Employee compensation plays a major role in improving retention and attracting top talent to your business. And we’re not just talking about wages. The perks and benefits you provide your team are just as important. According to a recent LIMRA study, 63% of workers are at least somewhat more likely to remain with their current employers based on their current benefits package.
But in order to reap the benefits of competitive employee compensation, your team needs to understand that their pay is, in fact, competitive—and that’s where total compensation statements come in.
A total compensation statement gives your employees a comprehensive view of their entire compensation (perks and benefits included!).
Let’s take a look at everything you need to know about total compensation statements—and how they benefit both you and your employees:
What Is a Total Compensation Statement?
A total compensation statement is a complete overview of an employee’s personal pay and benefits package. Typically, total compensation statements are distributed annually and include salary and wages, insurance benefits, wellness programs, and other perks.
Unlike pay stubs, which typically only display pay and taxes, total compensation statements give employees a big-picture view of their overall compensation—beyond just their take-home pay. They are also known as a total rewards statement or a letter of total compensation.
Total Compensation Template
Here's a sample total compensation statement. You can download this template and customize it for your team. Just click "Make a copy."
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What’s Included in a Total Compensation Statement?
Total compensation statements include details about every aspect of an employee’s compensation (hence the name “total compensation statement”) and are broken down into two parts: direct and indirect compensation:
Direct Compensation
Direct compensation is the amount of money your employees see each pay period. In other words, it’s tangible income that workers can use to buy food, pay bills, and fund vacations.
Examples of direct compensation include:
- Base pay (hourly rate or base salary)
- Overtime
- Bonuses, commissions, and other incentive pay
- Paid time off/paid leave
Indirect Compensation
Indirect compensation consists of items you pay for throughout the year on behalf of an employee that fall outside of their direct compensation. Indirect compensation will vary based on an employee’s compensation package.
Examples of indirect compensation include:
- Unemployment taxes
- Social Security taxes
- Medicare taxes
- Workers’ compensation insurance
- Health insurance
- Dental insurance
- Vision insurance
- Disability insurance
- Life insurance
- Flexible spending accounts (FSA) and health savings accounts (HSA)
- Retirement plans and 401(k) plans
- Stock options
- Educational assistance programs and tuition assistance
- Employee assistance programs
- Adoption assistance
- Childcare assistance
- Charitable donation matching
- Relocation expenses
- Reimbursement (like mileage and meals)
- Other perks (company-provided equipment and vehicles, paid meals, transportation and lodging)
What Are the Benefits of a Total Compensation Statement?
Compensation statements help your employees better understand their salaries and wages (which, according to data from the Bureau of Labor Statistics, account for 69% of total employer compensation costs) relative to their total compensation (which makes up the remaining 31% of compensation costs).
And helping your employees get a better picture of their total compensation can deliver a host of benefits—both for your team and your business—including:
Increased Retention/Loyalty
As mentioned, 63% of employees are somewhat more likely to remain in their role if they’re happy with their current benefits package—with 40% being considerably more likely to stay. As long as your compensation packages are competitive, giving employees more insight into their total compensation package can help increase your retention rate and improve loyalty—since employees gain a deeper understanding of how much you’re invested in them (outside of their standard paycheck) and how many perks and benefits they’re actually receiving.
Improved Morale and Employee Engagement
Employees who feel unappreciated or underpaid can have low morale, which can negatively impact productivity, company culture, and employee engagement. Sharing your employees’ total overall compensation showcases your true investment in their role—which can help them feel more valued and appreciated, improving morale and engagement.
Gives Employees a Deeper Understanding of their Finances
Total compensation statements give employees better insight into their financial standing. This can help them make better personal, professional, and financial decisions, as well as reveal perks they didn’t know were available to them—such as employer contributions to FSAs or 401(k)s. Rewards statements also demonstrate your investment in employees’ families and loved ones by calling attention to perks like adoption and childcare assistance—which, again, can help improve key markers like employee loyalty, retention, and engagement.
What are the Drawbacks?
Rewards statements are great for showing employees how well they’re valued—at least from a financial perspective. That said, if these documents are misused or misunderstood, it could lead to issues—for both your employees and your small business.
Let’s look at some potential compensation statement downsides—and, more importantly, how to avoid them.
Potential Resentment
Employees might compare statements and discover that they have different compensation packages or pay scales from their peers. This can lead to feelings of resentment, impacting your company culture and potentially leading to employee turnover.
Errors
There’s a lot of math involved in generating a compensation statement. And if there are any errors, even small ones, it can cause employees to question or doubt their compensation, leading to HR headaches and potential issues with the employee relationship.
Distrust
Providing a compensation statement at the wrong time—for example, right before an employee’s annual review—might be perceived as your attempt at discouraging workers from asking for pay raises, which could lead to trust issues with the employee.
Allegations of Fraud/Legal Issues
Including too many “perks” in your compensation statements—like free coffee or bathroom breaks—can lead to claims of fraud or result in litigation. Additionally, benefits that certain employees don’t consider useful might not be perceived as benefits at all—like providing free bus passes to an employee who drives.
How to Avoid These Issues
The good news? With a few simple strategies, these pitfalls are easily avoidable.
First, double (even triple!) check your statements for accuracy, which will ensure there are no errors (and, as a result, no distrust).
You’ll also want to have HR and/or managers review statements with individual employees; not only can this help them better understand the report, but when they have a deeper understanding of their compensation and are satisfied with the statement, they may be less likely to compare their statement to their coworkers—keeping potential misunderstandings (and resentment) at bay.
And if employees do compare their total comp reports—and have questions, issues, or concerns? Make sure to address them as soon as possible. The sooner you address them, the sooner you can clear them up—and the less likely they’ll be to cause issues in the long-term.
How to Create a Total Compensation Statement
Clearly, compensation statements can benefit your business—but only if you do them correctly. But how, exactly, do you do that?
Start by gathering accurate information about each employee’s specific pay and benefits packages from human resources or your preferred HR/payroll software. From there:
- Decide what to include: In addition to direct compensation, decide which indirect compensation you want to include in the report. Avoid insignificant perks like free coffee or snacks, but include more significant indirect compensation like insurance premiums, retirement contributions, and other important benefits.
- Input data into a form or template: Use your preferred software or template to fill out a personalized compensation statement for each employee.
- Provide a statement to each employee: Decide when to generate rewards statements, then hand them out on time each year—whether in person, digitally, or via mail. Make sure to let employees know if they have any questions or concerns, they should schedule a meeting with management or HR.
Need a head start? Use our template as a guide!
Total Compensation Statements Are an Important Tool
Your employees mean a lot to you and your small business. Unfortunately, it can be difficult for an employee to feel valued if their only unit of measurement is their take-home pay.
Total compensation and rewards statements can help you prove a worker’s value by spotlighting the employee’s total earnings and benefits—and improve job satisfaction, loyalty, and retention in the process.
