Compensation typically refers to the financial remuneration a person receives in return for their services. However, within a workplace contract, compensation is made up of monetary and non-monetary rewards that a company gives an employee in return for their work. 

An employee’s compensation package includes their salary or wages as well as any commission, bonuses, or additional benefits that are highlighted in the employment contract when onboarding. A balanced package with both direct and indirect compensation is a crucial approach to attracting and retaining employees.

Direct vs Indirect Compensation

Direct compensation is the money paid to an employee in exchange for their work. This direct compensation can be paid in cash, by check, or most commonly, by electronic funds transfer (EFT) at the intervals stated in the contract – often weekly, biweekly, or monthly. 

In contrast, indirect compensation refers to the additional rewards and remuneration that are not paid directly to the employee for doing their job. This could be a company car, a private health insurance plan, paid time off (PTO), or commission.

Types of Compensation

There is a range of monetary and non-monetary rewards that add to the value of compensation that an employee receives for their work. Here are some types of compensation:

Payment

Depending on the job position and contract, an employee will receive either an annual salary or an hourly wage, which is paid at regular intervals. 

Hourly pay, common for casual and part-time employees, is based on the actual number of hours an employee works during a specific pay cycle, whether that be weekly, bi-weekly, or monthly. 

Meanwhile, a salary is an agreed-upon amount of annual compensation for full-time workers and sometimes part-time workers.

Predetermined annual salaries are typically divided and paid into the employee’s bank account on a monthly basis, but can also be paid on a weekly or biweekly basis.

Commissions

Receiving commission is most common for those in sales and performance-driven roles. It is an additional monetary compensation in return for achieving a set goal, which serves as an incentive for employees to perform well. 

Commission often represents a percentage of the total revenue generated by that employee. For example, a car salesperson might earn a 5% commission on each car they sell. If they sell a car for $40,000, they would earn $2,000 in commission on top of their annual salary.

Bonuses

Bonuses are often tied to workplace performance, similarly to commission. Many employers allocate bonuses to their employees depending on department achievements or quarterly and yearly outcomes. 

However, some employers give their employees bonuses during holidays, as a token of appreciation, for referring a friend or family member to a role within the company, or for staying in a role for a specific period of time. This boosts employee retention.

Workplace benefits

Workplace benefits are incentives that employers provide to employees to boost the morale and retention of their workforce. When employers include benefits as a form of indirect compensation, it leads to increased job satisfaction and loyalty, which are both critical for retaining top talent.

Here are some benefits an employee may receive in addition to being paid for their work:

  • Private health Insurance: Employers may pay for and enroll their employees in a private medical insurance plan that covers medical, dental, and vision care.
  • Retirement plans: Whilst not a mandatory requirement, many employers in the US will make contributions to an employee’s retirement plan to help them save for retirement, as this attracts and retains employees.
  • Paid time off (PTO): Full-time and part-time employees will be paid for taking their vacation days, going on sick leave, and sometimes, having public holidays off.
  • Flexible working arrangements: Options to work remotely and choose flexible hours have emerged as an essential workplace benefit, with Randstad’s recent survey finding that 83% of workers in the US consider flexible working hours important.
  • Training programs and diplomas: Employers may cover all or some of an employee’s educational or professional development costs in order to upskill their workforce.
  • Well-being benefits: Employers may offer their employees access to gym memberships, online counseling sessions, and discounts at local venues to demonstrate their care for health and well-being, as this can boost employee retention.

Workers compensation

Workers’ compensation, commonly known as workers’ comp, is an insurance program that supports employees who become injured or ill while working or at the workplace. It usually pays the worker part of their usual wage in lieu of time missed from work and medical bills.

The rights to workers’ comp differ per state, but are commonly provided for:

  • Physical injuries caused by workplace accidents: For example, cuts, broken bones, or damaged organs.
  • Disabilities caused by workplace accidents: For example, blindness, hearing loss, amputations, or spinal damage.
  • Physical injury caused by repetitive use or strain: For example, nerve compression syndromes, carpal tunnel syndrome, or stress fractures.
  • Occupational illnesses: For example, dermatitis, respiratory conditions, asbestosis, or musculoskeletal disorders.

When an injured or ill employee receives workers’ comp, they waive their right to sue their employer for the accident or cause of illness.