What is Compensation?

By Abhishek Kathpal | Updated 07 August, 2022

Most people working are not doing it because it is fun but because of the compensation that comes with the job well done. Compensation comes after doing the work required in the labor market. Many workers are eager to work when they learn that they will be compensated for doing a good job.

What is Compensation

Compensation meaning and definition

Compensation involves the payment for a job in terms of money or benefits. From the workers' perspective, notwithstanding the term used, compensation is what they get for doing a job. How companies compensate their workers differs. Wages are a form of compensating employees of some companies. In contrast, other companies can pay their workers with salaries. Some workers even earn commissions or bonuses afterward. Accommodation, company cars, and sick leave options are also used in compensating employees.

It is vital for HR managers, company owners, compensation specialists, payroll specialists, and managers to know the different types of compensation. Legally, it is the responsibility of companies to compensate employees for the work they have done. Likewise, there is a need to explain compensation to workers and candidates, especially when hiring them. Also, they need to know about the compensation when reviewing salaries, performances, and granting interviews.

There are different forms in which companies can compensate their employees. Thus, it is vital for them to know how they will be compensated, which compensation types apply to them, and the overall value of their compensation package. All these are important because of the nuances of compensation after breaking down into stock options, commission, bonuses, base salary, and other benefits.

How Is Compensation Determined?

It is not easy to determine the compensation necessary for a specific position. There is a need to consider many factors before presenting an enticing offer to the prospective employee. Companies use the elements below to determine compensation:

  1. Job position and responsibilities

  2. The average pay for the same position in the industry

  3. Cost of living and where the workplace location

  4. Presence of qualified candidates

  5. Size of the business and reputation

What are the Forms of Compensation?

Compensation can come in different forms, including:

  1. As wages or salaries

  2. Disability insurance

  3. Life insurance

  4. Employees-paid health insurance

  5. Paid leave for vacation and sick days

What are the Types of Compensation?

Compensation can be classified as financial and non-financial compensation. Financial compensation is further classified into direct and indirect compensation. Below are the types of compensation:

  1. Direct Compensation: Paying workers money in the form of cash directly (such as wages, bonuses, salaries, and commissions) is known as direct compensation. Likewise, we can either have a base pay direct compensation or a variable pay direct compensation in which bonuses and commission fall under the latter, whereas wages and salaries fall under the former.

  2. Indirect Compensation: Employees also benefit from indirect compensation. Although they will not receive payment directly in cash, it has a monetary attribute, and calculating the financial value is possible. Unlike a direct compensation plan, there is variation in what indirect compensation each company may offer its employees. Still, it involves different monetary benefits that come with the job. Contributing to the worker's 401(k) retirement plan and sponsored health insurance is part of the benefits. Also, other benefits that fall under indirect compensation include:

• Stock options and profit sharing

• Company-paid gym membership

• Tuition assistance

The employees not receiving the cash for all the examples above makes them similar. However, there is a monetary value attached to them.

Non-Financial Compensation

Also, companies can compensate their employees without attaching a monetary value to them, such as:

  1. Giving them time off

  2. Making the work hours flexible

  3. Providing them with coaching and training opportunities

  4. Giving them recognition and awards

  5. Catering for their lunches

  6. Giving them a company car

All these examples above are valuable to the worker. Although they may not have cash attached, they are compensation for the employees. However, companies have a difference of opinions as to what can be regarded as indirect compensation and non-financial compensation. For a company that does not attach a monetary value to the benefits given to the employees or decides not to calculate its equivalent in cash, it may be hard to differentiate between the two.

What is Annual Compensation?

It is determined by combining an employee's base salary with the financial value of the benefits provided by the employer. Some of the elements of annual compensation employees receive include:

• Health insurance

• Disability insurance

• Sick leave

• Annual bonuses or commissions

• Life insurance

What is Equity Compensation?

Stock and share-based compensations are other names for equity compensation. It involves the employees receiving stakes in the company as part of their compensation plan. This form of compensation is usually practiced by businesses just starting and cannot afford to pay all the employees.

Variable Compensation

The results obtained from work done by an employee determine how much is paid as variable compensation. Employees receive this compensation, which can come in different forms, in addition to their salaries.

About the Author

Abhishek Kathpal

Abhi is the co-founder at Longlist.io. Funded by US based OnDeck, Longlist is currently enabling 50+ businesses to increase their candidate and client reach outs, automating the workflow across stages.