Compensation Definition: A Guide to Pay

Key takeaways

• The definition of compensation is the monetary and non-monetary payments you receive in exchange for the work you perform.

• Types of compensation include direct compensation, indirect compensation, and non-monetary compensation.

• Factors that influence compensation in the workplace include employee education, skills, and experience; location and cost of living; market trends; labor supply and demand; and the company’s financial health.

Employee compensation is important because it can attract qualified candidates, boost morale, and retain employees. Use this article to learn the definition of compensation, the three types of employee compensation, how a fair compensation package helps companies, and more.

If you’re ready to develop your HR skills, consider enrolling in the Human Resource Management: HR for People Managers Specialization from the University of Minnesota. You’ll have the opportunity to learn the best practices for hiring and rewarding employees in as little as two months. By the end, you’ll have gained in-depth HR knowledge that will help you prepare for your career.

Compensation definition: What is it?

Compensation refers to monetary and non-monetary payments that organizations provide employees in exchange for work performed. Offering fair compensation plans, including a mix of monetary and non-monetary types of compensation, helps attract, motivate, and retain employees.

3 types of employee compensation

Companies have three options when choosing their employee compensation structures: direct, indirect, and non-monetary.

1. Direct compensation

When workers receive monetary compensation for completed work, it falls under the category of direct compensation. Employees can receive four different kinds of direct compensation: hourly pay, salary, commission, and bonuses:

• Hourly pay: A certain amount of income received for every hour worked

• Salary: A set amount of money paid to an employee over the course of a year, regardless of hours worked

• Commission: An extra fixed amount of money paid to an employee based on a percentage of sales

• Bonuses: An extra variable amount of money paid to an employee for work above and beyond the job description

2. Indirect compensation

Indirect compensation refers to non-cash forms of compensation. Indirect compensation has a clear dollar cost to the employer. Examples of indirect compensation offered to employees include:

• Company cars

• Employer retirement contributions

• Health insurance

• Work-related equipment like laptops and smartphones

3. Non-monetary compensation

This type of compensation refers to rewards and advantages employees receive without monetary value; they are often cultural or structural. Examples of non-monetary compensation include:

• Public recognition, such as an employee of the month award

• Time off for community work or volunteering

• An open-door policy for manager access and constructive feedback

• Mentorship programs

• Opportunities for training and attending other work-related events

Is compensation the same as salary?

While related, compensation and salary are not the same. Salary is the amount of money you earn on an annual basis to perform your job duties. Compensation includes your salary, along with additional benefits, such as bonuses, commissions, paid time off, health insurance benefits, and more.

Why is employee compensation important?

Strong compensation makes a company attractive to top candidates for jobs. It can also lead to high morale and work ethic for existing employees, and can keep employees from looking for other jobs. Efficient companies draw top talent and keep existing employees happy, preventing excess costs from interviewing, hiring, and training new employees during periods of high turnover.

Factors that impact compensation

• Employee education

• Employee skills and experience

• Market trends for employee compensation

• Geographic location and cost of living

• Employee productivity

• Labor supply and demand

• Labor union requirements

• Company financial health and projections

Assessing compensation offerings is an important part of a company’s strategy for success. Many companies employ professionals who oversee compensation; they may work as compensation and benefits managers or within a human resources department.

What is a compensation and benefits manager?

A compensation and benefits manager oversees any activities that involve employee compensation and benefits. This job might include setting and monitoring a company's pay and benefits structure, managing pay and benefits distribution, ensuring compliance with state and federal laws and regulations, and working with outside benefits and insurance professionals.

According to Glassdoor, the median total pay for a compensation and benefits manager totals $160,000 [1]. This figure includes base salary and additional pay, which may represent profit-sharing, commissions, bonuses, or other compensation.

10 skills that might help you become a compensation and benefits manager

1. Ability to think analytically

2. Attention to detail

3. Business acumen

4. Communication skills

5. Decision-making skills

6. Familiarity with compensation and benefits software

7. Knowledge of company policies and procedures

8. Organizational skills

9. Problem-solving skills

10. Time management

How to become a compensation and benefits manager

• Get a bachelor's degree: A degree in business administration, business management, human resources, or finance may make you a strong candidate.

• Get work experience: Entry-level positions that can help give you the experience for this job include assistant, coordinator, or specialist positions in benefits, compensation, payroll, job analysis, or human resources.

• Get certifications: Professional associations that offer certifications you might want include the International Foundation of Employee Benefit Plans and the Society for Human Resource Management.

Related jobs

Jobs with similar duties and skill requirements to those of a compensation and benefits manager include:

• Compensation, benefits, and job analyst

• Financial manager

• Human resource manager

• Human resource specialist

• Labor relations specialist

• Payroll administrator

• Payroll specialist

• Payroll processor

• Training and development manager

• Training and development specialist

Read more: Human Resources Manager: Responsibilities, Skills, and Salary

Find helpful resources for your career

Read about industry trends and discover helpful career tips by subscribing to Career Chat, our LinkedIn newsletter. Then, explore these free resources for additional guidance as you consider a career in HR:

• Read our Career Chat issue: GenAI for HR: Use Cases and Benefits

• Watch on YouTube: 7 Key Communication Skills to Thrive in Your Career

• Take a quiz: Career Test: What Career Is Right for Me Quiz?

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