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What Does Compensation for Work Actually Mean?

Compensation is an important element when it comes to hiring and retaining employees. The right compensation can convince quality candidates to accept your job offers and makes current employees feel valued and appreciated. According to an Indeed survey, the vast majority of job seekers (83%) said good pay/compensation is the factor that most attracts them to a new job.* Not only that, but 39% of workers said they are searching for a new job because they want better compensation or benefits.**

But compensation doesn’t just mean salary or hourly pay rate. It involves all of the expenses you pay for each employee (e.g., commissions, overtime, insurance plans). This article offers a compensation definition, discusses some of the different types of employee compensation, what you should consider when creating compensation strategies and answers some frequently asked questions.

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What does compensation mean?

Compensation is what employees earn in exchange for their contributions to your business. The difference between base pay and compensation is that a total compensation package often includes an employee’s base pay (i.e., the minimum they’re paid each paycheck), plus a wide range of other monetary and non-monetary rewards.

Offering a competitive compensation package can help you attract and retain high-quality talent, motivate your current employees to be productive and successful, improve job satisfaction and help your business stay in compliance with federal, state and local regulations.

Types of compensation for work

Beyond salary or hourly wages, there are many different elements that can make up an employee’s compensation package, including:

  • Insurance benefits: Healthcare plans can be expensive for people to pay for themselves, so many companies offer employee health insurance plans, as well as other forms of insurance (e.g., life, disability, dental) to make an offer to an employee more enticing.
  • Retirement packages: Setting up an employee for retirement is an excellent way to enhance compensation, and it’s commonly done in the form of matching contributions into a 401(k) savings plan.
  • Profit-sharing and stock options: Providing stock options to employees is popular both with startup companies as well as highly successful businesses where the stock options represent significant value added to a compensation package.
  • Compensated time off: Benefits such as extended vacation time (or even unlimited PTO) can make a job offer more appealing to a potential hire.
  • Bonuses: In addition to guaranteed salary or wages, some compensation packages include cash bonuses that are paid out if the company hits specific milestones, at the end of the year or if an employee performs exceptionally well.
  • Commissions: For employees in sales or sales-adjacent positions, some companies offer a percentage or flat rate commission to staff when they make sales.
  • Overtime pay: In accordance with the Fair Labor Standards Act (FLSA), non-exempt employees (e.g., retail workers, servers) must be paid time-and-a-half in overtime pay when they work over 40 hours per week.
  • Additional compensation: Get creative with your compensation package. Other forms of compensation and fringe benefits could include: child care and tuition assistance, travel allowances, gym memberships, employee assistance programs (EAPs), tip income, merit pay and any other employee incentives.

Related: What is Competitive Pay?

What to consider when creating an employee compensation package

It can be hard to decide what to include in a new employee’s compensation package. You have to think about base salary, the benefits you’re required to offer according to state laws, taxes, minimum wage and more. Consider these tips when creating a compensation plan for your business:

  • The local market: Understanding the value other companies in your local area are placing on certain roles allows you to determine how much your potential hire could earn elsewhere and what you’re competing with.
  • Individual assessment: While the market can help set a baseline for your compensation offer, consider adjusting compensation to match the experience, skills and value-add of each individual employee.
  • Skill availability: If an employee is providing a specific skill or set of skills, understanding the scarcity or availability of those skills can help you determine compensation.
  • Company finances: Maintaining a responsible budget is important, so factor the financial impact of any compensation package into your plan.
  • Previous and coworker salaries: While paying attention to industry norms when it comes to compensation is important, it’s also a good idea to consider how much employees earned in their previous roles and how much your current employees are making relative to the compensation offer.

As you enter into salary negotiations, consider creating a compensation range or salary band. The low end should be a minimum that still shows value to the candidate and the high end should be the maximum that your company can afford.

Read More: What is a Salary Band? A Guide for HR Professionals

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Employee compensation FAQs

How can compensation motivate employees?

It’s natural for employees to be more motivated in a situation where they feel like the work they are doing is being valued. By offering a competitive compensation package for your employees, you demonstrate your appreciation of their value in a tangible way. This contributes to a positive company culture and helps keep productivity levels high.

Why is a compensation strategy important?

Building an effective compensation strategy is essential because it prevents overspending, helps maintain employee satisfaction and ensures equal pay for equal work across your business among many other benefits.

How do compensation and benefits affect employee retention?

Holding onto your most productive employees is one of the best ways to keep your company profitable and successful. Retaining employees saves you the cost of having to make a new hire, and allows you to maintain staff who are trained and familiar with operations.. When an employee is receiving the right compensation, they’re less likely to be looking outside your company for other job offers and more likely to stick around at your company. In fact, according to an Indeed survey, 39% of people look at job opportunities because they want better compensation.*

*Indeed survey, n=1,000
**Indeed survey, n=300

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*Indeed provides this information as a courtesy to users of this site. Please note that we are not your recruiting or legal advisor, we are not responsible for the content of your job descriptions, and none of the information provided herein guarantees performance.

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