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Direct compensation vs. indirect compensation

Examples of indirect compensation

Why is indirect compensation important?

What is indirect compensation

Indirect compensation consists of all non-monetary benefits provided to employees on top of their base pay.

Whether your workplace calls them employee benefits, perks, or incentives, indirect compensation can help you cultivate a positive work environment while attracting top talent. Your total compensation for work includes your direct monetary compensation plus your indirect compensation package.

In light of the current work culture, providing a comprehensive benefits package is likely to boost employee retention and attract job seekers who are searching for jobs that will allow them to have a better work-life balance.

Direct compensation vs. indirect compensation

Direct compensation includes the money that goes into your bank account each pay period, incentive pay, and deferred pay. Your monetary compensation can include:

  • Base salary or hourly wages
  • Overtime pay
  • Merit pay
  • Bonuses
  • Commission
  • Piece rate
  • Profit sharing
  • Stock options
  • Shift differential
  • Savings plan
  • Stock purchase
  • Annuity

Your indirect benefits cover everything else. Monetary compensation is relatively clear because an HR representative can present figures that break down your financial compensation, but indirect compensation can be a bit trickier.

Examples of indirect compensation

We can funnel the different types of indirect compensation into three categories: protection programs, pay for time not worked, and services and prerequisites.

Protection programs

Protection programs include forms of indirect compensation such as health insurance, life insurance, disability insurance, tuition reimbursement, retirement benefits, pension plans, and social security programs.

These kinds of indirect financial compensation give your employees a safety net so they feel prepared for any and all of life’s hiccups. While some of these are more common (like health insurance), others are becoming more popular (like tuition reimbursement).

Pay for time not worked

While the US doesn’t have a federal paid time off law at the moment, many states have laws regarding paid time off (PTO) for medical and family reasons. However, it’s important that your employees have the opportunity to take some personal time to refresh and recharge.

Whether your company opts for a segmented PTO program, unlimited PTO, or something in between, a great PTO system can help you gain and retain employees.

Pay for time not worked includes paid time off benefits like vacation days, holidays, sick leave, familial leave, and jury duty.

Services and prerequisites

Services and prerequisites are the catch-all groups of non-financial compensation. These types of indirect compensation include perks such as:

  • Gym memberships or access to recreational facilities
  • Company car
  • Work equipment (laptop, dual screen monitor, cell phone)
  • Financial planning services
  • Low-cost or free meals
  • In-office amenities (coffee, tea, snacks)
  • Childcare
  • Wellness services (massages, chiropractic care)

While some of these may seem unnecessary, they can be the kind of added bonus that makes someone decide to accept your job offer.

Why is indirect compensation important?

Let’s say two competing companies send out a job offer to a highly qualified candidate who is choosing which company to join.

Company A offers a marginally higher salary, but its benefits are limited to healthcare and retirement plans.

Company B—although offering a lower salary alongside the same healthcare and retirement package—offers this candidate unlimited PTO, a gym membership, and tuition reimbursement. Not to mention the fact that while the candidate was touring the office, they noticed the coffee and snack bar available to employees.

Which company would you choose?

Now that many employees are realigning their values, they want to get the most out of their workplace. The more perks you can offer your employees, the more likely they’ll be to work harder, be more productive, and stay with your company for a longer period of time.

Aside from the more obvious health benefits, there are a lot of perks that appeal to different groups of employees. The importance of indirect compensation lies in ensuring that you offer benefits that align with your employees’ values and needs. 

For example, if you primarily employ women in their twenties and thirties, a compensation plan that includes childcare and parental leave is going to be more appealing than it would be to a group of men nearing retirement.

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