Pay & Salary

Everything You Need To Know about Compensation and Benefits

March 25, 2021

Most companies want to recruit the most qualified employees and keep those employees productive and loyal. To attract and keep their high-performing employees, companies usually provide a competitive compensation and benefits package, which includes bonuses, salaries, wages and commission structures. In this article, we discuss what compensation and benefits are, learn why they are important and explore some of the most important employee benefits.

What are compensation and benefits?

Compensation is the payment made to employees in exchange for their service or labor. It's just another term for wages. Managers work with a company's human resources department to set and raise wages based on several factors, including competitive analysis, supply and demand, personal qualifications, labor negotiations and cost of living.

Managers may need to negotiate compensation both within their company and with their new hire. For instance, they may need to make a case for paying one individual more than another by explaining why the first employee's qualifications and skills positively impact the company's bottom line. The reasons behind compensation are complex—managers need to keep their eyes on the competition and evolving trends to ensure their employees get fair pay.

Benefits are a part of the employee compensation package, and they're usually worth a great deal to employees. Benefits are any perks that companies offer to employees in addition to salary. Many organizations offer a competitive package of benefits to retain or attract quality employees. Smaller companies might offer fewer components in the package, but most larger companies and government agencies offer an extensive and competitive benefits package.

In addition to benefits, other components of employee compensation include the following:

  • Salary and wages: In a compensation package, salary and wages usually make up the single biggest component, as they're what current and potential employees use as a common point of comparison. The employee's skills and experience should determine the salary, with subsequent raises in the future depending on the employee's value, contribution to the company and performance level.

  • Bonuses: Companies typically use employee bonuses as performance incentives and give them out at the end of the year in a single lump sum.

  • State/federal pay requirements: Federal and state laws are in place to protect employees from bad employment practices that could negatively affect their paycheck. Many states require employers to pay the state minimum wage, which is a bit more per hour than the federal wage. The Fair Labor Standards Act (FLSA) requires employers to pay overtime to certain employees. Overtime is usually given to salaried employees who work more than 40 hours in a week.

Related: Compensation Packages: Definition and What They Include

Why are compensation and benefits important?

The employee compensation and benefits package is one of the most important aspects of running a business. It can help a company flourish and compete in its respective industry. Some of the benefits of providing the right compensation and benefits package to employees include:

Attracting high-potential talents

Employees always aim to put themselves in the best possible financial position. Those who are worth a specific compensation amount usually know their value and look for positions that pay accordingly. Providing a competitive salary incentivizes a culture of high output. When employees perceive that they will be paid more than their counterparts at other companies, it usually motivates them to exert extra effort. They will work harder to show that they deserve that salary.

Increasing employee loyalty

When employees are compensated well, they are less likely to leave the company. Providing proper compensation and benefits is one reason employees stay with employers. Loyalty leads to low turnover rates and high employee retention, which means that companies don't need to continue spending energy, time and resources to recruit new candidates.

Boosting employee motivation

Compensating employees properly shows that the company values them not only as workers but also as human beings. When employees feel valued, they are more likely to care about their work and put in more effort during the workday. This also increases their morale and the overall workplace atmosphere. In addition, when employees know that they're getting benefits like bonuses in the future, they're increasingly motivated to exceed expectations.

Increasing profitability and productivity

When employee morale is high, their productivity increases. Productivity in relation to compensation begins with employees feeling valued, which increases loyalty and enthusiasm. Additionally, the longer employees are with a company, the more they learn and the more efficient they become. This improves productivity over time and can help increase a business's profits.

Increasing job satisfaction

Providing the right compensation and benefits package improves job satisfaction. Employees often boast about holiday bonuses, and those with stock options likely observe how the company stock is doing. The right compensation and benefits program invests employees into the work being accomplished, which provides them with a greater sense of satisfaction when the company succeeds.

The most important benefits

Some types of employee benefits are optional, while others are required by law. The list of legally required benefits varies from one place to another. Here are some important employee benefits that companies usually provide:

Long-term incentives

A competitive employee compensation and benefits package could include stock options or stock grants that serve as a long-term incentive. An employee stock option is when a company allows its employees to purchase a certain number of shares in its stock at a pre-set, usually reduced price over a certain period of time.

Related: Employee Benefits: Examples of the Most Common Employee Perks

Health insurance

This is fairly standard with large and medium-size organizations and some small businesses. When an employer pays for health insurance, it provides great value to employees and saves them money. This gives employees peace of mind because they know they have coverage, even with existing health conditions.

Health insurance comes in many forms that employees can choose from. For example, an employer may offer a health reimbursement account (HRA), flexible spending account (FSA) or health savings account (HSA).

Disability insurance

Disability insurance replaces part or all of the income that's lost when an employee cannot perform their job due to injury or illness. There are several types of disability insurance, including:

  • Short-term disability insurance: This insurance covers injuries or situations that can put an employee out of work for a short period, like a couple of months or a few weeks. The types of injuries or circumstances that short-term disability insurance covers include a broken limb or spinal cord and outpatient medical procedures that require recovery time. It may also cover maternity or pregnancy leave.

  • Long-term disability insurance: This insurance provides employees with benefits when a permanent or long-term disability, injury or illness leaves them unable to perform their job. For instance, an employee with leg injuries could be provided with long-term disability benefits until their retirement age. Other situations that long-term disability insurance covers include mental illnesses, cancer or medical conditions that require multiple surgeries.

Life insurance

Life insurance protects an employee's family in case they die. Benefits are paid all at once to the policy's beneficiaries—typically a spouse or children. Employees can get life insurance through their company if it sponsors a group plan. Company-sponsored life insurance plans are standard for almost all full-time employees in large and medium-sized companies. Employees can also purchase it privately, but this is often more expensive.

Retirement benefits

Retirement benefits typically refer to the money set aside to provide employees with a pension or income when they retire from their careers. There are two major types of retirement plans: pension plans and 401k plans.

In a pension plan, often called a defined benefit plan, the amount of money the beneficiary will receive is pre-determined based on salary and years of service. In this plan, the company bears the risk of investment.

In a 401k plan, often called a defined contribution plan, the employee and employer contributions are specified, but the amount of money they receive is typically tied to investment returns, which are not guaranteed.

Time off

Time off includes sick days, bereavement, personal days, holidays and vacation days. Companies that cannot offer competitive salaries and wages may provide employees with more time off. Companies are not required to pay employees when they take time off. However, to compete for highly qualified employees, most companies offer at least some paid time off.

Related: Everything You Need To Know About Part-Time Employee Benefits

Family and medical leave

Companies that have over 50 full-time employees are required to offer family and medical leave to any eligible employee. The Family and Medical Leave Act (FMLA) dictates that any qualified employee is allowed to take up to 12 weeks of unpaid leave per year to care for a sick family member, a newborn baby or any family-related emergency without their work being put at risk.

Related: 25 Types of Employee Benefits

Professional development and continued education

Another employee benefit that companies often provide is continuing education opportunities. Some companies pay their employees to take college courses, acquire a degree in a new field or complete their degrees. In addition, some might pay their employees to attend technical lectures, pursue professional training courses or take a certification examination.

Dental and vision insurance

In addition to general health insurance, many companies provide their employees with dental coverage. Dental insurance covers teeth fillings, cleanings and sometimes surgeries. It's cheaper than health insurance, so it can be an affordable option for both the company and its employees.

Vision insurance is another optional but affordable type of coverage. It contributes to the bill for corrective lenses and eye examinations. If an employee struggles with their eyesight or if they wear corrective eyewear, vision insurance might be a worthwhile addition to their comprehensive benefits package.

Fringe benefits

Fringe benefits are a variety of non-cash payments used to retain or attract talented employees. These benefits may include the following:

  • Wellness programs: More and more employers are investing in corporate wellness programs, which can include discounted gym members, access to nutritionists, mental health assistance and employee assistance programs. The idea behind a corporate wellness program is that when companies invest in their employees' wellness and well-being, they see more employee satisfaction and improved morale.

  • Student loan repayment and tuition reimbursement: As a way to proactively combat the student loan crisis, some companies offer student loan repayment and tuition reimbursement programs to their employees. These programs help reduce the financial burden on employees and motivate them to pursue advanced degrees.

  • Housing and relocation options: Some companies that operate in areas that are considered "talent deserts" are recruiting new employees by offering housing and relocation options. This may include giving financial assistance to employees looking to move and partnering with local housing authorities to help out-of-state employees find apartments.

  • Telecommuting or work-from-home options: More and more companies are offering telecommuting options and flexible work hours to make it easy for their employees to complete assignments outside of the workplace. Employees are more likely to take a position that gives them the flexibility to complete tasks on their own time.

  • Commuter benefits: In areas that have large public transportation systems, companies may offer tax-free commuter benefits. This reduces the employee cost for travel expenses, such as rideshare apps, train tickets and work-related parking fees.


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