What is Compensation?

Understanding Compensation in the Workplace

Compensation plays an important role in shaping your employees' experience in the company. It includes every financial and non-financial reward you offer them. 

The most common forms of compensation include wages and salaries incentives and benefits, bonuses, commissions, paid leaves, and rent allowances.

It recognizes your employees' hard work and impacts their overall job satisfaction.

Types of Compensation

Employees are an asset to an organization and, thus, must be fairly rewarded for their hard work and efforts. 

Knowing the various compensation types will help you extend generous and attractive pay packages. 

Here are the most common types of compensation offered to employees:

• Monetary: These are the direct financial payments that you give to your employees. These cash-based components can be:
  • Base salary is the fixed, regular salary.
  • Hourly wages are compensation based on the total number of working hours.
  • Bonuses are add-on financial rewards you will give your employees when they've achieved any milestone.
  • Overtime pay is given to employees working beyond their standard work hours.

• Non-monetary: These are the cashless benefits and perks given to an employee. Some common cashless compensations are:
  • Flexible work arrangements allow employees to choose their preferred work mode (on-site or off-site).
  • Stock options which give your employees a financial stake in the company.
  • Additional time-offs, like an off for a particular day or an extended lunch hour.

Work compensation can be further categorized into direct and indirect. Knowing about both is essential, as they are vital in retaining and motivating employees. 

Although they serve a common purpose, the pay structures are different. 

Here’s a detailed look into the two:

Direct compensation

The monetary component that an employee receives is their direct compensation. It is the tangible, straightforward reward they receive for their work.

I. Hourly wages

Hourly wages are usually given to contractual, temporary, or part-time workers. Even gig workers and freelancers are eligible for hourly wages. 

Manufacturing, construction, retail, legal, and market consultancy are some common sectors where employees are paid hourly. 

Most workers also earn overtime pay when they work beyond their contractual hours.

Example: A part-time cashier earns USD 18 per hour. They also earn USD 20 per hour as overtime pay when they work beyond their regular hours.

II. Base salary

A full-time worker or skilled employee earns a basic salary. It is the remuneration agreed upon by the employer and employee. 

Agreeing with your employee on a basic wage shows that you're interested in retaining and investing in your employee in the future. 

Managerial roles, education, medical, banking and finance, and pharmaceuticals are the most common sectors where employees receive salary.

Example: A teacher receives an annual salary of USD 60,000.

III. Bonuses

Most organizations will reward their employees with a bonus at the end of the year. A bonus is a special reward that marks a business's success. 

Usually, bonuses are given to every employee with varied percentages; however, some companies will provide bonuses to only those with exceptional performance.

Example: A marketing employee receives a USD 400 bonus at the end of the year for meeting sales targets or completing a project.

IV. Commissions 

This is performance-based pay, mostly given to sales roles. Employees are given a percentage of their total generated sales, which acts as an incentive to fine-tune their performance. 

Example: A real estate agent earns a 6% commission on each property deal that they close. 

Indirect Compensation

In simple words, the forms of employee compensation in addition to pay are called indirect compensation.

These are the non-cash benefits you can offer your employees to add value to their package.

V. Equity packages

Some companies offer equity packages or company shares as an add-on to their staff. 

It increases employee loyalty because the company's better performance now directly affects the employee's financial growth.

Example: An employee in a managerial role is offered 1.2% company shares.

VI. Paid leaves

PTOs, or Paid Time Offs, are attractive indirect compensation that allow employees to take time off while still receiving their regular salary. 

PTOs cover vacation days, sick leaves, national holidays, bereavement leaves, and other types of leave. 

They give your employees a chance to take a break and maintain a healthy personal and professional life balance. 

Example: An HR working for an IT company receives 15 PTOs along with their national holidays.

VII. Childcare benefits

Many companies offer childcare benefits to make their employees feel more appreciated and boost their productivity. Variations to this benefit may include an on-site childcare facility, paid maternity, paternity, or parental leave, flexible work schedules, and so on.

Example: A firm employee has a 3-month-old child, and the company provides an on-site creche with proper supervision.

VIII. Employee recognition and rewards

Recognition programs are ideal for rewarding your employees and acknowledging them for their hard work. 

Public praise and thank-you notes are more informal rewards, while an "employee of the month" award with monetary benefits is formal.

Example: An assistant auditor received an "employee of the year" award and a USD 450 cheque as recognition for their hard work and milestone achievements.

IX. Company perks and discounts

Certain companies offer discounts on limited products and services as part of the employee's compensation package. For example, you can offer a discounted gym membership, food coupons, or even technology allowances.

‍Example: A software company offers employees a 20% discount on purchasing cell phones and accessories.

Components of Compensation

Compensation for a job can include various elements other than basic pay. These elements will be essential in attracting and retaining employees in the long run. 

These components of compensation and the compensation level are highly influenced by employee skills, experience, and job level.

The most critical component is the basic salary. High job levels like managerial or executive roles attract a higher salary than the lower levels. 

With greater experience, employees demand higher base pay as they bring more value to the organization and better skill sets. 

Bonuses and incentives are other vital components highly influenced by the employee's performance metrics and the company's overall performance. 

Higher job-level employees also gain more significant bonus percentages and higher incentives since they are more directly responsible for the company.

Other important compensation components include perks and benefits like paid-offs, company vehicles, free meals, and utility reimbursements. 

These additional benefits are readily available for employees with advanced skill sets and higher roles in the company hierarchy.

Base Pay: Salary vs. Wages

Salaries and wages are different in terms of calculation, beneficiary, etc. Are you unaware of the difference between compensation and wages, compensation vs salary and how they differ from each other? 

Read this section as we define wages and salary better:

Variable Pay: Bonuses and Incentives

Variable pay is an equally important component of your employee's salary package, payable once every quarter, six months, or a year. 

Some of the most common flexible compensation components are bonuses, incentives, and commissions, which motivate and reward employees for their productivity. 

• Bonus, an appreciation gesture, motivates the employees to work towards surpassing their goal. 
• Incentives help employees feel more engaged and invested in their companies. They also encourage employees to be proactive in their work.
• Commissions are based on an employee's capacity for revenue generation. They are a direct reward for your employee's effort and encourage healthy competition.

Non-Employee Compensation

Many businesses hire external talent for their specializations, short-duration projects, and expertise. 

These workers' compensation is quite different from that of your regular full-time workers. 

The former can negotiate project-based fees or hourly rates, while the latter has a fixed salary package.

You have to pay contractors on an hourly basis, and salary negotiations will be based on work scope, industry or sector, and work experience. 

Unlike salaried employees, contractors will file their own self-employment taxes.

Another common non-employee category in the workplace is freelancers. These independent workers set their own rates, which can be per project or hourly/daily pay. 

Much like contractors, you do not have to extend additional benefits or perks to freelancers.

Taxable vs. Non-Taxable Compensation

Being aware of what is taxable compensation and what is not will ensure that both you and your employees are tax-compliant. Here are the taxable sections of compensation:

• Salary
• Commissions
• Royalty payments
• Rental income
• Equities and stocks
• Dividends and interest income
• An insurance premium paid by the employer

The nontaxable sections of compensation are:

• Gifts
• Healthcare benefits
• Inheritances
• Welfare payments
• Cash rebate

Why Compensation Matters in HR Management

Now that you know compensation, you must wonder why compensation and benefits in human resource management are so important in the workplace. Here's your answer:

• An attractive compensation package works wonders in attracting a talented global workforce. 
• A lucrative compensation package by your HR team will give you an edge in the competitive job market. 
• Compensation directly affects employee retention. Employees are likely to stay in any company where they feel they're adequately compensated. 82% of employees reported feeling more engaged in a company offering fair payment.

Building Competitive Compensation Packages

Here's why building a competitive compensation package is essential:

• It will help you secure in-demand or rare skill sets. You can quickly secure a qualified expert with a competitive package.
• Talented individuals often have the luxury of choosing from multiple options. Your company will stand out by offering a competitive package.
• A competitive package gives your employees the impression that they are valued by the company and that you are willing to invest in them. Thus, it motivates your employees to work better.
• With a competitive package, you will avoid attrition. Employees will be eager to stay in your company if they receive attractive benefits.

HR teams are responsible for crafting such competitive packages. With some market research, they can easily benchmark salaries and acquire expert talent for your company. 

Ensuring Fair and Equitable Compensation Practices

Ensuring fair compensation is a healthy practice in the workforce. When you offer equity-based compensation packages, where employees get paid for what they're working for, they feel motivated and appreciated. 

You can ensure fair pay based on the roles and responsibilities and overall performance of the employee or do quick market research and set the pay according to industry standards.

• Here are a few strategies to reasonably pay your employees:
• Conduct a regular salary review and ensure the packages align with current market standards.
• Create a realistic pay range or salary slab based on designations, duties, and responsibilities.
• Have an open discussion with your employees to understand their compensation expectations.

Compensation Synonyms and Terminology

Words like compensation, pay, salary, and wages sound similar. You'll be amazed that the words are as different as the sun and moon! 

Read on to learn about compensation synonyms in more detail:

How Skuad Can Help You Manage Compensation Globally

We understand that managing compensation across the globe can be a challenging task. You must bear in mind multiple labor laws, do market research on expected benefits, perks, and understand complex tax structures.

So, while focusing on your business strategies, Skuad will help you tackle these issues.

Skuad is here to assist you with global hiring, managing payroll, ensuring compliance, and much more! 

Our team will be your one-stop solution for compensation management. We will help you tailor lucrative compensation packages by analyzing local economic factors and market research.

Set to explore the global market? Book a demo today!

FAQs

1) What is the definition of compensation?

Compensation is the reward or benefit an employee receives for their services. It includes monetary and non-monetary components, like allowances, gifts, etc. A benchmark compensation package helps an organization compete in the job market.

2) What is an example of compensation?

Examples of compensation paid to working employees include an employee's monthly salary, annual bonuses, incentives, insurance, retirement benefits, etc. These are all direct compensations, and indirect compensations include stock options and equity packages.

3) Is compensation the same as pay?

Compensation and pay are two words often mistaken for being the same. Pay denotes the cash rewards an employee gets for their service. It includes base pay, bonuses, and incentives. Compensation denotes monetary and non-monetary rewards, like paid-offs, HRAs, stock options, etc.

4) How is compensation calculated?

You can easily calculate an employee's total compensation by adding up the following:

• Base salary is the core amount for services rendered.
• Bonuses and incentives, which are performance-related rewards.
• Allowances, like house rent, travel, food, etc.
• Benefits like insurance, stock options, and retirement contributions.
• Any other perks like paid leaves and utility bills.

5) What is the meaning of CTC?

CTC is the abbreviation for Cost to Company, which is the total money the company spends on an employee annually. CTC includes salary, bonuses, insurance, retirement fund contributions, and other perks.