Happy employees in a meeting

Employee Compensation: What You Need To Know And Why

Employee compensation is a term that describes the benefits an employee receives from a company. These benefits may be in the form of cash incentives, a vacation, or even paid leave.

Employee compensation is an essential element in any working relationship. It is the basis of a healthy workplace and is a crucial factor in keeping employees motivated while performing their roles in the establishment. However, maneuvering the employee compensation process is not a walk in the park. It requires a careful understanding of what compensation entails and when to offer it.

In our article below, we will guide you through everything you need about compensation, including why it is integral in your business.

What Is Employee Compensation?

Employee compensation refers to monetary benefits offered to workers in an organization. However, today, it is a broader term to refer to the combination of a base salary, benefits, bonuses, and other perks employees may receive from an organization.

Employee compensation is usually given to employees in exchange for their work for the company. Also known as remuneration, employee compensation is used as an incentive or a pat on the back for employees that do a good job.

Talent in the business world is growing increasingly difficult to come by. Talented employees in the job market know their worth, and employers are growing increasingly competitive in snatching these candidates up. To make their establishments look more attractive and encourage talented candidates to choose their establishments, employers are offering competitive employee compensation journeys.

This growing competition in which organizations can offer the best compensation for talent has caused company compensation packages to increase drastically. In fact, the total compensation increase was estimated to be 4.12% in 2022

However, talent acquisition is not the only reason companies add more incentives to their employee compensation package.

Employees are unlocking new sentiments about their jobs and having new reservations about what their jobs should be like. When a job no longer serves or helps them attain their needs, employees will leave. This is leading to a high employee churn rate.

One of the many factors employees use to judge if they will leave a company they already work with is the compensation package offered. If offered a position with better compensation, employees will jump at the chance.

Essentially, employee compensation is integral to the success of a company.

Components Of Employee Compensation

Employee compensation provides monetary and non-monetary benefits as an incentive for the work they do in the company. It is made up of several components, some of which include:

1. Wages And Salaries

Wages and salaries are the base payment for an employee’s services. They are used as a transaction benefit for an employee, providing thief skills and expertise in taking on a job role in an establishment.

Salaries are a permanent form of monthly compensation paid to permanent employees. This compensation does not change, regardless of how much the employee works. 

In contrast, wages are hourly payments for contractual workers. This payment type usually changes depending on how much time a worker puts into a day of work.

Salaries usually consist of the following:

  • Basic Pay

Basic pay, or base salary, is the amount an employer and employee agree upon, excluding overtime hours or any extra incentives. This is the money an employee earns before any additions or deductions are made. Essentially, basic pay excludes overtime and any extra salary the employer deems fit to give a worker.

The part of the compensation subject to tax is the basic pay. It usually depends on the law of the country and company policy.

  • House Rent Allowance

Some companies offer their employees accommodation. However, some choose to give them a rental allowance instead. This is usually commonly seen in companies that transfer workers to different states. In this scenario, the company may pay the relocation cost to incentivize the transfer.

House rent allowance is not a common employee benefit, as not every country offers it. 

  • Dearness Allowance

In some countries, salaries are adjusted according to changes in the market. In this case, when the prices of goods and services increase, the company offers an adjusted awareness allowance to adapt to price discrepancies.

  • Travel Allowance

This allowance is usually provided to employees on leave. It is only used to cover travel costs and is included in salary or calculated as a separate payment.

Not every company offers a travel allowance, but those that do often require travel

2. Commissions

Commissions are rewards usually given to employees (such as salespersons) that earn income based on marketing and sales revenue. They are usually a fixed percentage and depend on the number of sales an employee makes.

Boss giving out a yellow envelop to a female worker
Employee receiving compensation.

The rules for paying out commissions usually vary with the company. Some companies pay salary only, commission, or a combination of salary and commission.

3. Benefits

Benefits from a company can be monetary or non-monetary. They usually include things like housing and medical and recreational facilities. However, benefits sometimes include insurance benefits (such as health, vision, and dental insurance) or retirement plans courtesy of the company. 

Regardless of what it is, benefits are usually used as a plan to keep talents within the establishment. Some types of benefits include:

  • Fringe Benefits

Fringe benefits are given to an employee above the agreed salary for service performance.

Fringe benefits usually include incentives such as educational assistance, childcare, and flexible healthcare coverage. It may also include options like paid gym subscriptions, family vacation packages, social security, and access to a company car.

  • Paid Time Off

Every employee gets time off, but not everyone enjoys paid time off. Paid time off, or PTO, is a type of compensation where employees continue to receive salaries even while away from work. It is usually given to high-ranking employees or employees that perform exceptionally well.

  • Insurance Programs

Insurance makes up a high chunk of employee benefits. Companies often offer health insurance, hospital cover, family health insurance, disability coverage, and financial support to a bereaved family in the case of an employee’s death.

4. Rewards

Rewards are given to employees that have performed exceptionally well at their duties. It is usually used to recognize their hard work and achievements. 

As a component of employee compensation, rewards are used to keep employees motivated. When given rewards, employees will remain optimistic about working harder, especially because they know it will pay off.

Rewards can be in the form of yearly bonuses, recognition awards, promotions, profit sharing, and commissions for outstanding sales. Rewards can also be given to individual workers or team members.

Some examples of rewards include:

  • Bonuses: A common form of reward given to employees. It is usually used to celebrate employee achievements such as completing an important project, exceeding sales targets, and meeting production requirements.
  • Profit sharing: Profit sharing is used as compensation for employees who contribute to increasing a company’s profits. 

5. Stock Options

This compensation includes a company giving employee equity shares in the establishment. However, the shares cannot be sold by the employee.

Types Of Employee Compensation

Just as there are different components of employee compensation, there are different types. The two distinct types of employee compensation include:

1. Direct Compensation

Direct compensation is also known as financial compensation. It refers to the pay given to an employee in the form of money. The four main types of direct compensation include:

  • Hourly compensation: Given to gig workers, temporary employees, or contractual workers
  • Salary: Given to full-time employees, skilled employees, or those in senior management positions.
  • Commission: A compensation given to sales employees
  • Bonuses: Given to employees who greatly contribute to an establishment through production, sales, or a successful project.
  • Tips: Direct pay for a worker’s services. In some countries, this is usually given to waiters, bartenders, or cab drivers.
  • Savings plan and annuities: This is not usually offered at every company
  • Merit-based pay: This compensation is given to employees with unparalleled performances at work
  • Project work: Pay given to employees for completing a project or milestone.

2. Indirect Compensation

Any other type of compensation that is not financial is usually classified as indirect compensation. Employees do not receive direct cash from these compensation types, but they stand to enjoy financial benefits from them. However, some indirect compensations do not offer any financial benefit.

Some types of indirect compensation include:

  • Equity package: A small part of the company is given to the employee in the form of shares. It is typically seen in law firms, IT companies, and large retail establishments but can be used by any business.
  • Stock options: A compensation that allows employees to buy a certain number of shares at a specified price. 
  • Benefits: Usually includes healthcare, health insurance, mental health, and retirement plan benefits. However, benefits such as retirement and pension funds may also be given.
  • Non-financial compensation: This usually includes some mandatory compensations Paid Time-off (PTO), maternity leave, childcare benefits, company transport, gym plans, meals at work, flexible work schedule, and other forms of compensation. These offerings may seem minute, but they often go a long way in satisfying the employee when utilized properly.

Advantages Of Employee Compensation

Compensation is a huge part of any business. This is because it contributes to the success of the organization. But why exactly is employee compensation an integral part of an organization? Some of the reasons compensation is integral include:

1. Attract Top Talent

Compensation has become one of the biggest hiring trends of 2022.

Talented employees are in high demand in the job market today. However, there is not enough talent to meet this demand. So, how do you ensure you attract talent to your establishment?

Woman collecting a white folder in her office
A talented female employee receiving a compensation package

One way you can do this is to provide a good compensation plan.

Financial and job security are two things workers look for when hunting for a job. As a result, they often prefer jobs that offer good compensation packages. They understand their value and only choose to work with companies with a worthy salary and other compensation packages.

Today, employees want more than a competitive salary. They want to work with an organization that offers great compensation funds.

Research your competitor’s compensation and benefit plans. Tailor your compensation plans to be similar or outdo your competition to encourage talents to pick your organization in a crowd of other choices. Doing this makes your company a hot spot for talent while drastically reducing the recruitment costs of hiring them.

2. Increased Employee Motivation

Compensation employees for their contributions to your company is a good way to motivate them. When rewarded for accomplishments, employees are more likely to be more motivated and work hard to be more productive. 

Providing compensation creates an environment of active employees that are motivated to execute their roles to near-perfection quality. It increases job satisfaction as employees know their job offers more compensation than other competitors, thereby making them more empathetic to performing their responsibilities.

3. Boost Employee Loyalty

Employees’ loyalty knows no bounds when they are rewarded with adequate compensation. Compensation makes employees feel appreciated and valued. This, in turn, makes them loyal to the company they work with.

With loyalty comes the decrease in interest in leaving a company. This leads to a low turnover rate, a problem other employers who do not offer employee compensation may face.

A loyal employee grows with the company and they continue to be a great investment for the establishment. They perform exceptionally in their role as they know they will be rewarded and appreciated for their efforts.

4. Better Productivity And Profitability

Well-compensated employees are happy employees. Happy employees are more productive and profitable. 

Compensation plans increase employee morale and make them more interested in excelling at work than anything else. It prevents employees from losing interest in their work and keeps them inspired to be more productive. This breeds active employees who work timely toward the company’s financial needs. 

How To Determine The Compensation You Should Offer

One problem many companies face is determining which employee deserves what compensation package. 

Employee compensation can be mandatory or not mandatory. Most countries or states have laws on the compensation plans businesses should adhere to. These laws may regulate factors such as minimum wage requirements, mandatory benefits, and leave requirements. This makes it important to review the compensation laws for your location before allocating plans.

The type of compensation plan you should give an employee also depends on a wide range of factors. Some of the factors include:

  • Minimum wage requirements  (stated by the law)
  • Necessary experience
  • Required qualifications
  • Type of job
  • Job title
  • Job responsibilities
  • Industry-standard wages
  • The available supply of necessary talents
  • Company size and pollution
  •  Cost of living at the job location.

Compensation Is The Way To Go

Compensation is a great solution for helping your business become very successful. From motivating employees to attracting top talents in the industry, compensation is the key to happy, satisfied, productive employees. Are you planning to implement compensation plans in your business? Our guide has everything you need to know about compensation packages for employees!

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