the long term, pay transparency can protect against low morale and attrition by showing that employees are paid similarly to their peers. Limiting negotiations to a published range reduces the opportunity for unequal outcomes that may arise unintentionally during hiring, which could guard your company against claims of pay discrimination. 

Offer letter

An offer letter is a document sent to a prospective employee that officially offers them a role in the company. Offer letters typically include a job description, conditions of employment and, of course, total rewards details. 

Traditional job offer letters focus a lot on base salary and benefits, but not enough on equity compensation. Offering equity to your employees gives them the opportunity to grow wealth and creates more owners, which is what we aim to do at Carta.