What is Indirect compensation?

Definition and examples of Indirect compensation
By Abhishek Kathpal Updated 07 August, 2022

Offering competitive remuneration isn't always sufficient to recruit and retain personnel. Employees are getting more and more interested in extra bonuses and benefits as a result of a competitive labor market, rising costs, and diminishing consumer confidence in the economy. Businesses typically pay their staff directly or indirectly, respectively. By offering indirect compensation, like employee perks, you may attract top talent while also increasing the productivity of your current staff.

What is Indirect compensation

Indirect compensation meaning and definition

Indirect compensation is a non-monetary reward provided to employees in addition to their pay. It is an addition to direct compensation, which is cash given to workers in exchange for their efforts. It involves expenses incurred by a company on behalf of all employees and is frequently referred to as "fringe benefits." These benefits are important because they might help organizations attract and retain talent.

Types of Indirect Compensation

Indirect compensation comes in a variety of shapes and sizes. The bulk of indirect compensation is optional, meaning that companies are not required to provide it but are free to do so if they choose to. In addition, the law only calls for a limited number of specified forms of indirect compensation (for example overtime policy). The most frequent examples of indirect remuneration are listed below:

Difference between direct and indirect compensation

When an employee receives money from their employer in the form of salary or a wage in exchange for services provided, this is referred to as direct compensation. Variable compensation includes any commission or bonus system, whereas base pay often refers to salaries and wages.Indirect compensation is not monetary and has nothing to do with receiving a paycheck. Certain benefits are offered in addition to an employee's direct compensation. In spite of not receiving monetary compensation, indirect compensation can occasionally be just as advantageous as direct remuneration.

a) Monetary

The most obvious difference is that direct compensation involves a straightforward monetary payment. Although indirect compensation—the reason it is named indirect—might provide some financial benefits like paid vacation and holidays, it is subtle (thus, indirect) because it is not a part of the employee's regular pay.

b) Performance

The direct compensation for a worker is based on performance. If they succeed in their objectives, they can be given a promotion or bonus. It is not performance-based to receive indirect compensation. How well an employee performs at work has no bearing on whether they have health insurance or how many sick days they accrue.

Benefits of indirect compensation

The achievement of larger, longer-term goals can be aided by a company's offering of alluring indirect pay packages, which will keep all employees content and on the same page. Hence Reimbursement received helps organizations to:

a) Reduces employee turnover

Employee benefits are very important in lowering employee turnover. Pew Research Center reports that 43% of workers who left their employment in 2021 cited inadequate or nonexistent perks as a reason for their departure. 42 percent of survey participants said their new workplace had greater benefits, while 36 percent said they were about the same. Therefore, providing a full range of employee benefits helps businesses compete for talent.

b) Improve morale

Offering rewards to employees can enhance morale and productivity. When you look after your staff, they'll feel appreciated. When you have a job opening, employees who enjoy working for your company and have high job satisfaction are more likely to help you fill it by recruiting others, which can help you save money on hiring new employees.

c) Employees' loyalty

Because their employer values the work they do, employees could feel more loyal and committed to it. Thus making them fully devoted and absorbed in their work. Additionally, it can boost motivation, task engagement, effectiveness, and cooperation, which can all result in increased job satisfaction.

Advantages of Indirect compensation

As top management and HR departments begin to see the value of aspects like employee retention, loyalty, engagement, and motivation, long-standing organizations are beginning to focus more emphasis on indirect benefits.

a) Employers can utilize it to increase employee support for critical HR initiatives as well as the overall objectives and core principles of the business.

b) To give potential candidates an advantage over rival companies that they might be considering. An organization's sizable indirect pay package may convey to potential hires that they are not only desired by the company but will also be properly cared for as an employee.

Types of Indirect Compensation

Different forms of indirect compensation exist. The majority of indirect compensation is optional, which means that businesses are not obligated to offer it but are free to do so if they so desire. Furthermore, the legislation only requires a few specific types of indirect compensation (for example overtime policy). The following is a list of the most typical instances of indirect compensation:

a) Employees benefits

a) Health insurance

b) Life insurance

c) Disability income protection

d) Retirement benefits

e) Social security

f) Employer student loan contributions

g) Educational benefits

h) Childcare

I) Relocation benefits

j) Housing benefits

b) Pay for time not worked

a) Paid time off (PTO)

b) Leave policy (sick, casual, maternity leave)

c) Overtime policy

d) Holidays

e) Flexible working hours

c) Other perks

a) Use of the company car

b) Use of company laptop

c) Use of company mobile phone

d) Free meals

e) Use of recreational facilities

Difference between direct and indirect compensation

Direct compensation refers to funds that are given by the employer to the worker in the form of pay or wage in exchange for services rendered. Any type of commission or bonus structure fits under the variable pay category, while salary and wages are normally classified as base pay.Indirect remuneration is not monetary and has no connection to a paycheck at all. In addition to an employee's direct pay, certain benefits are provided. Despite not being paid in money, indirect compensation is sometimes as beneficial as direct pay, if not more so.

a) Monetary

Direct compensation entails a simple monetary payment, which is the most noticeable difference. Although indirect compensation, which is why it's called indirect, might offer some financial benefits like paid vacation and holidays, it's subtle (thus, indirect) because it's not part of the worker's regular pay.

b) Performance

Performance determines how much a worker is paid directly. They might receive a promotion or bonus if they achieve their goals. Indirect remuneration is not performance-based. Neither the health insurance coverage an employee has nor the number of sick days they accrue are influenced by how well they perform at work.

Benefits of indirect compensation

The achievement of larger, longer-term goals can be aided by a company's offering of alluring indirect pay packages, which will keep all employees content and on the same page. Hence Reimbursement received helps organizations to:

a) Reduces employee turnover

Employee benefits are very important in lowering employee turnover. Pew Research Center reports that 43% of workers who left their employment in 2021 cited inadequate or nonexistent perks as a reason for their departure. 42 percent of survey participants said their new workplace had greater benefits, while 36 percent said they were about the same. Therefore, providing a full range of employee benefits helps businesses compete for talent.

b) Improve morale

Offering rewards to employees can enhance morale and productivity. When you look after your staff, they'll feel appreciated. When you have a job opening, employees who enjoy working for your company and have high job satisfaction are more likely to help you fill it by recruiting others, which can help you save money on hiring new employees.

c) Employees' loyalty

Because their employer values the work they do, employees could feel more loyal and committed to it. Thus making them fully devoted and absorbed in their work. Additionally, it can boost motivation, task engagement, effectiveness, and cooperation, which can all result in increased job satisfaction.

Advantages of Indirect compensation

Long-standing businesses are starting to place more emphasis on indirect benefits as HR departments and higher management see the value in factors like employee retention, loyalty, engagement, and motivation.

a) Employers can use it to make it more compelling for workers to support important HR projects in addition to the company's general goals and values.

b) To give potential candidates a competitive edge over other businesses they might be thinking about. A company's significant indirect compensation package might show potential hiring that they are not only wanted by the business but will also be well taken care of as a prospective employee.

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.

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