Total compensation explained: A guide for HR & employees

August 12, 2025

Sara Maginn Pacella

Total compensation is trending for human resources (HR) professionals and employees alike. Why? Because transparency around total compensation allows prospective and current employees to evaluate whether a company’s values and offerings align with their goals. This then helps them make informed decisions about whether to sign an employment contract or begin job hunting. It’s also a good opportunity for employers to showcase what they have to offer.

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What is total compensation?

Total compensation is the sum of every form of pay and benefits that an employee receives. It includes base salary, overtime pay, bonuses, commissions, paid vacation days, company cars, cellphones, workplace benefits, profit sharing, gym memberships, employee assistance programs (EAPs), tuition assistance, on-site child care and other non-cash compensation.

Some find it helpful to divide total compensation into two categories.

Direct compensation: Employees’ wages and benefits.

Indirect compensation: The money that an employee receives from their company because they are employed with an organization. An example would be a pension provided by the company.

Why is total compensation important to a human capital management (HCM) professional?

Total compensation allows employers to customize their pay and benefits packages to meet the needs of their employees, instead of offering “one-size-fits-most” packages. It focuses on employee satisfaction and increases employee morale, productivity and retention. It can also attract a higher calibre of talent.

A total compensation plan may reduce costs because it can be customized to provide benefits that employees will use, instead of paying for many options that go untouched. It has also been shown to reduce turnover and, in turn, reduce hiring and recruitment costs.

Canada Life reports that the average annual premium for benefits is roughly 15 per cent for small businesses and can go up as high as 30 per cent for large companies. But, many benefits providers offer small businesses options as low as one to five per cent of total payroll.

” A total compensation plan may reduce costs because it can be customized to provide benefits that employees will use, instead of paying for many options that go untouched. It has also been shown to reduce turnover and, in turn, reduce hiring and recruitment costs. ”

Why is understanding your total compensation important as an employee?

For employees, understanding their total compensation is key to determining whether they’re being paid at market value and assessing the bigger picture of their employment beyond salary. It can help them decide whether to interview for a new position and accept an offer or stay where they are. For example, an organization may pay less than an industry peer but offer an excellent pension, flexible/hybrid work options and on-site daycare. For some, these benefits and perks far outweigh a small salary bump provided by another organization that doesn’t offer the same benefits and perks.

What is total compensation vs. total rewards?

Total compensation and total rewards are overlapping concepts. Total rewards speaks to the entire employee experience, including aspects that may not be easy to calculate in terms of money (i.e., leaving the office early on Fridays in the summer or bringing your dog to the office). In contrast, total compensation is more about the financial side of compensation and benefits. It’s up to companies to decide which concept they want to embrace in developing their compensation program and providing a narrative to their employees and job applicants.

Canadian legislation for job postings and total compensation

In recent years, pay transparency acts have been rolling out across Canada to provide job applicants with transparent compensation disclosure on all job postings. Moving beyond the letter of the law, organizations that are upfront about total compensation can ensure that applicants are aware of everything an organization offers beyond salary.

Bianca Burke, senior director of expert operations at Oyster, told Business.com: “If you just talk to candidates and employees about salary, you are underplaying the financial offering you are making, often very substantially.” Burke added, “You are making what you are offering appear less attractive than it actually is if you also offer components such as bonuses and equity. By ensuring you make employees aware of the full financial potential of working with you, rather than the guaranteed monthly salary only, you are more likely to close candidates and retain your existing talent.”

How to calculate total compensation?

There is no set formula for total compensation because factors can vary from year to year. To calculate total compensation, add up all direct and indirect compensation. (Note: placing a monetary value on something like being able to work from home can be challenging.)

HR and payroll software can be used to run various compensation, bonus and benefits reports to help calculate total compensation. Compensation analysis can enable HCM professionals to benchmark compensation compared to industry standards and make informed compensation decisions to attract and retain staff.

A total opportunity to promote your company culture

Accumulating total compensation data allows you to be transparent with both candidates and employees. It has become a vehicle to promote how much you care about your staff and it can be a part of your regular annual review of benefits to ensure employee needs are met.

Annual total compensation statements and a philosophy centred on transparent practices will help model pay equity and improve talent retention. Taking the time to communicate the value someone gets working for your company is priceless for talent recruitment and retention.

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