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
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.