Employee Compensation 101: Types, Benefits, and Best Practices

Happy employees = a thriving business; it should be as simple as that simple, right? 

But here’s the main problem—49% of workers are dissatisfied with their current employee compensation plans, and already exploring new opportunities. This puts businesses at risk of losing loyal talent to competitors over something as fundamental as compensation. 

And we’re not just talking about salary here. From bonuses to employee development and paid time off, compensation comes in many forms. Investing in employee success and recognition doesn’t just boost morale and satisfaction. It’s a vital block in building long-term business success with top talent in your corner, performing at their best.

So, let’s break down the concept of employee compensation—the benefits, importance, the different types, and some expert tips to help you design the best compensation for your teams.

Types of Employee Compensation

Employee compensation can essentially be boiled down to two main types: direct and indirect. 

Both types are commonly used across industries as a way to build brand trust and loyalty by keeping staff engaged, productive, and invested. It’s also a great way to reduce costs on new hires, save time on onboarding, and prevent starting from scratch every few months.  

1. Direct Employee Compensation Types

Direct employee compensation includes any monetary payments and rewards that employees receive for their performance, starting with their base pay.

1.1 Base Pay 

Base pay is the total amount the employee receives for their work and services. Base pay can be given in the form of a wage, salary, or hourly payment. It’s a fixed payment, commonly given for full-time work, or around 40 hours a week.

1.2 Overtime Pay

Overtime pay compensates employees for the extra time they worked beyond their regular schedule. It’s typically paid separately from the base pay and includes all additional hours or days worked, including working on holidays. 

1.3 Commission

Commissions are typical for sales businesses. They compensate your employees for reaching a certain quota or exceeding specific targets. Commissions are typically paid as a percentage based on the total revenue earned from a sale.

1.4 Bonuses

Bonuses are offered as a top-up to the employee’s base pay. They are given for outstanding work performance, for reaching unique goals, or as a company-wide reward. Bonuses can be offered for referrals, loyalty, and during holidays. They might also come as gift certificates, company stock, and other valuables. 

1.5 Equity

Equity allows employees to buy or be awarded company stock, including ESPPs, ISOs, and NSOs. Equity is commonly earned after the employee has worked in the company for several years, and ensures long-term loyalty and contribution to the company’s future success. 

1.6 Tips

Although not as universal, in some industries like hospitality and service, tips can be used as compensation. Depending on the country, tipping might be optional or mandatory. In the case of the latter, employers can offer compensation packages that spread collected tips among team members.

2. Indirect Employee Compensation Types 

Indirect employee compensation includes non-monetary benefits that enhance the employee’s compensation package, and their experience. It’s a form of investment on your part that’s not paid directly to employees but still adds value to their professional experience.

2.1 Paid Time Off

With certain employees, it’s not always about the cash prize—62% of workers said they preferred having more paid time off instead. While Paid Time Off (PTO) comes with minimum paid days off, companies can leverage it to meet the needs of specific employees. Offering paid parental leave or extra personal days off can make workers feel protected from burnout and also valued for all they do. 

2.2 Healthcare Benefits

If there’s anything more sought after than PTO, it’s healthcare benefits. In fact, a staggering 88% of employees consider health insurance the most valued benefit of all. Given the cost of modern-day healthcare and the vital need for it, companies can attract workers with robust health plans, including dental coverage, and incentivize quality talent to accept their offer. 

2.3 Retirement Funds

Everyone strives for a secure retirement, making it a top indirect compensation for employees. Offering tailored savings plans or traditional retirement plans, like the 401(k) plan, gives workers peace of mind for their future. In turn, they become more loyal to your brand and actively contribute to its success. 

2.4 Transportation/Meal Subsidies

Providing employees with paid meals and transportation might seem like a small move in the grand scheme of things. However, it can be a top benefit for employees in busy urban areas, remote workers, non-drivers, and those working late shifts. It’s convenient, saving employees time and money, which then results in more satisfaction and engagement at the workplace. 

2.5 Flexible Work Hours

Another indirect benefit of direct perks is flexible work hours. This can be a great compensation for employees working remotely, or those who don’t require direct supervision, like content teams and technical admins. In a business world that waits for no one, offering flexibility results in higher employee motivation and outputs, ensuring your business always operates at full steam. 

2.6 Learning and Development Opportunities

Companies have different employees—from talented juniors to seasoned seniors who could fill more roles than one. Investing in their professional development can, be a great tool for retaining talent and keeping them satisfied. Interestingly, 94% of workers said they would remain with a business longer, if they invested in their career development, be it through internal training or by attending workshops and earning recognized digital credentials. 

2.7 Additional Types of Insurance

Beyond health insurance, companies can also offer other compensation options with similar value. For example, compensation packages that include life insurance, disability insurance, pet insurance, or legal insurance can help attract employees seeking robust coverage and give them a good reason to stay at your company while adding more value to your business. 

2.8 Company Equipment 

Company equipment might not be the biggest compensation option for employees, however, it’s still valuable in some industries. Company cars, for example, are quite popular in sales and e-commerce. Moreover, equipment like company laptops and phones, help quickly set up employees, especially remote ones, with everything they need, without needing to use their own devices. 

2.9 Employee Wellness

Workers gravitate toward companies that have their well-being in mind. Introducing paid wellness programs, from mental health workshops to four-day weeks and gym memberships, can help you attract talent that wants to achieve a solid work-life balance. It’s good for their performance, too—employees who partook in wellness programs improved their energy levels by 12%, making them more productive, in their off time and at work.

How to Choose the Best Compensation for Employees 

Around 30% of employees leave their roles due to a lack of compensation beyond their base pay. To prevent top talent from slipping through your fingers, companies need a robust compensation plan that ticks all the boxes. Here are the key steps to take.

1. Align Compensation with Employee Preferences

Not all employees are after the same benefit. Some prefer a yearly bonus, others care to buy brand stock, and some opt for companies that invest in their career development. To ensure satisfaction, you need to understand employee compensation needs and compare them against long-term business plans. Aligning compensation offers with each employee’s preferences is critical in boosting motivation, securing their loyalty, and keeping them productive. 

A Tip: Collect insights into what workers value most in compensation plans. Carry out employee surveys, polls, and one-on-one reviews to grasp their career goals, financial plans, and future expectations. 

2. Leverage Market Insights

As the job market shifts, so do the trends on what employees consider to be quality compensation at the workplace. Businesses need to conduct regular market research to stay attractive to top talent, including building data-driven compensation packages that motivate employees to perform at their best and stay long-term. 

A TIP: Perform market reviews at least twice a year to understand current industry trends and compensation demands. Use that data to align your compensation efforts with your business goals and employee needs.

3. Implement Performance-Based Incentives

Performance-based incentives are the fastest track to get employees to go the extra mile. Tie incentives to desired results and ensure the requirements are achievable. This helps promote transparency with employers, motivating them to reach huge milestones and be rewarded for it.  

A TIP: Schedule regular compensation reviews to offer clarity on rewards vs tasks, monitor incentives success, and discover other compensation opportunities employees might like to explore. 

Employee Compensation is a Two-way Street: The Verdict 

Your business growth hinges on the people driving it forward, and changing a winning team should never be an option. From costly turnover to interrupted operations and rehiring, the risks aren’t worth the loss. Therefore, compensating your employees for their achievements and contributions accordingly isn’t a matter of ‘if’, but when and how. 

Now it’s the perfect time to invest where it counts. By following the steps we’ve outlined, you can leverage different compensation strategies to gain a competitive edge in the talent market. Gain a solid foundation to improve your compensation plans, acquire top talent effortlessly, and ensure retention, loyalty, and engagement—it’s a recipe for longstanding success.  

Frequently Asked Questions