Compensation

Compensation is the total cash and non-cash payments that you give to an employee in
exchange for the work they do for your business. It is typically one of the biggest
expenses for businesses with employees. Compensation is more than an employee’s
regular paid wages. It also includes many other types of wages and benefits.

Hiring the most competent and talented employees and retaining them at a company is
a top priority for any human resource (HR) department at an organization.

Compensation and benefits are important aspects of an employee’s satisfaction at a

workplace, as they directly impact an employee’s performance and motivation to work.
It is, therefore, imperative that an HR department ensure the compensation and
benefits offered to their employees are attractive enough to keep morale high. Doing so
will ensure that employees know that the company values them and wants to
acknowledge the work they do. Humans, after all, are the most important asset for a
company.

Compensation refers to a reward paid to an employee for the work they do for an
organization. When an employee works for an organization, they are paid back in terms
of money, perks such as free food, unlimited vacation time, great healthcare, bonuses,
etc. for their time and talent. All of this forms a part of the employees’ compensation,
which can be financial or non-financial in nature.

Benefits, on the other hand, refer to a non-financial reward given to an employee as a

token of appreciation for their work. Some benefits that are popular among employees
are flexible work timing, the opportunity to work remotely, access to gym memberships
and catered meals, as well as a casual dress code.

While benefits may not offer direct money to an employee, they are important to
attract talented employees to a company. Let’s assume an employee receives two job
offers. Both the offers have the same monetary compensation, but the first has a
superior benefits package compared with the second. The employee is very likely to
take the first job offer in this case.
Differences between compensation and benefits

Compensation Benefits
Compensation is an umbrella term used to
describe anything that an employer gives Benefits form a subset of compensation.
an employee in exchange for their labor.
Compensation is a way for an organization Benefits are used as a means to motivate
to attract the best talent. employees to perform better.
Compensation can be monetary or non-
Benefits are always non-monetary.
monetary.
Compensation is a direct payment for the Benefits are an indirect payment for their
work an employee performs at a company. work.
Compensation is usually fully taxable, or a Benefits can be tax-free or partially
part of it can be exempt from taxation. exempted from taxation

What are the types of employee compensation?

There are two different types of compensation: direct and indirect. Compensation is the
combination of monetary and other benefits provided to an employee in return for his
or her time and skill.

The different types of compensation include:

 Salary
 Hourly Wages
 Sales Commission
 Tips
 Stock Options
 Bonuses
 Incentive Pay
  Other Variable Pay
 Benefits (healthcare, paid leave, etc.)
 Non-monetary compensation (recognition, meals, etc.)

HOW IS COMPENSATION DETERMINED?

Determining a position’s compensation is not an easy task; there are many factors that
need to be considered in order to present an enticing and fair rate to potential job
candidates. Common factors companies use to determine compensation include:

 Required experience and education level of position

 Job title and responsibilities
 Industry average pay of similar jobs
 Job location and cost of living
 Availability of qualified candidates
 Company size and reputation

What is a compensation plan?

A compensation plan, also referred to as a "total compensation plan," encompasses all

of the compensatory components of a company's strategy – employees' wages, salaries,
benefits and total terms of payment. Employee compensation plans also include raise
schedules, all fringe benefits, and any union perks or employer-provided vendor
discounts.

A strategically designed compensation philosophy that is kept current, relevant and in

accordance with employment laws, supports several important components of your
business:

 Strategic plans
 Budgeting and business goals
 Industry-competitive challenges
 Operating needs
 Total reward strategies that support retention of the company's top talent
The Society for Human Resource Management (SHRM) further outlines the purpose and
value of maintaining a dynamic and strategic compensation program:

 It describes how your organization's pay and compensation philosophies support your
business strategy, competitiveness within the industry, operating objectives and staff
needs.
 It helps attract qualified candidates to join your organization.
 It serves as a strong motivator for employees to perform at high levels and exceed goals.
 It helps keep your business competitive in the marketplace in terms of base pay,
incentives, total compensation and benefits opportunities.

The 4 types of direct compensation

Although you can use any of the four types to compensate employees for their work,
employers typically choose one and stick with it. The exception is bonus pay, which is
meant to be an addition to regular pay based on employee or company performance.

Salary

The most traditional form of salary is a monetary amount scheduled over a one-year
period. How often salaried employees are paid is another part of the compensation
strategy, but businesses typically pay their employees every two weeks. 

Salary is the most common method of direct compensation for exempt employees. An
exempt employee is not eligible for overtime pay. They receive a base salary for the
work they perform rather than an hourly rate, so employers pay exempt employees for
the job they do instead of the number of hours they work.

Hourly pay

Nonexempt employees are typically paid an hourly rate, eligible for overtime pay and
guaranteed at least minimum wage. When an employee works over 40 hours in a
workweek, their employer must pay them overtime.

Hourly rate of pay is typically a predetermined dollar amount per hour of work.
Typically, nonexempt employees are paid an hourly rate rather than a salary. They
employees generally keep a timecard or clock in and out to begin and end their work
shift. During times of slow or reduced work, or a change in a company's budget,
nonexempt employees may not work as many hours as they did in previous weeks.
Thus, there is no guarantee of a routine number of hours worked per pay period.  
Commission

When compensation is based on volume, production or a predefined level of

performance, this is a commission. Other expressions of this type of renumeration are
"piecework" and "piecemeal."

Most commonly, there are two methods utilized and referred to as paid commission.
One calculus is based on volume of services performed or products made. The second
form is structured around sales volume. An example of a worker with this type of
compensation is a real estate broker: They sell a house and will be compensated off of
that sale. It doesn't matter how long or what work activities it took to sell the house,
only that the house was sold.

Bonus pay

Bonuses are used to motivate employees or increase their overall performance. This is a
variable method of compensation that is commonly associated with sales professionals,
who tend to be salaried or exempt personnel. For example, if a sales professional
exceeds her quarterly target by a certain dollar amount, based on a predetermined
matrix, she receives a commensurate bonus.

Bonuses can also be paid for company performance, as well as when difficult-to-fill
positions are filled with employees with unique or highly sought-after skills or
experience.

Types of indirect compensation

Indirect compensation can be any fringe benefit that employers offer. Most commonly,
it refers to the various types of insurance offered by employers, including medical,
dental, life, short- and long-term disability, and vision. Employee retirement programs,
like 401(k) plans, are another common form of indirect compensation.

Equity-based programs are another compensation offering, though these aren't typically
offered within the small business realm. Equity-based compensation is generally some
sort of share or stock in the company.

These are some other examples of indirect compensation:

  Disability income protection
 Vacation days or paid time off (PTO)
 Paid holidays
 Flexible working hours or scheduling
 Other forms of retirement benefits
 Opportunities for advancement
 Student loan assistance
 Educational benefits
 Assistance with child care expenses
 Relocation benefits
 Company car
 Company equipment (laptops, mobile phones, etc.)

Fringe Benefits: an extra benefit supplementing an employee's money wage or

salary, for example a company car, private healthcare, etc.

 Fringe benefits are a great way to lure and retain talent.

 Health insurance, retirement plans and paid time off top the list of desired
benefits, but employees want other benefits too.
 Companies have to be ready and willing to adapt their benefits to the moment.
For example, commuter benefits worked before COVID-19, but free home
internet may be a better option now.

Technology and office equipment

To keep teams connected and productive, some employers pay their employees' mobile
phone and internet bills. Many companies supply their employees with computers,
laptops or other gear to use for work.

Body and mind wellness programs

A trending fringe benefit in 2020, a wellness program gives employees access to free or
discounted tools to maintain both their physical and mental health. This could be a free
gym membership, a meditation app, or a smoking cessation program, to give just a few
examples.