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Determining compensation and benefits for your employees

October 31, 2022
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Employees now recognise that two jobs that offer identical salaries may hugely vary in the benefits category – making one a better financial proposition than the other. For companies to attract and keep talented people, they must offer competitive compensation alongside an attractive benefits package relevant to the employees. Once an agreement and policy are in place, employers must put the effort in to communicate with staff to ensure they are fully aware of any timescales and performance reviews. Staff rewards do not need to cost the earth and will likely be more cost-effective than constantly recruiting new staff.


Compensation and benefits are a crucial part of an employment relationship. People expect to be paid, rewarded and recognised for their work. This central work and reward relationship starts from the moment an employee is offered a contract to when they leave the organisation. It is essential all compensation and benefits are a part of your financial planning and carefully managed for the sake of both you and your employees.

As an employer, you are obliged to confirm the pay level and relevant benefits in the employment contract. Therefore, you should clearly outline the hourly or annual rate, holiday pay, pension contributions as good practice. However, when it comes to non-contractual pay and benefits, be careful what you include in the employment contract. Instead, it may be better to state how reward is managed outside of the contract through a standalone reward policy document or part of the employee handbook.

Navigating the rules and best practices around pay and reward in the workplace can frustrate business owners. However, it is worth persevering as it makes the difference between attracting and keeping top talent or having the upheaval of constantly recruiting new staff. This guide aims to help you determine the compensation and benefits that best suit you and your employees.


Whether given as an hourly, weekly, monthly, or hourly rate – one of the first things a candidate will look at will be the level of pay (otherwise known as compensation). For many employees, compensation now includes much more than the standard salary. It could also incorporate bonuses and anything else that is a fixed or variable financial reward.

Pay can be divided into two categories:

  1. Fixed (or base) pay – The guaranteed cash wage or salary paid to employees for doing their work for a contracted time period.
  2. Variable pay – Non-guaranteed pay, which can include bonuses, incentives and overtime.

On the other hand, benefits tend to cover indirect pay – including private health insurance, a company car, stock options and other incentives for employees. Both compensation and benefits are crucial to attracting and keeping the best talent. Two jobs offering identical salaries may vary wildly in the benefits category, making one a better financial proposition than the other.


Now that you understand the differences between compensation and benefits, here are a few key steps to help you establish them within your organisation.

Get the foundations in place – The first step to offering a competitive pay and benefits package to your staff is to get your contracts and policy documents in order by doing the following:

  • Make sure pay and benefits are appropriately included in all employment contracts.
  • Research competitors or use recruitment websites to ensure your pay level and benefits package is in line with industry standards.
  • Roll out a reward statement or policy with relevant information, including details of insurance providers, pension providers, company car schemes and guidance relating to bonuses.
  • Ensure employees know when to expect compensation and benefits by listing details in the employment contract.
  • Make sure everyone is clear on contractual and non-contractual elements of pay or benefits.

Standard benefits – In addition to pay, there are some benefits that all employers must offer their employees, such as pensions and insurance. As an employer, you must cover the following key points:

  • Provide relevant pension advice and guidance.
  • Ensure all staff members know who to contact concerning pensions and insurances.
  • Provide a benefits handbook or cover benefits in the employee handbook.
  • Check that all benefits are legally compliant with HMRC regulations.
  • Make sure that any policy updates are shared with employees.
  • Review and benchmark benefits against the market to ensure compliance.

Figure out a bonus scheme – You are not required by law to offer bonuses to employees, so you should carefully consider whether this is something you wish to provide. For example, it may be something you want to apply to some teams and not others. Consider the following when deciding if and how to offer bonuses:

  • Ensure all staff are aware of the bonus criteria and agree that it is fair.
  • Be cautious of including bonuses as part of an employment agreement.
  • Provide bonus guidance to staff via a handbook or policy.
  • Share relevant bonus time frames to make sure employees are aware.
  • Make sure part-time and maternity/paternity staff are not discriminated against.
  • Engage with staff regularly regarding existing bonus structures.
  • Communicate any changes to bonus policies in a timely manner.

Performance-related pay – Instead, or in addition to bonuses, you may choose to implement performance-related pay to help encourage and spotlight those who work hard to perform for your company. Performance-related pay can also be a great way to benchmark the successes of your employees and ensure performance is assessed against tangible rewards. When offering performance-related pay, make sure to do the following:

  • Clearly define and circulate the requirements for performance-related pay to all employees.
  • Ensure the criteria is relevant, appropriate and non-discriminatory by reviewing and discussing them during staff performance reviews
  • Use a pro-rata reward system to avoid potential discrimination
  • Assess and give feedback regularly to staff on their progress and performance
  • Ensure awards take into account part-time, equal pay or parental needs

Non-financial reward – Employee benefits can also include non-financial rewards and can be just as effective for staff retention and provide development opportunities. Consider the following examples of non-financial rewards to help motivate your staff:

  • Professional membership and upskilling opportunities
  • Flexible working
  • Allow time for volunteer work
  • Reward with extra leave (such as a duvet day)
  • Provide onsite wellbeing experiences

Holiday pay – What holiday allowance your company provides can make the difference between a talented professional accepting your employment offer or going to a competitor. When planning your holiday offering, consider the following:

  • The holiday awarded meets the legal minimum requirement.
  • State whether Bank Holiday and Public Holidays are included.
  • Ensure holiday is accrued and calculated accurately for all staff.
  • Double-check figures when calculating holidays for contractors and part-time staff.
  • Remember to include holiday as part of any payment of notice or redundancy.
  • Use annual holiday periods and ensure it is taken or compensated appropriately.


One of the main reasons companies offer competitive pay and benefits are to influence employee behaviour to entice them to join and stay with an employer long term. It can also help motivate them to do their best in their role.

Traditionally, salaries were enough to attract and keep people to an organisation – this mindset has changed, and benefits, bonuses and incentive schemes are needed to help retain them. Individuals are attracted, retained and engaged by a whole range of financial and non-financial rewards – which can change over time depending on personal circumstances.

There are some circumstances when individuals may not be motivated by financial elements and instead be passionate about a company's mission. This can be particularly relevant to people just starting their career, and they will be more focused on gaining exposure and experience to help access training and development.

As an employer, you need to find out what will help attract people to your organisation, keep them, and inspire them in the present and future. When creating a reward package, it is essential to remember that it may need to change as the people develop and their circumstances change. For example, if you have a predominantly mature workforce, you might focus on health and wellbeing benefits instead of maternity, paternity and childcare.

Behavioural science has offered valuable insights into how individuals may respond to various aspects of reward. Therefore, employers should use the lessons from behavioural science when designing, implementing and communicating its reward package.

Because there are various elements to reward, it is crucial to think about the appropriate mixture of variable pay, fixed to flexible benefits, and financial and non-financial rewards for meeting the needs of both the organisation and employees.

When deciding how to reward and recognise contribution, it is essential to identify the people risks involved. For example, you may add a clause that if the company sponsors an employee to gain a new qualification, the employee must stay for two years following the course or pay a percentage of the course fee back to the company.

If you have overseas employees, you may also want to consider whether rewards should be determined centrally or allow each region or subsidiary to develop its own approach. People in different locations may have more relevant benefits to them. They will get higher satisfaction from a tailored reward package and more value from it.


Whatever size or stage a business is in, all organisations should be budgeting for a compensation and benefits package. It does not need to cost massive amounts and should be seen as a tool for keeping valued employees. When staff feel unappreciated and taken for granted, they will naturally look to move elsewhere. Showing acknowledgement for their hard work through reward will help retain your talent pool.


Why are compensation and benefits important to employees? Compensation and benefits are essential aspects in a company as it helps improve employee satisfaction in the workplace. They can directly impact how people perform and provide motivation to work. Providing employee benefits will ensure employees are aware that the company values them and wants to acknowledge all the work they do.

What is covered by employee compensation? Employee compensation is the combination of salary, wage, and benefits received in exchange for doing a specific job. It can comprise annual salary or hourly wages combined with any bonus payments, benefits, and incentives.

Is compensation the same as salary? Although compensation is expressed similarly as base salary, the definition goes beyond the paycheck. It also includes commission and any incentives or perks (such as health insurance, travel allowances and commissions) that come with the given employee's position on top of the standard salary.

What are the four major types of employee benefits? Although each country and industry may have slightly different mainstream benefits, the leading UK employee benefits include a company car, healthcare and wellbeing, employee training and childcare. What you decide to include in your workplace will depend on the benefits your staff value most.

Can benefits differ from one employee to the next? It is legal to offer different benefits to different teams in the workplace. However, if you choose to segment benefits, you will need to be very careful to ensure everyone within the group receives the perk. An example of how you may segment is to offer more holiday allowance to staff members that have been with the company for more than two years. As long as you are consistent with each group and subgroup, you will likely remain on the right side of the HR law.

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