What does annual compensation mean? (and 9 more up-to-date FAQ on employee compensation in the US)

The most frequently asked questions about annual compensation and salary in the US

When it comes to annual salary and compensation, there can be a bit of confusion. What do these words encompass, how are they defined, and what’s legally required from an employer’s perspective?

Those are just some of the most frequently asked questions when it comes to annual compensation, which is why we’re tackling them—along with many other important questions—below.

1. What’s the difference between annual salary and annual compensation?

Quite simply, annual salary generally refers to the annual amount of money employees are paid for their work, and what other times might be called base pay. It doesn’t usually include variable pay or non-monetary types of compensation.

Annual compensation, on the other hand, is the base salary added to the value of variable pay like bonuses and commissions, as well as non-monetary types of compensation, which might also be referred to as benefits or perks. Those could include health insurance, a dental plan, a 401(k) (or other retirement plans), equity, paid vacation time, tuition assistance, childcare, discounted parking, gym memberships, and more.

2. Are full-time, salaried employees paid for working overtime?

According to the Fair Labor Standards Act, salaried employees who make at least minimum wage are classified as exempt. By definition, exempt employees are not entitled to overtime pay. That being said, it’s still beneficial to both the employee and employer to implement time tracking at work, regardless of whether employees are entitled to overtime payment or not. Effective time tracking allows for smarter decisions, better budgeting, and more accurate projections.

3. Are all U.S. companies required to provide qualified health insurance to their employees?

There is no law directly requiring U.S. employers to provide coverage to their employees, though most companies do so for two reasons.

To avoid getting penalized by the IRS, employers with more than 50 full-time employees are required to provide health insurance to 95% of their employees according to the Affordable Care Act (ACA). In addition to meeting the minimum requirements for coverage and affordability, the health care plan must extend to the employees’ dependents under the age of 26.

Furthermore, offering attractive health care plans (as well as dental and vision), is a great bargaining chip when it comes to attracting and retaining top employees. According to a study from the U.S. Bureau of Labor Statistics, 87% of full-time employees were offered health care insurance in the U.S. in 2019, a number that highlights the prevalence of this benefit offered through work.

4. I’m a small business owner with fewer than 50 full-time employees. Should I provide qualified health insurance to employees?

Companies with fewer than 50 full-time employees that don’t offer health insurance won’t be penalized by the IRS, and it is not required. Still, providing health care or not could be a deciding factor for employees wanting to join or stay on the team. Also keep in mind that small companies can apply for a small business tax credit if they do offer qualified health insurance to employees.

5. How much does it cost to provide health insurance to employees?

There’s not a one-size-fits-all equation to answer this question as the cost will depend on various factors. When figuring out how much it will cost to provide health insurance to employees, employers should consider the following: the insurance company itself, location, the employees’ demographics, and the type of health plan to offer.

Once those factors have been decided upon, the business can purchase a group health insurance plan for the employees, or set up a contribution amount toward employees’ health insurance.

According to an annual report published by the Kaiser Family Foundation, the average annual premiums for employer-sponsored health insurance in 2018 were $6,896 for single coverage and $19,616 for family coverage, of which $1,186 and $5,547 are paid by the covered employees. The amount paid my employees is typically just deducted from their monthly paycheck.

6. Are annual salary reviews mandatory in the U.S.?

No U.S. law requires an annual salary or performance review for employees, but there’s a reason most companies put such reviews in place. While employees can’t sue an employer for not giving them an annual review, they can sue for unlawful termination and/or wages, which makes a strong case for having a documented history of employees’ work history and performance.

Apart from that, annual salary reviews and annual compensation reviews are crucial to a company’s success. Not only do they help centralize and organize company salary patterns, they also provide a framework for employee success and engagement.

So while it’s not mandatory by law, it’s no mystery why most companies do have annual salary, compensation, and performance reviews in place.

7. How do you calculate employees’ salaries?

As an employer, it’s extremely important to consider this question when calculating employees’ salaries: Are my employees paid fairly? And while there is no set-in-stone algorithm to find the right number, there are some key things to keep in mind, which are as follows: comparison to peers, comparison to market, and other factors like cost of living and performance. For a more in-depth look, check out our complete guide to successfully performing an annual compensation review in Google Sheets.

8. How can I calculate the actual cost of an employee?

It’s important to remember that the annual salary of an employee is not the actual cost of a salaried employee. Depending on the formula you use to calculate this number, the actual cost of an employee is actually between 1.25-1.4 times the base salary, or 18%-26% more than the base salary. This post on the actual cost of employees walks you through both equations.

9. Are employers required to pay severance?

In short, no. According to the FLSA, employers are only required to pay terminated employees’ wages through their last day of work, as well as for any time the employee had built up (i.e., unused vacation days).

That being said, many companies do offer severance pay and/or packages. It’s important to note that severance pay and packages are included in an employee’s contract and decided upon along with the base pay and any other forms of compensation. Generally speaking, severance pay could range from a week or two worth of pay for each year the employee has worked up to an entire month’s pay for each year worked.

While there is no law requiring employers to pay severance, employers are required to offer COBRA (Consolidated Omnibus Budget Reconciliation Act), which gives recently terminated employees the right to prolong their health benefits provided by the company. Note that in this scenario, employers can require employees to pay the premium for their health coverage.

What the experts are saying

Annual compensation, and the reviews that come along with them, can be complicated. We thought we’d let a few experts weigh in with their thoughts on them.

We need to be justifying compensation more on what people do and accomplish and how they work together (or influence the success of other people) versus just compensating the people who demand the most, and who are the biggest bullies. I think if you can do surveys and assessments of people, and collect people analytics data that really shows the contribution that people make, as well has have other people assess each other on how much value they add to the company. There aren’t a lot of companies that do that right now, but I do think that that’s coming.

Mitch Zenger (People Analytics Experts)

Check job advertisements from your competitors or similar type of jobs in your area. Why? Because these are the jobs that your employees are flocking to if you do not pay them what they desire. Salary surveys are excellent tools, however they are outdated the minute they are printed, especially in today’s tight labor market. Yes, money talks but so does your benefit package and above all–your culture. You can pay someone the highest pay they have ever received, but if your culture is stifling, they will either ‘quit and leave’ or ‘quit and stay.’

Wendy Sellers (The HR Lady)

As the job market changes and an employee’s experience level grows, companies need to consider increasing and monitoring comp levels to be in line with the market, and to show your employees that you value their contribution. Your compensation increases should be frequent—1-2 times per year—and in line with the market rates. In this competitive market, an experienced employee who is even an average performer is worthy of an increase to show your appreciation for their continued commitment and effort.

Jessica Miller-Merrell (Founder of Workology)

We hope this post has been both helpful and insightful, and we’d love to hear from you in the comments below. What’s been your biggest struggle with annual compensation?

Photo by theyshane on Unsplash

PR and outreach manager at Beebole. A digital marketer who loves monitoring management and leadership trends to create more valuable B2B content for managers. Loves connecting with writers, journalists, and professionals across all industries to spread the word about the value of time tracking for companies. Katie is particularly interested in helping the world become a more productive place.


What a great read, especially from a European point of view. 🙂

In May 2019, the European Union’s highest court ruled (https://www.dw.com/en/ecj-eu-employers-must-track-working-time-in-detail/a-48734055) that all employers must track their employees’ working hours. I think that this will greatly benefit the employees, but still opens a bunch of new questions about employee monitoring and so on.

Do you think that something similar is likely to happen in the US?

Thanks so much for reading, Mitja, and for your thoughts. In the US, it’s actually best practice for employers to set up a time tracking or time records system for their (non-exempt) employees. In fact, the Department of Labor just issued a reminder about exactly this (https://www.lawandtheworkplace.com/2020/08/dol-guidance-reminds-employers-of-obligations-to-track-and-pay-for-remote-work/). Given our current situation with more people working from home than ever before, the DOL insists on the importance of tracking employee hours so employees are accurately compensated.

Still, like you said, this is an opportunity for new discussions on how employees can (and should) handle remote employees and teams, and what that means in terms of employee monitoring and even workplace culture.

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