What Is Compensation: Types and Examples of Benefits

By Indeed Editorial Team

Updated 22 January 2023

Published 7 September 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Organisations want to hire the most qualified staff and keep them productive and loyal. These organisations often provide a competitive salary and benefits package, which includes bonuses, salaries, wages and commission schemes, to attract and retain high-performing personnel. It's essential that you curate and combine a proper mix of monetary and non-monetary benefits to best attract your talents. In this article, we look at what is compensation, what are the different types, why is it important and outlines some examples of benefits in the workplace.

Related: Differences Between Annual Salary vs. Annual Compensation

What is compensation and what are the different types?

If you are wondering what compensation is, it refers to the monetary and non-monetary payment given to employees in exchange for their service or labour. Managers collaborate with the human resources department to establish and raise salaries depending on various criteria such as supply and demand, competitive analysis, personal qualities and performance, labour negotiations and cost of living. Managers might negotiate remuneration both internally and with their new recruit. For example, they may justify paying one person more than another by demonstrating how the first employee's credentials and talents benefit the organisation's bottom line.

The reasons for remuneration are complex. Thus, it's essential that managers observe the competition and how it's changing to make sure that employees are fairly compensated. You may research the employee's accomplishments and previous wages as well as the available funds to determine their compensation. The different types of compensation are as follows:

  • Hourly compensation: This type of compensation is traditionally associated with unskilled and semi-skilled labour.

  • Salary: Salaried employees are typically more well-educated and hold managerial roles. Salary can be categorised as fixed compensation.

  • Commission: Commission is most commonly used in sales and is paid as a percentage of targets accomplished.

  • Bonuses: Also another form of variable pay, bonuses represent incentive-based remuneration that rewards staff for their performance.

Related:

  • Wage vs. Salary: Definitions, Differences and Examples

  • What Is a Year-End Bonus? With Frequently Asked Questions

What are employee benefits?

Benefits are a component of the employee remuneration package and they're generally quite valuable to employees. Benefits are any additional advantages that a company provides to its employees in addition to monetary payment. Many businesses provide a competitive benefits package to maintain or recruit skilled personnel. Smaller businesses may include fewer components in their packages but most bigger businesses and government agencies offer a more comprehensive package.

Related: How To Negotiate a Salary (With Examples)

Why are compensation and benefits important?

One of the most significant parts of running a business is the employee salary and benefits package. It may help a firm thrive and compete in its industry. Some of the advantages of offering the appropriate salary and benefits package to employees are as follows:

Recruiting high-potential employees

Employees are continuously striving to place themselves in the greatest financial situation possible. Those who are worth a certain amount of money are typically aware of their worth and seek employment that pays properly. Offering a competitive wage encourages a high-output culture. When employees believe they're paid more than their colleagues at other firms, they're more likely to put in extra effort and strive harder to demonstrate why they're deserving of that salary.

Related: What Is Headhunting? (And How It Differs From Recruiting)

Boosting employee loyalty

Employees who are adequately rewarded are less likely to leave the firm. One of the reasons employees stay with their companies is because they receive enough salary and perks. Loyalty leads to low turnover rates and high staff retention, which means that businesses incur less money, time and resources to recruit new applicants.

Related: What Is Net Salary: Definition and Guide To Calculating Net Salary

Enhancing employee motivation

Employees who are appropriately compensated demonstrate that the firm regards them not just as workers but also as human beings. Employees are more likely to care about their work and put in more effort during the workday when they feel appreciated. This boosts their morale and improves the general working climate. Furthermore, when employees are aware that they may receive perks such as bonuses in the future, they're more driven to surpass expectations.

Related: How to Motivate Employees: 12 Effective Ways to Boost Morale

Optimising productivity and profitability

Employee productivity rises when morale is strong. Employees who feel appreciated have higher levels of loyalty and excitement, which leads to increased productivity in proportion to remuneration. Furthermore, the longer an employee works for a firm, the more they learn and the more efficient they become. This increases productivity over time and can boost a company's profitability.

What are some examples of employee benefits?

Outlined below are some examples of common employee benefits describing what is compensation:

Long-term performance incentives

Stock options or stock grants as a long-term incentive might be part of a competitive employee compensation and benefits package. An employee stock option is when a firm allows its employees to buy a specific number of shares of stock at a predetermined, generally discounted price over a certain period of time. This benefit incentivises employees to perform because they possess a long-term stake in the future of the organisation through stock ownership.

Related: What Is a Performance Bonus? Benefits, Types and Components

Health insurance

Health insurance is quite common in big and medium-sized enterprises and certain small firms. When a company pays for health insurance, it adds significant value to the employees' well-being and saves them money. Employees enjoy peace of mind knowing they're covered, even with pre-existing health issues.

Related: What Is Salary Benchmarking? Definition, Benefits and Tips

Life insurance

Life insurance serves as protection for an employee's family in the event of their death. Benefits are paid in full to the policy's beneficiaries, who are generally a spouse or children. Employees can obtain life insurance via their employer if the firm offers a group plan. Almost all full-time employees in big and medium-sized businesses are covered by company-sponsored life insurance plans. Employees can also buy it privately.

Retirement benefits

Retirement benefits are funds set aside to provide employees with a pension or income when they enjoy their retirement. Employers typically make Central Provident Fund (CPF) contributions according to the monthly rates stated by the CPF Act. The current CPF rates to be contributed by employers range from 7.5 to 17% of the employee's wage.

Time off

Sick days, bereavement days, personal days, holidays and vacation days are all examples of time off. Companies that are unable to offer competitive rates and payments may offer employees extra time off. It's not necessary for companies to pay employees when they take time off, but most companies offer at least some paid time off in order to compete for highly qualified employees.

Professional development and continued education

Companies frequently give continuing education programmes as an employee benefit. Some employers may pay their employees to attend college classes, earn a degree in a different area or finish existing degrees. Furthermore, some employers may pay their staff to attend technical lectures, undergo on-the-job training, undertake professional training courses or take a certification test. This can facilitate the personal development of employees, boost their productivity and ultimately, enhance the organisation's bottom line.

Dental and vision insurance

On top of regular health insurance, many employers offer dental and vision care to their employees. Dental insurance covers fillings, cleanings and in certain cases, surgery. Because it's less expensive than health insurance, it may be an economical alternative for both the firm and its employees. Another optional but reasonably priced form of coverage is vision insurance. It helps to cover the cost of corrective eyeglasses and eye exams. If an employee has trouble seeing or wears corrective lenses, vision insurance may be a useful addition to their entire benefits package.

Fringe benefits

Fringe benefits are non-cash rewards intended to retain or recruit skilled personnel. These advantages might include the following:

  • Wellness programmes: An increasing number of businesses are investing in corporate wellness initiatives, which can include subsidised gym memberships, access to nutritionists, mental health support and employee assistance programmes. A corporate wellness programme is based on the concept that when firms engage in their employees' wellness and well-being, they experience increased employee satisfaction, morale and job productivity.

  • Student loan repayment and tuition reimbursement: Some firms provide student loan repayment and tuition reimbursement programmes to their workers as a proactive response to the student loan problem. These initiatives assist employees to decrease their financial burdens while also motivating them to pursue further degrees.

  • Housing and relocation options: Some firms that operate in "talent deserts" recruit new staff by providing housing and relocation alternatives. This might involve providing financial support to employees who want to relocate and collaborating with local housing authorities to assist out-of-state employees in finding residences.

  • Telecommuting or work-from-home options: To make it easier for its employees to accomplish projects outside of the workplace, more and more firms are giving telecommuting alternatives and flexible work hours. Employees are more inclined to accept employment that allows them to perform duties on their own time.

  • Commuter benefits: Companies in regions with extensive public transportation networks may provide tax-free commuting perks. This saves employees' money on transport expenditures including ridesharing apps, public transport fares and work-related parking fees.


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