Structuring an effective compensation package to attract and retain employees is an important function of organizational effectiveness. Compensation may achieve several purposes assisting in recruitment, job performance, and job satisfaction. The Oxford Advanced Learner’s Dictionary defines compensation as, “money that an employee receives for doing their job.” It is the process of providing adequate, fair, and equitable remuneration to the employee. However, compensation encompasses more than just the monetary aspect. Compensation refers to a wide range of both monetary and non-monetary rewards given to employees as part of the employment relationship. Compensation is paid in many forms. The company’s goals are achieved while the employee earns money. While there are many factors that influence an individual’s choice to work for an organization, compensation plays a major role in that decision. Depending on their personal circumstances and stage of life, some employees may value monetary or direct compensation less than more robust, non-monetary benefits or indirect compensation, such as health, dental, vision, and life insurance. Compensation is an important component of effectively managing the labor force.

Some types of compensation given to employees include the following:

Monetary or Direct Compensation:

Base Pay
Base pay is agreed-upon pay that the employee receives for performing the job. It is most often the largest component of the compensation package. It can be paid as an hourly wage, based on hours worked (for non-exempt employees), or it can be paid as a specific, regular salary amount paid periodically (e.g., monthly, biweekly, etc.). Base pay can also be a percentage of sales, etc. Holidays and vacation or paid time off are included in base pay/salary. Base pay also encompasses ancillary pay (e.g., shift differentials, weekend pay, or on-call pay).

Variable Pay
Well-designed variable pay plans incentivize employees to work harder to achieve goals and earn additional pay beyond their regular base pay. Variable pay is characteristically based upon performance and/or achievement of goals – individual, organizational, or some combination of the two – and may be guaranteed based on pre-selected criteria or may be discretionary. This type of compensation can vary based on levels within the organization, such as senior executives, middle management, or front-line workers, all with different levels of compensation available to recognize and reward employee contributions above and beyond job duties. For example, senior executives may enjoy a larger percentage of variable pay that is tied to achievement of strategic organizational goals since the company’s performance is closely tied with their performance. Middle management’s objectives may be tied to an overall department level of performance, while front-line workers may receive a flat amount tied to a group goal or individual goals.

  • Incentive Pay – This is performance-based compensation that rewards attainment of pre-defined goals or objectives.
    • Short-term Incentive Pay – This is typically based on annual objectives.
    • Long-term Incentive Pay – This is typically based on a performance period of two or more years and includes cash and equity.
  • Commissions – Salespeople may earn a percentage of sales in addition to their base salary.
  • Bonuses – This includes performance bonuses, annual bonuses, Christmas bonuses, spot bonuses, referral bonuses, and retention bonuses. Bonuses may be discretionary or non-discretionary.
  • Profit sharing – This reward is based on how well the organization does.
  • Recognition programs – These programs may be non-monetary or constitute a small monetary amount (such as gift cards).
  • 403B, 457B – These refer to deferred compensation that an employer pays or supplemental contributions made by the employee (such as employer-matching contributions).
  • Defined benefit contributions – These contributions may be made to retirement/pension plans.

Non-Monetary or Indirect Compensation:

Compensation encompasses not only base pay/salary, but also the employer-paid costs of employee benefits, such as medical, dental, vision, 401K matching contributions, life insurance policies, holidays, paid time off, and more. With the cost of healthcare skyrocketing, the perquisite of an employer-supplemented group health plan makes the premium costs more manageable to individuals and families.

  • Health insurance
  • Vision insurance
  • Dental insurance
  • Basic life and disability insurance – long and short-term disability, long-term care
  • Accidental death & dismemberment
  • Pet insurance
  • Home and auto insurance
  • Legal benefits
  • Tuition reimbursement
  • Gym memberships
  • Discounted tickets to amusement parks or attractions
  • Auto allowance
  • Cell phone allowance
  • Professional association membership fees
  • Stock, equity compensation
  • Professional development
  • Flexible spending accounts
  • Retirement benefits, such as a 401K matching plan

Companies that are well versed in compensation – both monetary and non-monetary – are able to articulate the total compensation package that promotes the organization. Base pay may not always be aggressively competitive on its own. However, assessing the total compensation provided, both monetary and non-monetary, allows for consideration of offers on a level playing field. For more information on calculating compensation and benchmarking salary and pay, visit ERI.