Definition
The term total compensation is used to describe all forms of monetary payments to an employee. For existing employees, this can include both base pay as well as incentives. For newly-hired employees, the total compensation in the year hired may also include a sign-on bonus.
Calculation
Total Compensation = Base Salary + Incentive Compensation
Explanation
Total compensation can also be used to describe the total value an organization offers employees. For example, this might include job perks that have a monetary value, as well as the benefits provided by the employer. Vacation time, holiday pay, health insurance, dental plans, life insurance, and tuition reimbursement plans are all benefits that can be considered part of an employee's total compensation package.
A strict definition of total compensation would include two components:
Base Salary: the minimum annual money received, or the standard salary that an employee receives for doing a specific job.
Incentive Compensation: the portion of an employee's salary that is related to performance, and not a guaranteed payment. Incentive compensation is additional money, or other rewards of value such as stock options, that are supplementary to base salary.
Example
Ann recently accepted a job offer from Company A as an environmental health and safety officer. The compensation plan offered to Ann included a base salary of $70,000 plus an incentive compensation award of 10%. The total compensation package offered to Ann would be:
= $70,000 + $70,000 x 10% = $70,000 + $7,000, or $77,000
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