Staying Competitive: The Types of Compensation You Need to Know About

If your top talent is walking out the door for better opportunities, you may want to look into your compensation structure. Compensation is one of the biggest reasons why employees quit their jobs, with 73% of employees admitting they’d consider leaving their job for a higher paycheck.

A lackluster compensation plan doesn’t just increase turnover rates—it can also discourage top candidates, which can cost companies a lot of money. According to the Society of Human Resources Management (SHRM), the total cost to hire a new employee can be three to four times the position’s salary. Putting that in perspective, it could cost you up to $200,000 to fill a role that only pays $50,000.

By creating competitive compensation packages, you can reduce the amount spent on turnover and redirect those resources to improving the employee experience. In this article, we’ll discuss the most common types of compensation and how to choose the right strategy for your organization.

Once you’re ready to implement your compensation structure, we have you covered: BambooHR makes managing compensation easy by streamlining your processes, so you can coordinate everything from payroll and benefits to PTO, all in one platform.

What Is Compensation?

Compensation is the total amount of payment given to an employee in exchange for work they do for a company. Compensation is usually made up of two parts:

• Direct compensation in the form of a salary or hourly wages
• Indirect compensation, such as health benefits, PTO, and retirement benefits

The combination of these two forms of payment is called total remuneration, or a total compensation package.

Employers typically base compensation on industry benchmarks, company budgets, and the employee’s qualifications and job responsibilities. Employees can also negotiate their compensation, often before they accept the job or during performance reviews.

Today, companies are offering many perks to candidates besides money, so being knowledgeable about these various types of compensation will give your organization a competitive edge during the recruitment process.

What Are the Different Types of Compensation?

Again, the two different types of compensation are direct and indirect compensation. Let’s explore in them in detail.

Direct Compensation

Direct compensation refers to the monetary wages you pay employee. Whether it’s an annual salary or an hourly wage, this is the numerical value that most employees refer to when they say how much they’re being paid. ‌Below are a few examples of direct compensation.

Hourly Wage

An hourly rate is a predetermined amount an employee earns for each hour of work. An employee will usually use a time tracking system to document their hours worked, which is then sent to their manager for approval.

In the US, hourly rates must meet federal minimum wage requirements, and overtime must be paid for any hours worked over 40 hours per week at 1.5x the hourly rate.

Salary

A salary is a fixed amount of pay, usually expressed as an annual sum, that’s typically paid out monthly or biweekly. While a salary is generally based around a 40-hour workweek, the pay would remain the same even if the employee works over 40 hours, as a salaried employee isn’t generally eligible for overtime pay.

Commission

Commission pay is a percentage earned based on an employee’s sales performance or completed tasks. These pay structures are typically found in sales environments and may be the sole compensation offered or added on to a base pay.

Bonuses

A bonus payment is another form of monetary compensation that can be added to an employee’s base pay. While commissions are a percentage based on sales performance, bonuses are a fixed amount of pay awarded to employees for meeting specific goals or achievements.

Organizations often use bonuses as a retention and performance incentive, such as offering an end-of-year bonus to all employees if the company reaches an annual earnings goal. Other common types of bonuses include candidate referral bonuses, signing bonuses, and retention bonuses.

Indirect Compensation

Indirect compensation is all the forms of compensation that go beyond an employee’s salary or hourly wage. These are benefits or perks that supplement an employee’s wages, also known as fringe benefits.

According to the Bureau of Labor Statistics (BLS), benefits make up 29.7% of total compensation in the private labor industry.‌ That’s a sizable chunk of people’s pay they don’t even get in their bank account, so why focus so much on these?

These incentives or “perks” are often what draw candidates to choose an organization, and these incentives are closely tied to the company’s culture.

Examples of Indirect Compensation

• Benefits: Health, vision, dental, and disability insurance are all examples of benefits that an employer may provide. In addition to insurance, employers may also offer retirement plans such as a 401(k) matching program, paid time off, and flexible or health savings accounts.
• Perks: Perks are fun and creative incentives for employees. Some examples include bringing your pet to work, free gym memberships, local business discounts, snacks and drinks provided in the office, and even sleep pods or on-site massages.
• Stock Options and Equity: Stock options are an opportunity for an employee to purchase shares in the company they work for—usually at a reduced price. Equity is partial ownership of the company, most commonly represented in stock shares. An employee who owns shares in a company that’s profitable receives compensation in the form of capital gains and dividends.

What Is Total Compensation?

Total compensation, or total remuneration, is the total sum of both direct and indirect compensation. Offering benefits in addition to base pay becomes particularly attractive in a competitive market where candidates are comparing opportunities with similar base pay.

When a high salary alone is no longer enough to attract and retain candidates, the benefits and perks added on top can make or break the decision for potential employees deciding between offers.

To communicate the full value of a compensation package, you can use a total compensation calculator to highlight benefits and other forms of indirect compensation that may not be so obvious up front to a potential candidate.

If an employee understands the monetary value of the insurance coverage, retirement savings, and stock options that are included in their compensation, they’re more likely to recognize the investment that the company is making in their wellbeing.

All that said, combining these various forms of compensation into a compelling package for potential candidates isn’t always simple. To fine-tune your compensation strategy, you’ll need to dig into the data and identify the particular needs of your employees.

How Should You Determine Compensation for Your Employees?

Although fun perks, like in-office games or lunches, can certainly draw some attention, they can be very costly to provide and don’t necessarily address employees’ top priorities. Use these tips to avoid costly missteps as you develop your compensation strategy.

1. Conduct Industry Research

Knowing what other organizations offer their employees is a good starting place for exploring compensation plans. For example, salary and wages account for 70.3% of total compensation in private industries. If you’re a private company, you’ll likely want to craft a compensation package with a similar ratio.

Keep in mind that as the market changes, you’ll have to reevaluate your compensation strategy to reflect your company’s budget and goals.

How to Get Reliable Data When Conducting Industry Research?

• Look into companies within your industry and geographic location that are similar in size, scope, and brand strategy. Be sure to include both direct competitors and industry leaders.
• Use reputable sources such as government labor statistics, sector associations, and specialized consulting firms for your industry reports, salary surveys, and compensation benchmarking studies.

2. Understand Current and Potential Employees

Every organization is different, so you’ll need to create a plan tailored to both your current and prospective employees’ needs. You can get a better understanding of what employees need through employee feedback surveys and internal data reports.

As you investigate your employees’ specific compensation needs, keep the following factors in mind:

• The local cost of living, state income taxes, and labor laws
• Your employees’ and job candidates’ levels of education, professional certifications, and specialized skills that might add value to roles within your company.

3. Identify Essential Benefits

Benefits can make all the difference in the value of a compensation package. Using the research you’ve conducted on industry standards and employee needs, as well as your company goals, identify the essential benefits that should be offered, such as healthcare, dental and vision insurance, retirement plans, PTO, and professional development opportunities.

Check state and federal laws to ensure compliance, e.g., in the US, the Affordable Care Act (ACA) or Family and Medical Leave Act (FMLA).

4. Explore Expanded Benefits Options

In addition to offering basic benefits like health insurance, you can make your compensation package more competitive by including extra benefits that address important employee concerns.

These benefits should align with the needs specific to your industry and region, as well as address any employee feedback you’ve received.

Examples of expanded benefits include:

• Extended parental leave
• Flexible hours or hybrid work
• Student loan support
• Home loan support
• Employee assistance programs
• Childcare reimbursements

5. Evaluate Company Goals and Budget

As you develop your strategy, determine the company’s resources and budget available for employee compensation. Collaborate with leaders to define your goals around retention rates, performance, and employee satisfaction to find a compensation plan that reflects the company’s priorities and values.

A Solid Compensation Plan Boosts Business Success

Investing in a great compensation package goes beyond financial remuneration. It’s a strategic necessity that boosts business success amid an increasingly competitive marketplace while showing your company’s commitment to employee satisfaction and wellness.