Compensation is often thought of in strictly monetary terms; however, many other valuable forms of compensation exist. In terms of compensation offered to employees, financial compensation in the form of salaries and wages is no doubt crucial, but it makes up only one part of what’s known as an employee compensation package.
In this guide, we’ll walk you through everything you need to know about employee compensation, including what it is, the different types of employee compensation, what benefits are included in a compensation package, and more. Let’s get started.
What is Employee Compensation?
Employee compensation refers to the combination of salary and wages, benefits, bonuses, and any additional perks employees receive for performing their job. To better understand everything employee compensation encompasses, let’s break down each of these components individually.
Salary and Wages: The amount of money employees receive for their work, which is processed through payroll. This might be paid as an hourly wage or an annual salary and includes any commission employees receive. Salary and wages are paid to employees on regular pay schedules.
Benefits: Any employer-provided benefits that employees receive. This typically includes any insurance benefits (health, dental, vision, life, etc.), retirement plans, stock options, profit-sharing plans, and various types of leave. These benefits may be statutory (required by law) or supplementary (at the employer’s discretion).
Bonuses: Bonuses might be paid to employees for exceeding sales goals or if the company has an excess budget at the end of the year. These, too, are processed through payroll but might not be paid out every pay cycle.
Additional Perks: This covers anything else employees receive for their work that doesn’t easily fit into any of the previously mentioned categories. This might include things like company-provided lunches, on-site parking, and other perks that don’t have easily measurable monetary values like flexible work schedules, professional development opportunities, stipends for employees’ home offices, and more. These perks are typically beyond statutory requirements, so are left to the employer’s discretion.
Types of Employee Compensation
There are three different types of compensation: direct, indirect, and non-monetary. An example compensation package might include any combination of these. Let’s take a closer look at each.
Direct compensation is the salary and wages that are paid directly to employees, i.e., any monetary payment. Direct compensation can be viewed as an employee’s net pay vs. their gross pay as the latter is their total pay before any deductions (such as payroll tax). Direct compensation includes whatever method you use to pay employees, whether that’s an hourly wage or an annual salary, as well as variable compensation, such as bonuses, commission, and overtime pay.
Indirect compensation is compensation that has a monetary value but isn’t paid directly to employees, i.e., non-cash benefits. This includes any benefits and contributions that the employer covers. What’s included in indirect compensation can vary significantly based on your employees’ working locations because mandatory and customary benefits differ from jurisdiction to jurisdiction. For example, in some countries, you must pay into retirement plans, whereas in others, it’s left to the employer’s discretion. We outline country-specific employer costs in our OmniAtlas.
Indirect compensation also includes non-mandatory benefits like stock options and company profit-sharing plans.
Non-monetary compensation refers to any remaining employee compensation that doesn’t have a monetary value. Instead, it may contribute to better employee satisfaction and engagement. This includes some of the previously mentioned “additional perks” such as a flexible work schedule and company volunteerism.
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