Employee Compensation: Are You Spending Too Much or Too Little on Benefits?

09/05/2024

Posted by: Altura Benefits in Insurance Money

employee compensation
To attract top workers, you need to provide attractive employee compensation – but how much of that compensation should take the form of benefits? Although offering only salary or wages may seem like the easiest strategy, it may not meet the needs or expectations of workers. Benefits may also be a more cost-effective form of compensation. Finding the right balance between benefits and earnings is the key to a successful employee recruitment and engagement strategy.

Benchmarking Your Compensation

Before deciding how much to spend on benefits versus salaries and wages, it’s helpful to look at what other employers – i.e., your competition for talent – are doing.

According to the U.S. Bureau of Labor Statistics (BLS), employer costs for employee compensation for civilian workers average $46.14 per hour, as of March 2024. Of this, $31.72 takes the form of wages or salaries and $14.41 takes the form of benefits. This means wages and salaries account for slightly more than two-thirds of total compensation with benefits accounting for just under one-third.

The breakdown for private industry workers is similar. Total hourly compensation averages $43.78, with $30.76 of this taking the form of wages or salaries and $13.02 taking the form of benefits. This means benefits account for 29.7% of total compensation.

It’s important to note that some benefits are a legal requirement. Legally-required benefits include Social Security and Medicare taxes, unemployment insurance, and workers’ compensation insurance. The total cost comes to $3.21 per hour on average, or 7.3% of compensation for private industry workers. This leaves $9.81 per hour in optional benefits, or about 22.4% of total compensation.

It is possible to break down the amount private industry employers spend on benefits still further:

  • $3.31 – Paid leave (vacation, holiday, sick, and personal)
  • $1.77 – Supplemental pay (overtime and premium, shift differentials, and nonproduction bonuses)
  • $3.20 – Insurance (life, health, short-term disability, and long-term disability)
  • $1.52 – Retirement and savings (defined benefit and defined contribution plans)

Unsurprisingly, health insurance accounts for the lion’s share of insurance costs. Employers spend an average of $3.00 per hour per worker on health insurance. Assuming an employee works 40 hours a week, 52 weeks a year, this comes to $6,240 a year.

Variations by Position and Status

The BLS data shows what the average employer pays, but there is considerable variation based on industry and type of employees.

For example, part-time workers often don’t receive optional benefits like retirement plans and health insurance. As a result, wages will likely account for a larger proportion of total compensation for most part-time employees.

On the other hand, highly-compensated workers are more likely to receive benefits, meaning benefits may make up a larger portion of their total compensation. For example, the BLS says 35% of civilian workers have access to long-term disability insurance. However, among the lowest-paid quarter of workers, only 9% of workers have access to this insurance, whereas among the highest-paid quarter of workers, the figure is 59%.

Leveraging Financial Benefits

It often makes financial sense to offer benefits as part of total compensation.

For one thing, many benefits are tax deductible. (To use these tax deductions, employers need to make sure they’re following IRS rules.) By offering health insurance and other benefits, employers lower their employment costs while increasing total compensation. This creates a win-win scenario for employers and their workers.

Employers also have access to group rates that make benefits more affordable. For example, an employer might decide to offer group life insurance as a voluntary benefit. The employee pays the premium using payroll deductions. By offering this voluntary benefit, the employer makes the total compensation package more appealing, while only seeing a slight increase in administrative costs. This is also a good deal for the employees who have access to lower group rates.

Meeting the Needs of the Workforce

Many workers are struggling. In a study from Guardian, 36% of workers said their mental health is good or excellent, 37% said their physical health is good or excellent, and just 32% said their financial health is good or excellent. In addition, nearly half of workers in the study said they would experience financial hardship if they lost their workplace benefits.

Workplace benefits typically help workers solve common problems. Health insurance helps them maintain their physical and mental health, whereas life insurance, disability insurance, and retirement benefits provide financial stability. All these benefits relieve the financial stress that often accompanies not knowing how to pay for an emergency.

Employees could pay for some of these benefits on their own, but the cost might be much higher. Individual disability insurance, for example, tends to cost more than group disability coverage. Some workers may decide it’s simply too expensive, no matter how much they would like to have coverage. By providing employee benefits, employers help workers secure the coverage they need.

Of course, workers also need cash to pay their rent or mortgage and to spend on however they choose. However, offering generous benefits promotes worker wellbeing in a way cash cannot.

How Much Should You Allocate to Benefits?

When crafting your employee benefits strategy, use the following to determine how much of your total compensation to allocate to benefits:

  • What do your workers and job candidates expect? In addition to the BLS data, consider what compensation packages are typical of similar employers in your region. If your competitors are offering generous benefits, workers and job candidates may expect the same. If competitors are not offering much in the way of benefits, you may be able to stand out by doing so.
  • Would additional benefits help your workforce? Consider the problems your workers face. For example, if many of them are avoiding necessary healthcare due to the costs – a problem that may lead to worse health outcomes and missed work – offering additional health benefits may be worthwhile. If workers are dealing with stress and mental health issues, additional mental health benefits may help.
  • Would additional benefits help your compensation allowance go further? This may require a bit of math. For example, if you’re not offering any optional benefits, figure out how much money you would save through tax incentives if you cut salary a little and began offering health insurance. (If you’re worried that workers would resent this, don’t be. In a poll from Randstad US, 61% of workers said they would accept a lower salary if a company offered a great benefits package, 42% said they’re thinking about quitting because their benefits package is inadequate, and 66% said a strong benefits and perks package is the main factor for them when considering job offers.)

Determining how much of your total compensation should take the form of benefits is a complex challenge. Fortunately, Altura Benefits can help you make the right decision for your company. We’ll work with you to design an employee benefits package that helps you attract and retain top talent. Learn more.