Employee Compensation: Types, Benefits & Strategy Tips
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Employee compensation used to be a simple exchange: money for labor. Now, it’s a competitive, rapidly changing arena in which employers compete for the best talent in the world.
Great talent is at a premium, and employees know their worth. The forecasted average total compensation increase for 2022 is 4.12%. And 98% of executives surveyed by Harvard Business Review decided to offer at least one new employee benefit during the pandemic, prioritizing whichever benefits their employees found most valuable.
In this article, we’ll discuss different types of compensation, why a solid compensation plan benefits your company, and how to create a compensation package that will improve your chances of winning (and keeping) your employees.
Employee compensation refers to the monetary value an employee receives in exchange for their work for your company. It includes the amount of money on the employee’s paycheck (or base salary), mandatory employee benefits paid through taxes, bonuses and performance incentives, and other perks.
Also called remuneration (usually in the UK), compensation incentivizes employees to perform their best and deliver outstanding results. Strong employee compensation packages are a primary factor in attracting and retaining talented individuals.
4 types of employee compensation
The four categories of employee compensation differ based on how the compensation gets packaged–either in cold hard cash or some sort of lifestyle perk.
In some cases, compensation depends on the type of contract (part-time vs. full-time employment) or employee performance.
Direct compensation (base pay)
Direct compensation refers to the money an employee receives for their work, either in hourly wages or annual salary. Also known as base pay (vs. gross pay, which refers to the total compensation, including benefits), direct compensation gets paid to employees on a specific payroll schedule: monthly, bi-weekly, weekly, etc.
Hourly wages refer to the amount paid to a worker based on how many hours they’ve worked during a pay period. Wages are the most common way to pay temporary or part-time employees and employees in the hospitality or construction industry. If you pay your employees in hourly wages, you’ll have to:
- Pay any overtime hours (you’re required to by law)
- Comply with minimum wage law requirements (which varies by country)
Salary is a fixed sum of money an employer pays to their employee regularly to compensate for the work they’ve done. It’s the most common way of paying full-time employees and indicates a long-term commitment between the employer and the employee.
When signing the employment agreement, parties involved agree on an annual salary the employer pays in 12, 24, or more pay periods in a calendar year. You also need to honor local minimum wage regulations when determining how much you’ll pay your employee but do not have to track and pay overtime hours.
Employee compensation requirements set by the FLSA
The Fair Labor Standards Act (FLSA) establishes requirements about minimum wage and overtime pay US employers must follow:
The federal minimum wage is $7.25 per hour. However, each state has its own minimum wage, and you must pay the employee the higher of the two amounts. If you hire globally, you need to consult local employment law when determining the employee’s salary and comply with local minimum wage requirements.
Overtime pay for hourly workers means that all part-time (or nonexempt employees) receive 1.5 times their regular hourly rate pay for every hour worked after 40 hours each week. Employees over 16 years old can work unlimited hours per week, so long as they receive overtime pay.
Check out our global hiring guide, where you can get more information about local laws in 150+ countries.
Variable compensation refers to monetary pay provided to an employee based on the employee’s achievements. In 2018, 77% of US companies offered variable pay to their employees, and the trend was expected to grow.
Commission is a form of payment made to an employee after they complete a task or reach a goal. It’s common for positions that have specific quotas or targets to achieve, like salespeople.
There are several types of commission structures, but usually, the employee gets a fixed base pay with a chance to earn more depending on how many deals they close.
Employers usually give bonuses to employees who perform above and beyond and have hit or exceeded a long-term goal. Some companies also provide bonuses to the entire company if they hit revenue targets or end up with an excess budget at the end of the year. Bonuses incentivize employees to be on top of their game and attract applicants during the hiring process.
Employees typically receive bonuses less often than commission: quarterly, annually, when a project wraps up, as a hiring incentive, or when an employee refers a new customer or employee.
Indirect compensation is the portion of employee compensation that has monetary value but isn’t included in the employee’s base pay and is not paid in cash. Indirect compensation includes employee benefits and taxes covered by the employer.
Mandatory employee benefits
Mandatory employee benefits are non-wage compensation guaranteed to employees by law.
The US federal government’s Department of Labor (DOL) requires six types of mandatory employee benefits:
- Medical care
- Retirement income
- Unemployment insurance
- Workers’ compensation
- Health insurance
- Family and medical leave
Mandatory employee benefits vary by country–consult our global hiring guide to get details about different countries’ mandatory benefits. Also, use our employment calculator to estimate your total employer costs when hiring from new locations worldwide.
Non-mandatory employee benefits
Non-mandatory employee benefits that fall under indirect compensation are perks with measurable monetary value not required by law, such as 401k retirement plans, stock options, and work-from-home stipends are considered indirect employee compensation.
Related: Learn how to grant stock options to foreign employees.
Non-monetary compensation refers to the benefits or perks that don’t have an easily measurable monetary value. Time off, flexible working schedules, learning and development opportunities, and on-site childcare options are examples of non-monetary compensation.
For many companies, offering unique non-monetary compensation is a way to stand out from similar employers and attract top talent worldwide—for instance, Netflix’s year-long maternity leave or Airbnb’s $2,000 annual travel stipend.
Why invest in a competitive compensation package?
A couple of years ago, 23% of employees in a survey stated they didn’t feel confident they received fair pay. If workers don’t think their compensation is reasonable, they’re less likely to stay at your company, let alone feel motivated to be motivated and engaged.
A competitive compensation package can help you ensure you have the best talent and motivate them to do their best work.
Attract and retain top talent
A well-crafted compensation package with a competitive salary and generous benefits is your best bet to win the war on talent.
High salaries are still among the top three factors when deciding whether to accept a job offer (for 46% of job seekers, according to Glassdoor). And many employees will consider offers with lower salaries if they have attractive benefits packages, specifically strong health benefits, generous vacation time, and flexible working schedules.
Generous compensation helps you retain the best talent, too. For example, stock options encourage long-term loyalty and motivate your team to be more productive because they become personally invested in the company’s growth.
Just like stock options motivate your employees to stay with you longer, bonuses, commissions, and performance-based salaries can motivate your employees to be more productive.
Bonuses and commissions are concrete extrinsic rewards that directly pay off extra effort. Likewise, learning and development budgets lead employees to attribute growth and development to your company. They see working at your company as an investment in their career.
Burnout can impact productivity and personal and professional relationships. Even if your employees love what they do, burnout is a dangerous reality.
Paid time off and the ability to take extended vacations are the best defenses against burnout. And if you add wellness programs (like a gym membership, employee assistance programs, or subsidized lunches) to the mix, you get a team of well-rested, productive employees.
Improve company culture and employee experience
High salaries can attract and retain talent, but according to some studies, it’s not enough to provide a positive employee experience. The link between company culture and an employee compensation package is more focused on the benefits you offer.
If you have mental health programs and coaching, or sports evenings and gym memberships, you send a clear message about the values of your company. If you offer team bonuses rather than individual ones, you tell the world you value teamwork more than individual successes.
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The backbone of a solid compensation strategy
More and more companies now realize the importance of having a compensation strategy. In 2021, 76% of companies created a compensation strategy (or already had one in place). In 2022, that percentage grew to 86%.
Businesses care about attracting and retaining talent, especially now the Great Resignation (or better said, the Great Reshuffle) proves employees are not afraid to leave if an employer underdelivers.
A solid compensation plan includes:
1. Compensation within your budget
Some businesses spend up to 80% of their gross revenue on employee compensation– the cost of labor will likely be one of your largest expenses. To avoid overpromising your way into a budget deficit, calculate total employment costs (not just salary) to determine an accurate budget.
Bear in mind some of the most valuable budgets don’t have an upfront cost. If you are a small or growing business, consider offering stock options or profit sharing, generous vacation policies, or a four-day workweek to appeal to employees without a large price tag.
2. Compensation competitive within your industry
Most businesses cannot compete with Facebook or Apple, so don’t waste your time comparing your benefits package to theirs, especially if you’re a small business. Instead, focus on similar companies–companies in your industry, of your size, and in your location.
Websites like Glassdoor provide insights into salaries across countries, industries, and positions. Also, check job descriptions for salary ranges and benefits to establish a benchmark for the salaries and benefits your target employees might expect.
3. Compensation aligned with your business goals
Your compensation package should also align with your business goals and values. That way, it will drive your workers towards achieving their individual, team, and overall company goals.
If you’d like to build a stable team that will stick with you for a long time, it makes sense to offer company stocks as a part of your compensation plan. If you’re planning to become a remote-first company, remove commute expenses from the equation when creating the compensation strategy and consider other perks for remote workers, such as travel allowances.
4. Compensation compliant with local laws
If hiring globally, ensure that your salaries comply with labor laws in each country. Pay special attention to paid annual leave by country, parental leave by country, and minimum wage by country.
For example, the minimum monthly wage is $175 (USD) in Columbia and $533 in Estonia. Likewise, mothers receive around 12-16 weeks of maternity leave in many countries. In Serbia, they get 52 weeks.
Monthly salaries vs. hourly waged: which should you choose?
Employees who work for a monthly salary get the same amount in each paycheck, regardless of how many hours they worked. Employees who work for an hourly wage get paid depending on how much they work and receive overtime pay if they work more than 40 hours a week.
Offer monthly salaries if...
- You want to hire full-time employees
- You can offer 40+ hours’ worth of work each week
- You want to offer a sense of security to your employees
- You have more than 50 employees and want to offer healthcare
Offer hourly wages if...
- Your budget can’t handle a big benefits package
- Your workload fluctuates a lot
- You need temporary workers for peak season
- You have a reliable system for time tracking
What perks do job seekers want the most?
In the end, the best benefits package is one your employees actually want. The best way to learn that is to survey them to understand what they will (and won’t) use.
If you already offer benefits, keep track of benefits usage. You may discover that everyone at the company uses the L&D budget, but just a few team members use the gym membership. Use that information to make adjustments and get the most bang for your buck.
A 2020 study showed that employees get the most value out of:
- Health, dental, and vision insurance
- Flexible working hours
- Vacation time
- Remote work
- Unlimited PTO
- Student loan and tuition assistance
- Paid parental leave
Manage your team's salaries and benefits with Deel
Building a global team requires keeping track of employment laws, benefits, salaries, and minimum wage requirements that vary by country. But you don’t need to do it alone.
Deel helps businesses around the world hire internationally. Let us:
- Handle your hiring and onboarding processes
- Manage your global payroll
- Enable you to pay your entire team in one click
- Ensure compliance with local labor laws
- Provide legal assistance every step of the way
- Collect and file your tax documentation
Want to know more about how Deel works? Schedule a demo today and see if we’re a good fit.