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What Does Employee Compensation Mean? Definition and Types of Compensation

February 20, 2021
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Building a successful business involves building a reliable team. That’s why many companies worldwide invest in different employee compensation strategies.

A good base salary, professional development opportunities, and similar benefits packages are just some elements of a good employee compensation strategy.

Many believe employee compensation is the same thing as a base salary. However, it includes much more, and it has become a competitive field for employers who want to attract the very best employees to their companies.

Even when you offer fair base pay, a poor-built compensation system may be a deal-breaker for many new employees.

So, what does employee compensation mean, and what does it include? This article will provide you with a better understanding of what employee compensation is and what types of compensation there are.

What is employee compensation?

Employee compensation packages start with the minimum wage the employer pays to the employee for their work. Still, it includes several other elements, like bonuses, overtime pay, profit-sharing, stock options, health insurance, fringe benefits, paid time off, and more.

On the other hand, the employee compensation definition may involve recompense for an injury in the workplace or if an employee has been laid off for no valid reasons. That said, a company’s compensation package can also include lawsuit-related payouts, requital, and indemnification in case of wrongful contract termination, for example.

Also, compensation doesn’t involve just monetary perks. Some employers award their employees with gym memberships, language courses, and similar perks and benefits compensating for their service to the company. They have become popular in the last couple of years since many companies recognize the importance of investing in their staff.

Are employee compensation and remuneration the same thing?

The short answer is -  yes. These two terms are synonyms according to the thesaurus. You may just hear them in different regions - in the UK, for instance, people are more likely to say remuneration. Compensation is the more commonly used term in the US and Canada.

What are the three types of employee compensation?

As we mentioned, there are plenty of elements a compensation package can include. All of them can be divided into three major categories: direct, indirect, and non-monetary compensation.

Non-monetary employee compensation

Non-monetary compensation refers to vouchers, traveling allowances, tuition assistance, and different employee benefits that don’t include giving money to the worker. These are still an award for the worker’s contribution to the company. Some companies even provide employee assistance programs that may consist of legal advice or counseling for their workers.

Indirect employee compensation

The difference between direct and indirect compensation is that the indirect isn’t given to the employee directly, although it has monetary value. This type of compensation usually refers to health care insurance and employees’ retirement plans.

Direct employee compensation

The direct compensation goes to the employee directly, and it’s always money. The four types of direct compensation include base salary, hourly wages, commission, and bonuses. Let's dive into details.

What are the four types of direct compensation?

  • Base salary
  • Hourly wages
  • Commission
  • Bonuses

Base salary and hourly wages

An employee’s salary and hourly wage is usually fixed and is called base pay. In most states, there’s a minimum wage an employee must be paid, and it’s up to the employer whether they’ll pay out their workers weekly, biweekly, or monthly.

Commission and bonuses

These can vary, so they’re called variable pay. For example, a salesperson may get a commission based on the sales they make within a month. Some employers offer performance bonuses at the end of the year to the highest-performing employees. This part of your compensation package can make all the difference when it comes to motivating employees as well as attracting new talent.

What is base pay?

Base pay can be broken down into two types of direct compensation an employer pays to their employees. It’s also the usual type of employee compensation candidates ask about when considering different job offers. They want to know what their salary or hourly wages will be.

Several factors influence whether an employee will be paid an hourly wage or have a monthly salary.

Hourly wage vs. monthly salary

The unwritten rule says that employees who work temporarily for a company or those who have a part-time contract are more likely to have an hourly wage-based compensation.

On the other hand, people employed in large companies with a full-time contract, typically with higher education degrees, will likely work for a monthly salary.

A small business may not always need to have a full-time worker on its staff. Moreover, if the business is just starting out and has limited financial resources, they are most likely to opt for workers with an hourly wage. So the size of the business and the needs may affect the type of base pay offered to workers.

Base salary vs. total compensation

When onboarding new employees, you need to inform them about the compensation package you’re offering.

Base salary refers to the minimum amount of money you pay your employees regardless of whether they have an hourly-wage or salary-based contract. It doesn’t cover, for example, the hours an employee has spent working overtime or an end-of-the-year bonus. These additions to the base salary are part of the total compensation.

That said, the total compensation presents the sum of all the wages and other benefits you pay your employees for working at your company.


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How to determine employee compensation?

It may not always be easy to plan your workers’ compensation. However, there are some universal guidelines that you can apply to your business. Here are a few tips and tricks that will help you find what works best for you.

1. Do your research

Before you determine the appropriate compensation package you’re going to offer, do your research.

Learn what your employees expect and what kind of benefits they had in their previous jobs. Get to know your industry - salary surveys can help you find out what base pays and salary ranges are typical for similar jobs and determine how competitive you can be.

Then you can see what perks and compensations you can add. Another way to approach the research is to browse similar job descriptions and find out about the salary ranges connected to them.

If your employees are asked to relocate, bear in mind that the cost of living in the new city may be higher for them. In case you have employees based in different countries you should consider setting a salary range based on the cost of living.

2. Budget properly

It’s also important to stay within budget. You need to balance the desire to offer competitive benefits to your workers and the need to act responsibly when it comes to managing your company’s finances.

3. Merit-based benefits

Assess your employees’ skills and the effort they put into their jobs. If someone stands out because they go out of their way to achieve incredible results for the team and the business, they may deserve more benefits.

Don’t forget to plan for pay raises in advance - you’ll also want to raise the base pay for your top-performing employees. All of this can be discussed during a performance appraisal session.

4. Check the law

The reimbursement law may not be the same in every US state. Check the guidelines that apply to your region before you determine your compensation policy. If you can’t find adequate information, you can contact your State Workers’ Compensation Office.

Take a look at our step-by-step guide on compensation strategy for remote teams.

Employee compensation regulations in the US

The Fair Labor Standards Act (FLSA) is a federal law that determines the minimum wage you need to pay to your workers. All the states need to abide by these rules, although, as mentioned, some may have their own laws.

The FLSA regulations include many labor-related aspects, including child labor and discrimination, and the taxes that come with compensations. The regulations apply both to part-time and full-time workers.

That’s why it’s crucial to learn how to calculate the taxes for different types of compensations. For instance, employers get to withhold the taxes on overtime wages or tips, but not the employment taxes for benefits.

Determine the best employee compensation package for Your business

As you can see, employee compensation involves more than just the base pay your employees earn. Multiple factors can affect what you’re going to include in the package you offer, like your budget, the skills your workers bring to the business, their future within the company, and more.

There are different ways to remunerate the work your employees do for your company, and whatever benefits you opt for, you need to make sure they align with the FLSA standards.

By following their guidelines and creating competitive salaries and incentives, you’ll make sure your company is a desirable place to work for talents from all around the world.