Chapter 06

Compensation & Benefits

Compensation and Benefits Strategy

The first definition of compensation reads as follows:



1. Something, typically money, awarded to someone as a recompense for loss, injury, or suffering.

If this is the compensation you’re looking for, you’re better off in the Regulations and Legislation chapter. Most of the time, we’re more interested in the second definition of compensation:


The money received by an employee from an employer as a salary or wages.

In this chapter, we’ll explore the mechanics of compensation and benefits, including pay schedules, salary ranges, benefit categories, and health plans. And after we outline these basics, we’ll explore best principles for promotions and pay raises as your organization and employees grow and develop.

HR’s role in compensation is to ensure decision-makers understand how compensation and benefits affect the employee experience. While a good culture, targeted hiring, and thoughtful performance management all help employees value working for your organization, none of them will succeed without a solid compensation foundation. Compensation and benefits support the most important parts of an employee’s life—ensuring your compensation package and company benefits meet your employees’ needs is essential for long-term employee retention.

Developing a Compensation Plan

The first steps to developing a compensation plan involve analyzing the type of work employees perform. Compensation structures need to help employees understand:

They need to specify what employees can expect now, and the organization’s policy on pay raises in the future.

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Begin with Compensation Research

For organizations looking to hire new employees and grow their workforce, this starts with a clear understanding of their current talent needs and their expected financial resources. Identifying these in advance helps your organization develop job responsibilities, determine how much to pay employees in direct compensation and benefits, and know how fast your organization can afford to grow.

A well-aligned compensation and benefits plan takes the following factors into account when calculating compensation:

Once you’ve determined acceptable amounts for your organization to provide for each position’s compensation and benefits, the next step is to determine the employment terms employees need to follow to earn it.

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Hourly Wages

An hourly wage is compensation that employees earn for working for a period of time, generally measured in hours. Most hourly employees perform manual or location-based labor. Examples of hourly workers include retail workers at a store’s location, manufacturing operators on an assembly line, and medical personnel in a hospital. In the United States, the Fair Labor Standards Act (FLSA) defines a full workweek as 40 hours. If an employee works more than this, the extra time is paid out as overtime pay at an increased wage, commonly known as time-and-a-half.

Planning out compensation for hourly employees

Overtime laws make it costly to overwork hourly employees. But hiring too many employees can also put a strain on an organization’s budget, especially when factoring in the cost of compensation and benefits.

Part-time employees often provide a solution when additional employee contribution is needed, but won’t produce the return on investment to justify the cost of a full benefits package. Because part-time employees are contracted for fewer hours, they can help cover busy periods of the week, such as retail spaces on weekends. A part-time arrangement could also enable caregivers or older employees to continue to work in an arrangement that matches their other responsibilities and goals.

Outside of what is required by laws such as the Affordable Care Act (ACA), employers have broad leeway on benefits packages for part-time employees, leaving them free to offer full benefits, partial benefits, or no benefits.


Exempt employees are excluded from overtime regulations under the FLSA and are commonly referred to as salaried employees. They are paid for the tasks they perform, as these typically knowledge-based tasks are difficult to track on an hour-by-hour basis. In addition, exempt employees must exercise independent judgement for more than 50 percent of their workday. These broad categories cover much of what is termed “knowledge work.”

Because the FLSA only limits working hours for non-exempt employees, organizations have no legal reason to discourage exempt employees from working long hours. As a result, many salaried employees work far more than 40 hours each workweek to complete their duties or simply as a display of their dedication.

Getting more working hours from employees doesn’t always mean getting more for your money, though—long working hours can take a toll on an organization’s employee engagement, job satisfaction, and retention rate as employees burn out. An effective company culture will balance employee needs and desired outcomes when setting performance expectations, enjoying the benefits of employee growth rather than experiencing the costs of employee replacement.

Commissions, Bonuses, Tips, and Other Performance-Based Compensation

Many organizations tie certain employees’ compensation to their individual performance or the success of the organization over time. Commissions and tips are the most common examples of this performance-based income, many times supplementing a smaller wage. Along with the FLSA, several states have passed laws to regulate compensation for tipped employees.

Many organizations also offer employees profit sharing and investment shares, providing an additional incentive to help the organization succeed.

In spite of bonuses and incentives being additions to base compensation, employees tend to view indirect compensation as they would regular compensation—a means to support their standard of living. If you plan on offering rewards and recognition to increase employee engagement, your employees need to feel that their current performance-based compensation supports their needs. Otherwise, you risk turning encouragement into an unintentional threat.

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Indirect Compensation

Certain companies may also offer non-monetary incentives, such as a company car or cell phone, catered office lunches, or nap pods. These incentives remove costs from an employee and strengthen the connection between employee and company.

In any employment contract, long-term success depends on aligning the needs of the employee and the employer and ensuring that alignment continues as both employee and employer grow and change. Optimizing compensation amounts, types, and schedules is vital for this process.

Offering benefits is only half the battle—for your benefits to support your employees, your employees need to use them.

Developing Company Benefits

Life’s essentials can be costly without the right support. Company benefits help support employees so they can focus on more fulfilling aspects of their career instead of worrying about whether they can afford to continue working for your organization. To build a solid foundation that covers all of their basic needs, your benefits offerings should support employees’ physical, mental, and financial health.

Physical Health Benefits

In the US, benefits requirements for physical health are regulated by the ACA. This legislation requires all but the smallest employers to offer access to ACA-qualified health insurance benefits or face fines.

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Here are a few definitions that you’ll need to help employees understand as you offer health plans:

Several factors influence these dollar amounts, including the number of employees covered, the average age of employees, how many employees participate in preventive care, and the total cost of care for all employees from previous years.

Here are some features of common health care benefit options you can offer your employees:

Traditional Health Insurance

Traditional health insurance operates on a system of pre-tax premiums and copays (as explained above). In exchange for higher premiums than other health plans, traditional plans have lower deductible and out-of-pocket maximum amounts.

Flexible Spending Account (FSA)

FSAs are supplemental programs used with traditional health insurance. FSAs allow employees to make pre-tax contributions (up to a maximum limit) to a yearly fund to pay for prescriptions, vaccinations, certain over-the-counter medications, and other approved medical purchases. These contributions are generally use-it-or-lose-it—any amount left at the end of the plan year doesn’t roll over to the next.

High Deductible Health Plan (HDHP)

For healthy employees with low healthcare costs, high deductible health plans have lower premium costs by offering higher deductibles and maximum out-of-pocket limits. In return, these plans provide little to no contribution to medical expenses until the deductible has been met.

Health Savings Account (HSA)

Health savings accounts are generally used to offset the high deductible of an HDHP. In fact, HDHP participation is one of the legal requirements for setting up an HSA. Employees can make pre-tax contributions into an HSA and use that money toward their health expenses, and any unused amount at the end of the plan year can roll over into the next. In addition, employees can choose to invest their HSA funds and use those proceeds to grow their account.

Additional Physical Health Benefit Considerations

Here are some additional factors to consider when choosing physical health benefits for your organization:
Offering benefits is only half the battle—for your benefits to support your employees, your employees need to use them. It’s essential to measure employee benefit utilization rates and try to improve them through education, feedback, and benefit adjustments over time. High utilization rates not only ensure employees benefit from your benefits, but they can also lead to a direct financial advantage for your organization through lower group rates from benefits providers. Having benefits providers explain how their benefit works can help employees understand how benefits are more than money coming out of their paycheck. See the onboarding chapter for tips on how to get new employees excited about your benefits.


Mental Health Benefits

According to the World Health Organization, mental health issues cost an estimated one trillion US dollars globally in lost worker productivity. As your employees navigate through life’s ups and downs, conditions like depression, anxiety, and post-traumatic stress disorder can make it harder to respond productively to stress in the workplace and in their personal life.

Supporting employees’ mental health can help support their physical health as well, as stress can cause multiple physical symptoms that interfere with normal life. These include insomnia, increased risk of heart attack, increased blood sugar, and a weakened immune system. So not only will unmanaged stress increase the healthcare costs for your employees and your organization, but it will also let stressed employees share their illness with others as they fail to fight off infections.

Life Balance

After making sure that your health plan covers mental health practitioners, one of the most important practices you can promote in your organization is supporting a balanced life for your employees. This doesn’t just mean balancing time at work with time at home—it means supporting your employees’ desire to matter, both through meaningful accomplishments at work and through providing the time and freedom to pursue personal goals.

This is where the strategy behind performance, compensation, and benefits intersects. Benefits support basic needs, compensation fuels possibilities outside work, and effective performance management helps employees grow professionally while knowing your organization recognizes their contribution.

Employee Assistance Programs (EAP)

Employee assistance programs are benefit offerings that help employees cope with sudden, stressful changes. Even the most positive, well-adjusted employees will go through difficult situations, whether it’s dealing with the death of a loved one, navigating a divorce, or struggling as a new parent. EAPs provide a limited number of free counseling sessions with guaranteed privacy for the employee, helping them work through issues and stabilize their life.

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Financial Health Benefits

Money troubles are one of the top sources of employee stress. They cascade into relationship issues, on-the-job stress, and worries for the future. Providing company benefits to support your employees’ financial health supports their physical and mental health as well.

Paid leave helps resolve one of the difficult questions employees ask themselves: will I hurt my long-term financial standing if I take time off? Adding a paid leave policy is the first step to reassuring employees that you value balance in their lives. The rest of the balancing act comes from creating a culture where employees can take time off without managers questioning their dedication.

Encouraging employees to use time off has another benefit aside from helping them come back to work refreshed. Most benefits agreements stipulate that, when employees leave, their unused vacation leave must be paid out at their current salary. All in all, it’s better for employees to come back to your workplace after a week of vacation rather than taking the vacation during a job transition.

Retirement Accounts

Providing employees with access to retirement benefits lets them take steps to save for their future. A good provider will offer many different investment vehicles, including both pre-tax and post-tax contribution accounts.

You can also invite your provider to answer employee questions on your financial offerings more regularly than once a year during open enrollment. Quarterly presentations can help new employees start fully participating more quickly.

As your organization puts together its compensation plan, it can help to identify compensation bands and use them to organize promotions.

Promotions and Raises

Revisiting your compensation research every year and keeping up with performance management are the first steps to getting pay raises and promotions right.

Many employees believe that increased compensation only comes when they can be promoted to management positions. But not every employee has the broad skill set that managers need, and there can only be so many managers in your organization. It’s just as important to use compensation increases to recognize deep expertise, whether in the employee’s specialty or just in their knowledge of how things work in your organization.

As your organization puts together its compensation plan, it can help to identify compensation bands and use them to organize promotions. For example, a junior copywriter might be in the same salary range as a social media manager or a senior customer support representative. After progressing and taking on new responsibilities, this copywriter might earn a promotion, with the possibility of continuing to senior copywriter.

When employees reflect on their life and career, they will ask themselves if they can continue progressing in your organization. Being transparent about salary increases and internal advancement opportunities helps employees know what to expect and make plans for their future.

Taken together, the points on compensation and benefits in this chapter show that supporting employees isn’t just to resolve their concerns over their next paycheck. An effective compensation plan will recognize employees’ growth, support them in their lives, and give them what they need to do their best work—both now and in the future.

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Chapter 7: Time Tracking