What it means
When a company advertises a salary, it is describing only the most visible slice of what it spends on that person. Around the salary sit a range of extras: contributions to a retirement plan, medical and dental cover, paid holidays, bonus schemes, training budgets, company cars, meals and childcare support.
Together these are often grouped under the label other benefits. For the employer, the point is cost.
Benefits can add anywhere from a small percentage to well over a quarter on top of salary, depending on the country and the industry. A finance team that budgets only for salaries will find a gap between planned and actual people costs.
For the employee, the point is value. Two jobs with the same salary can be worth very different amounts if one includes generous health cover and retirement contributions and the other does not.
Benefits are also often tax-efficient, because some are taxed lightly or not at all, depending on the local rules. In the accounts, benefits are usually part of employee costs, but some need special treatment.
Promises to pay benefits in the future, such as retiree health cover, create a liability that must be estimated and recorded as the employee earns it, not when the cash is paid. This group is sometimes called other post-employment benefits, and it can be large for older companies.
Managers who do not control the budget still influence benefit costs through hiring and policy decisions. Offering a new allowance to one team may create expectations elsewhere, and benefits that are easy to give are hard to withdraw.
Good practice is to cost each benefit per employee and review the total package once a year. Benefits also shape recruitment and retention.
Candidates in a tight labour market often ask about flexibility, learning budgets and retirement matching before they ask about the salary. A company that cannot raise pay may still compete by improving the parts of the package that cost less than they are worth to staff.
In practice
Real-world examples.
Example
A start-up founder prices a new engineering hire at $120,000 and forgets to include health cover and a retirement contribution. When the accountant adds $18,000 of other benefits, the real cost rises to $138,000. The founder revises the hiring budget before making an offer.
Example
A retail chain compares a job offer from a rival that pays $2,000 more in salary. After counting paid leave, a bonus plan and health insurance, the current package turns out to be worth $6,500 more. The employee decides to stay.
Example
A manufacturing firm in an older industry reviews its liabilities and finds that promised retiree health cover is a significant obligation. The CFO asks an actuary to estimate the present value of those promises and records the result in the accounts. The board then decides whether to cap the benefit for new joiners.
Formula
Calculation
Total employment cost = base salary + other benefits + employer payroll costs
Benefits load = other benefits / base salary
An employee earns a base salary of $80,000. The employer pays $6,000 towards health cover, $4,000 into a retirement plan and $2,000 for training, so other benefits are 6,000 + 4,000 + 2,000 = $12,000. If employer payroll costs add $6,400, total employment cost is 80,000 + 12,000 + 6,400 = $98,400. The benefits load is 12,000 / 80,000 = 15%.Case study
Seen in the real world.
Larkfield Logistics is a fictional delivery company, and this account is illustrative. Its managing director approved a plan to hire 20 drivers at $42,000 each, a salary budget of $840,000.
The finance manager pointed out that the budget left out health cover at $5,000 per driver and a uniform and training allowance of $1,500 per driver. These other benefits added 20 x (5,000 + 1,500) = $130,000, which is before the cost of covering shifts during paid leave.
The managing director revised the plan to 17 drivers, since 17 x (42,000 + 6,500) = $824,500 fits within the original $840,000 budget. The illustrative lesson is that a salary figure alone understates the cost of a hire, and that comparing the full package is the only fair way to decide.
Watch out
Common mistakes.
- Budgeting people costs from salary alone, which leaves a gap when benefits and employer taxes are added.
- Ignoring the long-term cost of promised future benefits, which can be a large and growing liability.
- Assuming that employees value every benefit equally, when a benefit that costs the employer a lot may mean little to staff.
Questions
People also ask.
Are other benefits taxable?
It depends on the benefit and the tax rules where you operate, as some are taxed lightly or not at all and others are treated like extra pay.
How do I compare two job offers?
Add the cash value of each benefit to the salary, then adjust for tax and for how much you would use each benefit.
Who decides which benefits to offer?
Usually human resources proposes a package and finance sets the budget, with senior leaders approving the policy.
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