Compensation and benefits

Compensation and benefits

In 2018, 23% of employees indicated they weren't sure if they were being paid properly, ranking fair pay as one of the most unfavourable poll issues, states Jocelyn Stange. For several years, the item "I am paid fairly" has placed among the bottom five in terms of employee favorability. Some employees do not believe they are being fairly compensated, while others do not know — and this is a barrier to engagement.


Offering a compensation and benefits package that employees find tough to refuse is one of the essential tools in an H.R. professionals arsenal for attracting top talent. According to the Society for Human Resource Management, 63 percent of U.S. employees believe that compensation and benefits are an essential element in determining job satisfaction, second only to respectful treatment.

What are Compensation and Benefits?

Compensation and benefits refer to the compensation/salary and other monetary and non-monetary benefits passed on by a firm to its employees in return for their services.


Compensation and benefits are key aspects of HRM since they help keep employees motivated and are the most critical hygiene considerations. It assists in providing advantages to employees depending on their performance and activities, and it brings out the best in employees at the workplace, according to MBA Skool Team.


In its depth, compensation is the monetary incentive that employees receive in exchange for their job and the services they provide to the firm. Compensation comprises monetary compensation such as bonuses, profit sharing, overtime pay, recognition rewards, and sales commission, among other things, as well as non­monetary advantages such as a company-paid automobile, company-paid housing, and stock options.


Benefits, on the other hand, are non-monetary rewards offered to employees as a show of appreciation for their efforts. Employees like amenities such as flexible work hours, the ability to work remotely, access to gym memberships and catered meals, and a casual dress code.


Differences between compensation and benefits


While compensation and benefits may appear to be the same to an employee (a remuneration from an employer), these are some of the major differences:




Compensation is a broad term that refers to anything that a business provides to an employee in exchange for their effort.

Benefits are a type of compensation.

Compensation is one approach for a company to attract top employees.

Benefits are used to incentivize employees to perform better.

Compensation can be monetary or non-monetary.

Benefits are always non-monetary.

Compensation is a payment made to an employee for their work at a company.

Benefits are an indirect payment for their work.

Compensation is normally entirely taxable, or a portion of it may be tax-free.

Benefits may be tax-free or partially tax-exempt.



Types of Compensation

Compensation can be provided in both monetary and non-monetary means.


1. Direct Compensation

It enables companies to ensure that employees are paid fairly and without bias within the confines of a company. This sort of pay includes all perks, including the employee's income and health-related benefits.


It removes the worry of the cost incurred loss from the employer's mind, removing the possibility that a well-trained employee will leave the firm for the competitor.


Among the several monetary kinds of compensation are the following:

  • incentives
  • employee recognition and rewards
  • a sales commission
  • profit-sharing,
  • compensation for working extra hours, etc.


2. Indirect Compensation

Employees are motivated indirectly via indirect compensation. It does not entail a direct movement of funds between the two parties. Instead of receiving cash rewards, employees are assisted with various other helpful activities. It eventually fosters a sense of belonging and admiration in the firm, deterring people from quitting the corporation.


Non-monetary types of compensation include the following:

  • reimbursement for mobile phones usage
  • Public appreciation
  • Transfer service
  • Opportunities for advancement
  • company-paid accommodation
  • Travelling office automobile provided by the company.
  • Free online course scholarship.


The Importance of Compensation and Benefits

What is the importance of compensation and benefits?

The more talented a company's employees are, the better its output and bottom line. Human Capital Hub states that a competent approach to workplace remuneration and benefits goes a long way toward ensuring that a company's employees are satisfied.


1. Attracting top talent

People are continuously attempting to put themselves in the best financial position possible. Those worth a particular amount of money are often conscious of their worth and seek employment that adequately rewards them. Examine the pay and benefits packages provided by your competitors. To attract excellent candidates, make sure you offer a comparable compensation package to potential employees.


2. Employee Motivation

Employees who are adequately compensated reflect that you value them as employees and persons. When employees feel valued, they are more likely to come to work. Furthermore, higher corporate morale motivates workers to go to work and do a good job.


3. Increase productivity

Happy employees are more productive. Employees that feel valued are more driven and loyal, resulting in higher productivity. Employees are more motivated to do a good job, but they also learn more and become more efficient as they work for the business for a longer period.

4. Job Satisfaction

When the right payment system is in place, job satisfaction rises. Employees may brag about their holiday bonuses or keep a close check on the company stock because they have stock options. The right compensation program engages employees in their work, giving them a sense of ownership. According to Human Capital Hub, 84 percent of employees with high benefit satisfaction report high job satisfaction


What are the key components of compensation and benefits?

As previously said, compensation and benefits can be broken down into many components such as salary, time off, healthcare, and well-being policies. However, there are three major components to compensation and benefits:

Fixed pay

Fixed pay is the bare minimum of money that an employer pays to their employees, excluding any incentives or overtime. An employee is paid monthly rather than on an hourly basis. Minimum salary, employee job, cost of living, industry standard of pay, and other factors all play a role in determining this figure.

Variable pay

Variable pay is a payout from an employer that is based on an employee's success and the company's general performance.

Equity compensation

Stock options and stock options are sometimes included in employee remuneration packages. These are non-cash assets that signify ownership of the company. These stocks are included in an employee's remuneration package as equity pay. However, these stocks often vest only after an employee has worked for the company for a certain period.


What are the ways to calculate compensation and benefits?

While governments ensure that everyone who chooses to work is paid a minimum wage, businesses frequently use an industry-wide standard to determine how much they pay their employees. There are several ways to accomplish this:


Salary Surveys

According to Quantum Workplace, less than three-quarters of individual contributors and supervisors believe they are fairly compensated. Job level and perception of pay have a perfect inverse relationship – as position level declines, employees are more likely to perceive being paid unfairly.


That's where salary surveys come in!


Every industry has specific compensation requirements that must be met to attract the most qualified individuals. Salary surveys assist businesses in determining the benchmark of pay. These surveys are crucial for ensuring fair pay practices and maintaining employee satisfaction. Additionally, resources for creating a pay stub, can help employers generate accurate and professional paystubs, further enhancing transparency and trust in compensation practices.

Salary surveys are frequently conducted by a pay specialist hired by a company e.g. Industrial Psychology Consultants. These professionals collect information from various companies concerning the remuneration packages they provide to their employees. This information is then anonymized and sold back to the corporations to estimate an industry norm of compensation.

Compensation managers will calculate the best salary for a position and the salary range for that position. Because applicants differ greatly, it doesn't always make sense to pay everyone the same amount. One person may have more experience and superior talents than another and thus be entitled to a greater wage. Each range has a midpoint, which is referred to as a compa-ratio. If your compa-ratio is 100%, you are at the midpoint of the compensation range. The range enables businesses to define their wage offerings appropriate for their size while also conforming to an industry norm.


Regression Analysis

When determining a wage based on many characteristics, H.R. professionals frequently employ an algorithmic technique. These variables can include an employee's current income, greatest educational qualification, longevity at a company, and work performance ratings.

Regression analysis is typically acknowledged as reliable by courts, easily customizable, and effectively isolates the relationship between gender (or race) and compensation. However, it cannot be used to examine job groups with few people (usually less than 20-30) or heterogeneous groups that lack at least a critical mass of employees of each gender (or race).



To assist firms to grow greatly in the future, every organization must incorporate compensation and benefits into their policies. Assume your corporation wishes to keep its best talent indefinitely. The organization's best talent is constantly on the point of being attracted by competing organizations' attractive compensation packages and other benefits. In that scenario, employing them through Compensation and Benefits can be a wonderful alternative.

Denzel Moyo
This article was written by Denzel a Consultant at Industrial Psychology Consultants (Pvt) Ltd

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