What Is Compensation?

Compensation is an employee’s regular salary or hourly pay, as well as any other types of wages such as overtime , bonus pay, retirement benefits, health benefits, stock options, and other non-financial incentives.

Employers use various forms of compensation to recruit and retain employees and incentivize desired performance. Companies often adjust their compensation according to business goals, available resources, and the marketplace. However, employee compensation is also governed by local, state, and federal laws. Such of those laws help determine the following:

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What Are the Types of Compensation?

There are two types of employee compensation, direct and indirect.

Direct compensation can include:

Indirect compensation can include:

Insurance Benefits: These can take the form of health, dental, vision, disability, and life insurance. These benefits can be costly so some small businesses don’t offer them until they reach 50 or more employees, at which point offering health insurance is mandated by law.

Retirement Benefits: This is a low cost and simple benefit that businesses both large and small typically offer their employees.

Other Benefits: Paid time off, vacation time, transportation discounts, and other similar benefits are other forms of indirect compensation that can attract and retain valuable employees.

Incentives: Indirect incentives can be anything from a company-paid cell phone to the use of a company car.

Equity-Based Programs: A more complex form of compensation is an equity-based program where an employee is tied to a company via a percentage of ownership.

What Is a Compensation Package?

A compensation package is a total compensation statement awarded to an employee. In addition to both direct and indirect compensation, the package can also includes other things such as relocation expenses, tuition reimbursement, employee assistance, learning and development offerings, and any possible career-advancement opportunities.

What Is Nonemployee Compensation?

Nonemployee compensation (also called self-employment income) is paid to an independent contractor rather than an employee. This type of compensation includes fees, commissions, and awards for services rendered. As an employer, you do not withhold federal income taxes (this is done by the nonemployee) and do not need to pay the employer portion of FICA. If you paid more than $600 in a year, you need to report the wages to the IRS on Form 1099-MISC.

How Do Companies Use Compensation?

Since compensation is the primary reason employees work, it’s a powerful tool that employers can use for many purposes, such as:

4 Ways To Communicate Compensation to Drive Strategic Outcomes

Communicating compensation can be tricky, but doing it right can yield incredible benefits. Learn about HR’s strategic outcomes and how compensation connects to them.

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