Compensation Types: Everything HR Managers Need to Know (2023)

Types of Compensation: Everything HR Managers Need to Know

If organizations want to reward their employees fairly, they need to understand the different types of compensation and how to create attractive compensation packages for their employees. Let's look at the different types of compensation that employers can offer.

What is compensation?
What are the types of employee compensation?
– direct compensation
– Indirect compensation
- Full compensation

What is compensation?

Compensation refers to any payment made by an employer to an employee during their tenure. In return, the employee makes his time, labor, and skills available.

That compensation can come in the form of salary, salaries, benefits, bonuses, paid vacations, pension funds and stock options, and much more. Compensation is sometimes also calledcompensationoutside of the US and Canada.

Understanding the different types of compensation is crucial to creating an attractivecompensation packagefor your current employees. This will not only help you retain your top talent, but it will also help you attract new talent to your business, as long as you differentiate yourself from the competition.

implementation oneCompensation AnalysisDeveloping a strong compensation strategy is the responsibility of Human Resources and Compensation and Benefits professionals. In the absence of a HR team, this typically falls to the business owner or manager. If this is not your area of ​​expertise,using the right compensation metricscan go far

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Suppose you haven't given much thought to yourCompensation & BenefitsStrategy. If you do, you could be missing out on overall improvement in employee satisfaction and engagement, as well as employee retention metrics and employer branding.

What are the types of employee compensation?

Compensation plans vary from country to country. In the United States, for example, health benefits often form a large part of an employee's compensation and benefits package. While in some parts of Europe parental leave, childcare and living costs are more common.

There are two main types of compensation:

  1. Direct compensation (financial)
  2. Indirect compensation (financial and non-financial)

Anyone involved in creating an employee compensation plan and salary structure must first understand the different types of compensation. This is because it is the organization's responsibility to explain the compensation plan to all applicants and employees. This is especially important during the hiring process and during salary and performance reviews. With so many different options available across the two main pay types, it's easy for employees to get confused.

Let's look at these types of compensation in more detail.

Direct Remuneration

Direct compensation is a form of financial (or monetary) compensation. Here are the four main types of direct compensation:

from hour to hour

Hourly wages are generally awarded to unskilled, semi-skilled, temporary, part-time, or contract workers in exchange for their time and labor.

Jobs where some employees earn hourly wages include retail, hospitality and construction.

Hourly wage workers are generally employableovertime pay. This payment consists of overtime hours worked outside the stipulated contract.

When setting your employees' wages, you must comply with local minimum wage laws.


Annual salaries are generally awarded to most full-time or skilled employees and those in management positions. A salary often indicates that the organization has made a long-term investment in that employee.

Examples of employees who receive salaries are teachers, accountants, doctors, and retail and hospitality managers.

Both hourly wage and salary make an employeebase salaryobase salary.


Commission is a common form of compensation awarded to employees in sales roles. It is usually based on a predetermined quota or goal. The higher the quota reached, the higher the commission.

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Compensation Types: Everything HR Managers Need to Know (3)

Commission rates are typically based on several predetermined factors, including revenue and profit margins.

Some employees work only on commission or are paid a commission salary.


Often companies offer bonuses to employees based on year-end business results or individual achievement of set goals. Sometimes the decision is left to the discretion of the manager.

Bonuses can be paid annually, quarterly, or even at the completion of each project.

This includes commissions and for performance; pay for performance, along with piece rate pay, profit sharing, stock options, and shift differences.

However, bonuses can also be paid without reaching a goal. For example, when the company has had a great year and decides to reward everyone. In this case the bonus would be classified asvariable pay.

Tips are also a common form of compensation in people-based industries, particularly hospitality.

Another direct compensation umbrella isdeferred paymentThese include savings and pension plans.

pay for performanceit is typically awarded to an employee who achieves their goals or performs well in their role.

indirect remuneration

indirect remunerationit is still a financial form of compensation as it has monetary value. However, employees are not paid directly in cash. Therefore, certain types of indirect compensation are considered monetary, while others are considered non-monetary. This often varies between organizations.

Indirect compensation is often referred to as employee benefits or workplace perks.

These are some common examples of indirect compensation.

heritage package

Equity as part of a compensation package essentially means that the employee receives capital (ownership) in the company, either through shares or an option to purchase those shares.

A stock package is common in start-up companies. These businesses may be struggling financially or cash and need other incentives to attract and retain employees.

storage options

This form of compensation entitles employees to purchase a specified number of shares at a specified price after a specified period. This differs from a stock package in that the employee does not own the company.

Many stock options require employees to work between three and five years before they can access this award.


typicalemployee bonusThis generally includes health insurance, life insurance, retirement plans, disability insurance, legal expense insurance, and pet insurance.

As mentioned above, healthcare in the US is a universal benefit because it is expensive to acquire. In the UK, healthcare is free to the NHS.

Retirement funds and retirement plans are also common benefits that employees look for when considering a new role in a new organization.

This was the result of a survey.48% of job seekersin the US said they would be more likely to apply for a job with good benefits. While the base compensation you offer is important, it's important to think about your overall compensation package.

non-monetary compensation

Non-monetary compensation includes benefits such as:

  • paid or unpaid time off
  • Flexible working hours
  • Learning and development opportunities
  • maternity licence
  • childcare
  • company vehicle
  • phones or laptops,
  • and meals

ANDSurvey by Fractlfound that American workers value health care more as an asset. However, additional forms of indirect compensation, including additional vacations, childcare, and tuition reimbursement, were also on the most sought after list.

Silicon ValleyCompanies offer their employees a wide range of enticing benefits, including concerts, on-site yoga classes, massages, free nights during the holidays, foosball tables, and catered lunches.

While some of these forms of compensation may seem small or redundant, they can make a big difference to your employees' day. This can improve your overall satisfaction in and out of the workplace.

It's important that you offer a variety of benefits that appeal to the different types of employees you employ and plan to hire in the future. For example, if one of your employees just became a father or is looking to start or grow a family in the next few years, they'll appreciate benefits like parental leave and childcare.

Additionally, certain forms of compensation can be considered both an advantage and a disadvantage, depending on the rules that apply to them. For example, if you provide all employees with a company laptop, should they use it for business purposes only or can they use it for personal use? Some people may find having two laptops to be a hassle. Others may not like the idea of ​​the company tracking and controlling all your private browsing history. That's why it's important to be clear about who your key employees are and what they want before creating a compensation plan.

Once again, there are differences between organizations in what counts as non-monetary compensation.

full compensation

An employee's aggregate compensation consists of a compensation package comprised of all applicable compensation types listed above. Total compensation can (and often does) include different bonuses and benefits at different job levels.

A total compensation statement is useful for employees. They have a clear idea of ​​what they are entitled to and what different types of compensation are offered from the start. For example, breaking down base salary, bonuses, and commissions helps employees understand what they're automatically entitled to and what they need to do to meet revenue goals.

You can split the compensation into two different columns: direct compensation and indirect compensation. Or you can go a step further and divide the compensation within each of these categories into different subcategories, for example, B. Health, company car, stock options, and pension fund.

Every new employee should receive a full and clear statement of their total compensation and have a manager to consult with if they have any questions. This means that all managers should have at least a basic understanding of the compensation package on offer. You should be able to explain how it works and answer any questions that may arise.

fetchshowed that when an organization adopts a progressive and transparent approach to compensation management, employee engagement increases, turnover decreases and itsemployer brandgain momentum. Therefore, HR teams need to be strategic about the total compensation packages they offer to employees and the introduction of these total compensation packages at every stage of the hiring and hiring process.

Basic pay is required by law, so your team must ensure compliance with these changing laws. A generous compensation package will inevitably help you stand out from the competition and attract the right talent to your company, helping you retain your existing employees.

The right compensation package will help you attract and retain talent

Understanding employee benefits and types of compensation and creating attractive compensation packages for all of your employees is essential to attracting the best talent to your company and keeping them happy.

Many organizations offer similar wages and salaries. So when an employee decides between two different job offers, it's likely that he's comparing minor details included in the compensation plan. An organization that offers small perks like free lunch and extra vacations is likely to be more attractive than an organization that offers nothing of the sort.

Therefore, your employee compensation plan is an essential part of building and maintaining a strong team. It forms a large part of the employee value proposition.

If you haven't created a compensation package for your employees yet, there's no better time than now to start.

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