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What is a Compensation Package?

Malcolm Tatum
By
Updated May 16, 2024
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A compensation package is the combination of benefits that an employer offers to employees. This may include wages, insurance, vacation days, guaranteed raises, and other perks. Strong compensation packages are often used to attract and keep good employees, and to promote certain company values. A business that does not pay the highest wages may still be competitive by offering free or inexpensive childcare to employees, for example.

Common Components

Almost every compensation package includes consistent wages or salary. This may include a guarantee of regular increases based on the cost of living, time with the company, or the job performance of the individual. Employees in some industries work solely for commission or may accept no wages in exchange for another form of compensation, but this is rare and is not legal in some countries.

Time off, either paid or unpaid, is also a common benefit. The entire facility may shut down for a few weeks during the summer or at the end of the year, or vacation time may be accrued individually to be used at the employee's discretion. Sick time is often separated from vacation time and is used on an individual basis.

Health insurance is considered compensation in places where it is not nationally funded. This insurance may be paid for by employers or employees, or by contributions from each. Not all coverage is the same, and a company that cannot offer higher salaries may offer better healthcare plans — including dental and vision insurance — as a way of attracting new talent.

Other types of benefits vary widely. For instance, an employer may choose to provide childcare services on the premises at no charge. Some provide development classes or pay for continuing education, assisting those who want to update their skills or pursue a degree in a field that is relevant to their employment. Other perks may include the use of a company car, cell phone service, office equipment for working at home, or any other type of benefit that the company wishes to extend.

Differences Between Packages

One factor may determine what goes into a compensation package is the value of the company. Powerful companies that make a lot of money often have the ability to offer their employees higher salaries and more benefits. Just because a company is very profitable does not necessarily mean that everyone makes a lot of money, however; sometimes, a small company with only a few employees may be more generous because it values each person more. Packages can also vary between employees, with executives often getting more compensation than lower level employees.

Another factor is the standards of the industry. For example, professors in universities usually expect tuition exchange for their children and spouses to be one of their benefits, whereas people who work in retail usually expect employee discounts in company stores. Even the way raises and starting salaries are structured may be uniform across an industry.

Unfair Practices

Most of the time, a company can choose to hire people at whatever starting wages and benefits the company believes is appropriate. However, it is common for employees to start at a standard rate with standard benefits, at least at the lower levels of the company. One issue with offering different packages to employees in similar positions within the same company is that employees are not always secretive about their wages. This may open a business up to legal problems; if a man and a woman are hired at the same time, for example, and the woman is paid less, she might complain that her salary is lower because of gender discrimination. When employees know that people who do the same basic job are paid different amounts, it can hurt morale as well.

Negotiating Benefits

It is sometimes possible to negotiate the salary and benefits that are offered with a job. Experts often recommend that people know what their skills are worth and what the average salaries and benefits are in an industry so that they can tell if an offer is fair. Negotiations are often more successful if they are realistic and based on reliable research; they can also serve to show a potential employer that the person is ambitious and well-informed. Not all companies are willing to negotiate, however, and compensation is best discussed late in the interview process. It is often more difficult for entry-level employees, who may not have the experience to back up their demands, to negotiate, but higher level executives are often in a better position to demonstrate their value with a history of success.

Legal Regulations

Sometimes, employers are required by law to offer some degree of compensation, such as a certain amount in wages. Vacations and maternity leave may also part of an employee's rights in some countries, although the amount of time allotted can vary. On the other hand, pay cuts and reductions in benefits are often legal, although employees in these situations usually have the right to quit their jobs if they are dissatisfied.

Designing Compensation Packages

From an employer's perspective, designing a good compensation package is often the key to attracting talented employees and keeping them for a long time. Offering higher wages is one strategy for improving a package, but employees also value their potential to earn more money later through raises and bonuses. Understanding what the people who work for the company really want and providing adequate compensation can improve worker morale and performance.

Many business attempt to make their values clear through the benefits they offer. Beyond wages, benefits like childcare or paid volunteer days can tell potential employees what the company cares about more than just the work. This helps to attract workers who share these values, resulting in a more cohesive workforce.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum , Writer
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.

Discussion Comments

By anon350217 — On Oct 02, 2013

In my opinion, a compensation package should not be a factor in selecting a job because esteem needs are also required to choose a job. Only basic needs are not enough for us.

By anon172668 — On May 04, 2011

@luna49, I agree that a well balanced compensation package is the way to go. Sometimes benefits can more than make up for a lack of base salary, and you're right, if the employee doesn't take advantage of all the benefits the company has to offer, then it's not a very good deal. Annette C.

By Moldova — On Jul 14, 2010

Luna49- I agree with you. A friend used to work at UPS and was offered many generous benefits. He was offered a car allowance, an employee pension plan and a stock purchase plan.

The benefits were so rich that turnover rate remained low. The stock purchase plan allowed him the ability to purchase Class A UPS stock for a discount than the market price.

In addition, because UPS was such a large organization, he was also offered discounts to many of partners of UPS. The salary raises were not as high but the benefits were outstanding.

By luna49 — On Mar 24, 2010

I think that it's also important to make sure a compensation package is well-balanced. A company may not pay as well as others, but will offer a lot of fringe benefits to make up for that difference. This can be a great deal if you, as an employee, use those benefits - but if you don't take advantage of the benefits offered, it's not a very good deal.

Malcolm Tatum

Malcolm Tatum

Writer

Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
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