TYPES OF COMPENSATION

  

 

What is compensation?

Compensation refers to any payment given by an employer to an employee during their period of employment. In return, the employee will provide their time, labor, and skills. This compensation can be in the form of a salary, wage, benefits, bonuses, paid leave, pension funds, and stock options, and more (Jay, 2021)

Why is understanding different Types of Compensation Important?

Many sole proprietors or formerly small companies who are expanding quickly lack a skilled HR team. This indicates that no strategy was considered while creating their salary packages.

The following can happen if you don't have an effective compensation plan and don't provide your employees with the correct balance of forms of salaries:

• Attrition

• De-motivation

• Reduced Productivity and therefore Reduced Profitability

• Lack of Satisfaction and Engagement

• Failure to Attract Top Talent

• Reduced Employee Loyalty

 

Types of Compensation

Around the world, different types of compensation are preferred. It is typical to discover that attractive health advantages make up an important portion of their pay in countries where medical costs are comparatively expensive.

There are two types of compensation:

• Direct compensation (financial)

• Indirect compensation (combination of financial and non-financial)

HR professionals, no matter the size of the organization they work for, have to have a clear understanding of the different types of compensation. It is their duty to communicate the details of the compensation package to candidates and new employees. Understanding the different types of compensation also helps HR professionals when they have to conduct performance reviews and give employees increments.

 

1. Direct compensation

Direct compensation refers to the payment made to an employee in the way of money or finances. There are four main types of compensation that come under direct compensation:

• Hourly

  Unskilled, semi-skilled, contract, temporary, part-time workers, frequently bill their employers on an hourly basis. Regardless of the quality of their labor, workers get compensated for the time they put in.

This is evident in the IT, construction, tourism, and logistics industries. Employers often let workers know how much time their services are needed when employing them for hourly pay. Hourly employees may qualify for overtime pay if completing a task takes longer than expected.

 

• Salary

Full-time employees, skilled employees, and those who are in senior management positions typically receive salaries. Having a fixed salary generally indicates that the employee's company has plans to invest in this employee and work with them for the foreseeable future.

Some jobs that usually get paid in annual salaries are teachers, accountants, doctors, managers, and so on.

• Commission

The commission system is typically preferred for compensating sales teams. Typically, the commission percentage is predetermined for a certain volume of sales. If the sales goals are met or even surpassed, it can rise. The product being sold and the profit margins involved affect the commission %. Real estate, car sales, software sales, and similar fields are typical examples of businesses where commission-based pay is typical. Some businesses encourage employees to work harder in order to earn more money by providing a meager wage package together with an alluring commission plan.

• Bonuses

Many organizations reward their employees for their contribution to the success of the business at the close of a financial year in the way of bonuses. Some companies hand out bonuses to all employees. Others hand out bonuses to those employees that have contributed more than others. Bonuses are usually paid annually but can also be paid quarterly or on a project basis.

• Tips

Tips also constitute direct pay for a worker's services. In some countries, it is common for waiters to only work for tips paid to them by the customer.

2. Indirect compensation

The other major type of compensation is indirect compensation. Although employees may not receive cash directly, they still stand to gain financially from some types of indirect compensation. In contrast, other types of indirect compensation do not entail specific financial benefits.

Here are some types of indirect compensation:

• Equity package

Employee compensation using equity, or a tiny portion of the business in the form of shares, is becoming more and more common. Previously only seen in law firms, employee equity is now being offered by IT companies and sizable retail chains.

Giving an employee equity or shares increases their loyalty since they stand to gain more financially from owning business stock as a result of the firm's success.

• Stock options

This type of compensation allows employees to purchase a fixed number of shares at a specified price after a certain tenure. Stock options do not mean that employees have any ownership of the company.

• Benefits

Benefits that are given to employees usually entail healthcare benefits, health insurance, mental health benefits, retirement plans, and so on. Retirement funds and pension plans are also attractive benefits that could be offered to employees.

• Non-financial compensation

Non-financial compensation includes the following:

• Paid Time Off

• L&D Opportunities

• Maternity Leave

• Childcare Benefits

• Company Transport

• Company Equipment

• Meals at work

• Flexible Work Schedules

Companies often offer seemingly small benefits, such as access to the gym, free entertainment tickets, free stay options, or even access to indoor sporting equipment. All these seem like minuscule efforts and even unnecessary; however, when put together, the overall package becomes quite attractive to an employee.

 

How Do You Determine the Compensation You Should Offer?

There are a lot of different factors that go into deciding the types of compensation and the level of compensation you should offer for a role. Here are some factors that will help you decide:

• Minimum Wage Regulations

• Required experience

• Required Qualifications

• Type of Job

• Job Title

• Responsibilities.

• Industry Standard Wages

• Cost of Living at Job Location

• Creating the right compensation package can help attract and retain top talent.

Most organizations in the same industry offer similar salary structures. This means that different criteria must be used to determine which company the person you want to hire will work for. The type of compensation you offer can make a big difference here. You need to know what's trending and what your target talent is looking for. Remember, the happier your talent is, the more likely they are to work harder and contribute more to the company. 

  

Conclusion

Organizations that are transparent about compensation management increase employee engagement, reduce turnover and significantly improve the overall employer brand. HR departments need to create strategic compensation plans.
Keep in mind that it depends on the location. There are labor laws and compensation policies that must be followed. You also need to make sure your compensation plan is aligned with your business goals and staffing budget. However, if you are looking for top talent, you should be prepared to offer competitive compensation packages. As mentioned before, the type of rewards to include is also a big determining factor.

 

References

Jay, S., 2021. www.aihr.com. [Online]
Available at: https://www.aihr.com/blog/types-of-compensation/
[Accessed 02 05 2023].

Kolmar, C., 2022. www.zippia.com. [Online]
Available at: https://www.zippia.com/advice/types-of-compensation/
[Accessed 02 05 2023].

Stewart, A., 2020. www.payscale.com. [Online]
Available at: https://www.payscale.com/compensation-trends/what-are-the-different-types-of-compensation/
[Accessed 01 05 2023].