Total Rewards Strategy: Components, Calculation and Benefits

Salary is only one part of what an employer offers its employees. Bonuses, insurance, retirement plans, paid time off, flexibility and development opportunities also shape the employee experience.

A total rewards strategy brings these elements together in a way that aligns with the organization’s goals, financial resources and employees’ expectations. It helps employers make clearer compensation decisions and communicate the full value of what they offer.

What are total rewards?

Total rewards encompass all the financial and non-financial benefits an employee receives through their employment. They include salary, but extend beyond it.

A total rewards policy sets out how an organization selects, provides and adjusts these elements. It may cover salary ranges, bonuses, benefits and the criteria used in compensation reviews.

What is the difference between salary and total rewards?

Salary is the amount paid to an employee for their work. Total rewards include salary and the other benefits offered as part of employment.

It is important to distinguish total rewards from the employee’s perspective from the employer’s total labour cost. Mandatory employer contributions and recruitment expenses, for example, are business costs, but they are not necessarily benefits that should be presented as compensation received by an employee.

What are the components of an employee’s total rewards?

The mix varies by organization. It may include four main categories.

1. Base pay

This is the regular compensation associated with a position. A compensation policy and salary structure can help define job categories, salary ranges and progression rules.

2. Variable compensation

This may include bonuses, commissions or other incentives tied to individual, team or organizational goals. The people concerned should know and understand the criteria for receiving them.

3. Benefits and other financial offerings

Depending on the organization, these may include group insurance, employer contributions to a retirement or savings plan, additional paid time off, or an allowance for certain work-related needs.

4. Non-financial benefits

Flexible schedules, training opportunities, professional development, recognition and the quality of the work environment can also form part of the employer’s offer to employees.

These elements matter in a total rewards strategy, even though assigning each one a dollar value when calculating an employee’s compensation could be misleading.

How do you calculate total rewards?

To estimate their annual monetary value, add up the elements whose value can be determined for an employee:

Base pay + variable compensation + value of employer-funded benefits + other monetary benefits = estimated monetary value of total rewards

For example:

This does not mean the employee receives an $80,000 salary. It illustrates the estimated value of monetary compensation and employer-funded benefits. The employer’s total cost may differ because of mandatory employer contributions and other employment-related costs.

When comparing positions or communicating an offer, use a consistent method and clearly state what the calculation includes.

Why develop a total rewards strategy?

A strategy helps an organization make more consistent decisions. It clarifies what the organization wants to offer, to whom, according to which criteria and within what budget.

It can also help to:

• explain the full offer to candidates and employees;

• support employee attraction and retention;

• recognize employees’ contributions more consistently;

• compare certain practices with those in the market;

• monitor compensation costs;

• adapt benefits to employees’ actual needs.

The goal is not necessarily to offer the highest salary or the greatest number of benefits. It is to build an offer that is relevant, understandable and sustainable for the organization.

How do you develop a total rewards policy?

Assess your current offer

Take stock of the salaries, bonuses, benefits, paid time off and non-financial measures you already provide. Review their cost, how they are used and how well employees understand them.

Define your goals and principles

Identify what the policy should support: recruitment, retention, recognition, internal consistency or cost management. Then establish the principles that will guide decisions, including how you want to position compensation relative to the market.

Establish clear rules

Document the criteria for setting salaries, progressing through salary ranges, awarding bonuses and qualifying for benefits. Managers should be able to apply these rules consistently.

Consult and communicate

A benefit that employees rarely use or do not understand may not achieve its intended purpose. Ask employees about their needs, then clearly explain each component of the offer and the rules that apply.

Review the policy regularly

The needs of the organization and its employees, as well as market conditions, change over time. Plan to review the policy, its costs and its results regularly.

Bring clarity to your total rewards offering

A total rewards strategy involves more than raising salaries or adding benefits. It helps you make consistent choices and show employees the full value of what you offer.

Mallette’s teams can help you assess your compensation practices, develop a compensation policy and salary structure, and review your benefits offering.