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What is compensation?

Compensation is the payment that an employer distributes to their workers in exchange for the time and services they provide. The main purpose of both monetary and non-monetary compensation is to keep employees motivated and turnover rates low. If you are starting a business, understanding more about the topic will help you manage your company more effectively.

Generally under the purview of a human resources department, compensation packages are calculated according to a variety of factors. Namely, those considerations include an employee’s level of responsibility, skills and prior experience, and influence within the organizational structure.

Compensation can also refer to the court-ordered financial restitution a workplace owes its employees due to a work-related injury or loss.

Direct versus indirect compensation

Sometimes compensation takes the form of a monetary amount, paid in a fixed or variable amount at set times. That is known as direct compensation. However, there are other ways to offer value to employees besides a paycheck. Known as indirect compensation, these may include legally-mandated contributions (e.g. Social Security taxes in the United States) or perks like stock options and meal stipends.

Non-cash benefits can still have a major impact on employee satisfaction. In fact, a Glassdoor survey found that nearly 80% of employees would opt for more benefits over a raise in their salaries. That supports the idea that, like direct compensation, benefits can also be used to build loyalty and satisfaction amongst workers. For instance, a Fractl study found that top-notch health benefits could persuade applicants to accept a job that pays less than one which features a higher salary but lower-quality insurance.

Together, your direct compensation and your indirect compensation make up what’s called your total remuneration package. This is a comprehensive way of looking at the total value of the compensation and benefits you will be receiving.


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Types of compensation

As mentioned above, compensation and benefits can come in direct or indirect forms. Within those two categories, there are many possible types of compensation:

  • Fixed salary

  • Overtime pay

  • Commission or performance-based pay

  • Bonuses or merit-based pay

  • Stock options

  • Health benefits

  • Travel or food stipends


Related Term

Human Resources (HR)

Related Term

Fixed Cost

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