KEY FINDINGS
· While most employees—and possibly some employers—think of employee compensation primarily in terms of “wages” or “salary,” many employees’ total compensation packages add up to a significantly larger figure.
· Many employees don’t understand the actual costs of their total compensation packages.
· Many employers do not adequately communicate to employees the cost of benefits they provide.
· Different employees place different values on specific benefits.
· Offering choice over the mix of compensation has some costs, but can benefit both firms and employees

Center for Advanced Human Resource Studies

English

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Cornell University ILR School 
DigitalCommons@ILR 
CAHRS ResearchLink Center for Advanced Human Resource Studies (CAHRS) 
6-2010 
Employee Compensation: Know the true costs of employment 
and optimize them to benefit employers, employees 
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Employee Compensation: Know the true costs of employment and optimize them 
to benefit employers, employees 
Abstract 
KEY FINDINGS 
· While most employees—and possibly some employers—think of employee compensation primarily in 
terms of “wages” or “salary,” many employees’ total compensation packages add up to a significantly 
larger figure. 
· Many employees don’t understand the actual costs of their total compensation packages. 
· Many employers do not adequately communicate to employees the cost of benefits they provide. 
· Different employees place different values on specific benefits. 
· Offering choice over the mix of compensation has some costs, but can benefit both firms and 
employees. 
Keywords 
Employee Engagement, HR Strategy, compensation, benefits, employer cost of compensation, value of 
employee benefits, retention 
Disciplines 
Human Resources Management 
Comments 
Recommended Citation 
Center for Advanced Human Resource Studies. (2010, June). Employee Compensation: Know the true 
costs of employment and optimize them to benefit employers, employees (CAHRS Research Link No. 8). 
Ithaca, NY: Cornell University, ILR School. 
This article is available at DigitalCommons@ILR: https://digitalcommons.ilr.cornell.edu/cahrs_researchlink/10 
Employee Compensation: Know the true costs 
of employment and optimize them to benefit 
employers, employees
THE TOPIC: WHEN IT COMES 
TO EMPLOYEE COMPENSATION, 
WHAT THEY DON’T KNOW 
COULD HURT YOU
Employers want to present themselves in the best 
light to current and prospective employees to 
gain a competitive edge. However, one commonly 
overlooked point of differentiation is the total 
compensation package that an employer offers—
not just take-home salary, but the benefits and 
other job attributes that can constitute a significant 
portion of  employees’ overall compensation.
In the past, many firms offered comparable benefit 
packages, and companies generally did not need 
to specifically point out the value of their benefit 
programs. Indeed, employees often took generous 
benefit packages as a “given.” However, employers 
should ensure that prospects and current employees 
are fully aware of the total compensation they are 
offered. 
In addition, employers may be well served to 
consider redesigning their benefit packages to make sure they are receiving the most for their money. Specific employee populations 
may value certain benefits more than others, based on such characteristics as their marital and family status, age, gender, or investment 
knowledge, for example. Thus, employers may gain a significant competitive advantage by offering choice to individuals regarding the 
benefits they receive. In a paper (and forthcoming book)1, Cornell ILR School professor Kevin Hallock explores the real cost of employment 
and how this may differ from how employees value their compensation packages.
KEY FINDINGS
◊	While most employees—and possibly some 
employers—think of employee compensation primarily 
in terms of “wages” or “salary,” many employees’ total 
compensation packages add up to a significantly larger 
figure.
◊	Many employees don’t understand the actual costs of 
their total compensation packages.
◊	Many employers do not adequately communicate to 
employees the cost of benefits they provide.
◊	Different employees place different values on specific 
benefits.
◊	Offering choice over the mix of compensation has 
some costs, but can benefit both firms and employees.
No. 8, June 2010
The Center for Advanced Human Resource Studies (CAHRS) is an 
international center serving corporate human resources leaders and 
their companies by providing critical tools for building and leading high-
performing HR organizations. CAHRS’ mission is to bring together 
partners and the ILR School’s world-renowned HR Studies faculty to 
investigate, translate and apply the latest HR research into practice 
excellence.
CENTER FOR ADVANCED 
HUMAN RESOURCE STUDIES
Cornell University
ILR School
193 Ives Hall
Ithaca, NY 14853
Tel: 607-255-9358
www.ilr.cornell.edu/cahrs
cahrs@cornell.edu
esearchLink
2  CORNELL CENTER FOR ADVANCED HR STUDIES | ResearchLink
Compensation means much more than wages
The U.S. Bureau of Labor Statistics’ ECEC survey measures the 
average cost to employers for wages and salaries and benefits, 
per employee hour worked. Of the $29.40 average hourly cost 
per employee in September 2009, $8.90—slightly more than 30 
percent of the total—went toward various benefits. Put another 
way, employers’ average expenditures for benefits were higher 
than the hourly wages earned by more than 10 percent of the U.S. 
population (U.S. minimum wage as of July 24, 2009, was $7.25 per 
hour).
Of the $8.90 (30 percent) figure, average expenditures for benefits 
break down as follows:
Employers must also pay for a required set of benefits, which 
accounts for 7.8% of the average total employee benefit costs per 
employee hour:
Gauging appropriate benefits for different needs
Hallock suggests that the actual costs of insurance, retirement 
benefits, stock options, and time off may not reflect the value that 
employees place on these forms of compensation. And workers 
in different personal situations will value benefits differently. For 
instance, a childcare benefit means little to a childless employee, 
and generous healthcare coverage for dependents is not particularly 
helpful to an unmarried employee. However, both of those benefits 
could be extremely valuable to someone with a family. In similar 
fashion, retirement benefits may have different value to a young 
worker than to an older employee.
Hallock suggests employers can optimize the salary/benefits 
formula by thinking carefully about how much benefits are worth 
to specific workers, versus how much they actually cost. He cites 
the real example of a worker who did not need her employer-
sponsored health insurance because her spouse held a secure 
government job providing generous dependent coverage. The 
worker asked her employer if she could drop the health insurance, 
which cost the employer $10,000 annually, in exchange for $5,000 in 
THE STUDY QUESTIONS
Among the questions the research explored are:
◊	 Are employees aware of the full costs of their compensation—especially benefits?
◊	 What is the difference between the costs of compensation to employers and its value to employees?
◊	 Does the actual cost of benefits for employers accurately reflect the value employees place on those benefits?
◊	 Do employers understand the values that specific employees place on different forms of compensation? 
SOME FINDINGS
Take-home pay is only a fraction of the total cost of employee compensation. In fact, while employers spend on average $29.40 per hour for 
each employee (Employer Costs for Employee Compensation (ECEC), September 2009)2, only $20.50 of that is in actual wages and salaries. 
The actual costs of benefits may not accurately reflect their value to the employee. Employers would be well advised to think carefully 
about how to maximize benefits for specific employee populations and perhaps even specific employees. 
Even employers are not always fully cognizant of the advantages they can realize by altering the mix of wages and benefits for different 
employee populations. 
3  CORNELL CENTER FOR ADVANCED HR STUDIES | ResearchLink
additional salary. While this change would have benefited both employer and 
employee by $5,000 annually, the employer declined the worker’s offer. 
Hallock mentions that if employees are simply asked how they value specific 
benefits, they may not be able to give meaningful answers. Indeed, people 
are rarely able to predict their own responses to hypothetical situations. 
He suggests, rather, that changing compensation systems and observing 
employees’ subsequent behavior provides concrete results for better decision 
making and company HR decisions.
For example, in one study, a company wanted to determine how specific 
employees valued stock options, possibly to gauge how much cash would 
be needed to replace the options if they were discontinued (Hallock & Olson, 
2010)4. The estimates that the researchers formulated differed widely from 
those that some standard economic models would have predicted.
In a similar study, a firm told its employees that they could take either fewer 
stock options or less at-risk bonus in exchange for higher guaranteed salaries 
(Hallock & Olson, 2009)3. The researchers found that men preferred the more 
risky types of compensation (such as stock options and at-risk bonus) than did 
their female counterparts. 
THE TAKEAWAY
How can the findings from this paper help HR practitioners think more 
critically about their employee benefit costs and options?
◊	 There is a huge disparity between the actual cost of an employee to an 
employer, and the take-home pay that the employee receives.
◊	 Firms should consider more carefully communicating to employees 
their total compensation—not just their wages and salaries.
◊	 When firms provide certain sophisticated forms of compensation, such 
as stock options, they should consider educating employees about the 
compensation.
◊	 In the end, it is always good for firms to reconsider compensation 
strategy and communication. If employees don’t understand pay, the 
pay isn’t doing everything it could. 
THE ECEC SURVEY
Employers Costs of Employee Compensation (ECEC). Bureau of 
Labor Statistics, United States Department of Labor. September 2009. 
http://www.bls.gov/news.release/archives/ecec_12092009.htm
The ECEC survey covered roughly 62,700 occupations from a sample of 13,200 
establishments in private industry and roughly 11,700 occupations from a 
sample of about 1,900 establishments in local and state governments. These 
data were obtained from employers, not employees. For more information 
about this survey, visit: http://www.bls.gov/news.release/ecec.tn.htm.
THE RESEARCHER
• Kevin F. Hallock, Director, Institute for Compen-
sation Studies (ICS); Professor and Chair of Labor 
Economics and Professor of Human Resource 
Studies; Research Director, Center for Advanced 
Human Resource Studies (CAHRS), ILR School, 
Cornell University
REFERENCES
1. Hallock, K. F. (2010). Pay. Unpublished manuscript.
2. Employers Costs of Employee Compensation 
(ECEC). Bureau of Labor Statistics, United 
States Department of Labor. September 2009. 
h t t p : / / w w w. b l s . g o v / n e w s . r e l e a s e / a r c h i ve s /
ecec_12092009.htm
3. Hallock, K. F. and Olson, C. A. (2009). Employees’ 
Choice of Method of Pay, working paper, Cornell 
University and University of Illinois
4. Hallock, K. F., and Olson, C. A. (2010). New Data 
for Answering Old Questions About Employee Stock 
Options. In Abraham, K. G., Spletzer, J. R., and Harper, 
M. (eds.), Labor and the New Economy. National 
Bureau of Economic Research and University of 
Chicago Press.
For an in-depth discussion of this 
topic, see:
Hallock, Kevin F. (2010). 
Wages and Salaries Versus 
Total Compensation: Is there a 
Difference between Employee 
Value of Compensation and 
the Cost to Companies? In 
Pay, Chapter 4. Unpublished 
manuscript. 
◊	Questions about this paper 
should be directed to Kevin 
Hallock at hallock@cornell.edu.


Employee Compensation: Know the true costs of employment and optimize them to benefit employers, employees

KEY FINDINGS · While most employees—and possibly some employers—think of employee compensation primarily in terms of “wages” or “salary,” many employees’ total compensation packages add up to a significantly larger figure. · Many employees don’t understand the actual costs of their total compensation packages. · Many employers do not adequately communicate to employees the cost of benefits they provide. · Different employees place different values on specific benefits. · Offering choice over the mix of compensation has some costs, but can benefit both firms and employees.No8_10ResearchLink_HallockCompValue__1_.pdf: 14643 downloads, before Oct. 1, 2020

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