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Compensation Letter Templates for Small Businesses

Compensation LetterCompensation Letter
min read
October 13, 2023

For 46% of employees, compensation is the biggest motivating factor to stay in their roles. But total compensation—which consists of pay, benefits, and other perks—isn’t always fully outlined for an employee, especially if your small business picks up the tab for travel expenses and other costs.

With 79% of employees wanting some form of pay transparency, how do you break down and outline employee compensation? By writing and providing a compensation letter.

Let’s look at what, exactly, a compensation letter is, how to write one, and the benefits of sending these letters to your employees.

What Is a Compensation Letter?

A compensation letter or letter of compensation is a formal letter or document that:

  • Outlines an employee’s wages/salarybenefits, and perks
  • Stipulates the reimbursement an employee will receive for any travel-related costs
  • Documents an employee’s final compensation terms, benefits, and severance after termination

This document isn’t the same as an employee’s pay stub; it’s a formal document that outlines all or some of an employee’s compensation.

As for what’s included? That depends on the type of letter you send. For example, a letter of reimbursement wouldn’t include information about the employee’s health insurance, whereas a letter of offer for a job candidate should

Compensation Letter Templates

Need to send a letter of compensation to a job candidate, current or former employee, or an employee who’s entitled to reimbursement? Use these compensation letter samples as inspiration:

How To Write a Compensation Letter

A letter of compensation needs to be comprehensive and detailed, but what should you include?

  • Date: The date you’re writing or issuing the letter.
  • Recipient’s contact details: The full name, address, phone number, and/or email address of the letter’s recipient.
  • Salutation: A greeting for the recipient (like a “hello” or “dear”).
  • Introduction: A few short sentences to introduce you, your company name, and the reason for the letter.
  • Compensation information: A list that includes the pay rate or salary, bonus and incentive pay, insurance benefits coverage—like health insurance, life insurance, disability insurance, and other benefits—paid leave, including vacation time, sick leave, holidays, bereavement pay, and other paid time off, workers’ comp, retirement benefits, perks, like relocation assistance or childcare assistance, and reimbursement for travel expenses.
  • When compensation becomes available: Eligibility information for when the employee will begin to receive benefits; for example, the first day they begin working at your company, the final date they will receive severance pay, or how and when reimbursement is paid out.
  • Compensation terms: Specific conditions or situations that an employee needs to meet before compensation is paid out, for example, submitting travel documents or mileage sheets.
  • Final salutations: A closing statement and goodbye, like “sincerely,” “thank you for your interest,” or “contact me if you have any questions.”
  • Your contact details: Your signature, full name, address, and phone number and/or email address

What Is the Compensation Letter of Offer?

A compensation letter of offer, or offer letter, supplements a job candidate’s employment contract by outlining the terms of compensation. This can help the candidate decide whether to take the role or continue looking for employment elsewhere and should include details about the total compensation you’re willing to provide.

Why? Most employees won’t accept a job offer if they don’t know what the compensation package is. 

What Is a Total Compensation Letter for Employees?

A total compensation letter for employees is when you let team members know their total compensation beyond what they receive each pay period. This can make employees aware of the benefits and perks available to them, helping them feel appreciated and well-compensated—and giving them more reason to stay at your company.

You might also send one of these letters to let employees know how much of an allowance is available when traveling on behalf of the company—for example, to book a ticket, pay for a room, and buy food—or how much you’re reimbursing to pay for travel expenses. (Travel reimbursements and allowances can be included as part of a compensation letter or documented separately in a travel allowance letter or travel letter.)

What Is a Compensation Document?

A compensation document is another term for a compensation letter. In some cases, the term can apply to a type of letter you might send out after changing an employee’s compensation (for example, after a raise or promotion).

Why Write a Compensation Letter?

The benefits of writing a compensation document include:

Highlight How Much You Value an Employee

Employee compensation is made up of more than just the employee’s hourly wages or yearly salary. To remain competitive and hire the best talent, you typically need to offer an attractive compensation package that supports your employees’ health, well-being, and lifestyle—which means the cost of an employee adds up.

Writing a letter of compensation lets you detail the value of every perk and benefit your company offers, line by line. This gives an employee a full and comprehensive understanding of exactly how large their compensation is—and clues them into perks they might not know they’re entitled to!

Improve Employee Retention and Engagement

Compensation plays a major role in retaining employees and preventing turnover. In fact, nearly 63% of workers claim their compensation package makes them at least somewhat more likely to remain at their current employer.

And one of the ways of making sure employees know the full extent of their compensation package? With a letter of compensation. By outlining an employee’s total compensation—including indirect compensation they might not often think about—you can paint a fuller picture of an employee’s compensation package to boost retention and keep them engaged in your business.

Help Job Candidates Make Employment Decisions

To attract top talent, your compensation package needs to be competitive. But how do you help candidates compare your offer to others they might have received? With a compensation document.

A letter of compensation highlights what a candidate would earn and each benefit and perk they’d be entitled to. This means that even if you pay less base pay than a competitor, your compensation package might look more competitive if you offer better indirect compensation—none of which would be accurately represented by a candidate’s potential take-home pay.

FAQ: How Do I Write a Letter of Complaint About Compensation?

If you are an employee and you’re confused about your compensation or dissatisfied with what you’ve been paid (for example, if your final paycheck didn’t include unused PTO), you can write a compensation claim or request letter. This type of letter is used to claim unpaid compensation and should include:

  • Your name, address, and contact information
  • The date
  • The recipient’s name, address, and contact information (typically a manager, human resources representative, or someone in the payroll department)
  • A greeting or salutation
  • Your complaint (including specifics about unpaid/missing compensation)
  • Proof that the employee is entitled to the unpaid/missing compensation
  • A final salutation
  • A signature

Stay Competitive and Retain Employees

It’s important to demonstrate that your employees are compensated well and fairly, whether you’re trying to attract new hires, retain your existing employees, or make a final payment to an employee who’s moving on. 

A compensation document or letter reveals an employee’s total compensation—beyond what they earn for each hour worked—so they can understand (and use!) all of the benefits they’re eligible for while feeling valued and appreciated.

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