A Guide to Compensation and Benefits
- Compensation is an employee’s direct pay. Benefits are in addition to the base salary.
- Compensation and benefits motivate and validate employees and show a company’s culture.
- Quality compensation and benefits can help increase employees’ job satisfaction.
- Benefits include health, disability, and life insurance, along with retirement and PTO.
Starting the job search is exciting — but it can also be overwhelming. Compensation and benefits are terms that may be unfamiliar to you, but they can have a major impact on the quality of any potential job.
Compensation and benefits refer to the money and perks you receive from your employer in exchange for doing your job. To understand whether a job offer is fair and beneficial, it’s important to understand the total compensation package.
According to Aflac’s 2020 WorkForces Report, when employees understand their benefits, they are more often satisfied with those benefits.
Why Are Compensation and Benefits Important?
A company’s compensation package can give job seekers information about the work culture and whether employees are valued as much as profits.
In a 2020 survey on job satisfaction, 61% of employees ranked compensation as one of the most important factors in how much they liked their jobs. Fifty-six percent chose benefits as a top contributor to their job satisfaction.
It is increasingly important that companies invest in their employees and make them feel like valuable members of the organization.
One of the best ways to do this is with quality compensation packages. When people are fairly compensated for their work, they tend to perform better and are more likely to stay with the company.
A 2017 Glassdoor study revealed that increasing employee pay by even 10% raises the chances — by 1.5% — of employee retention and satisfaction. This illustrates how compensation and benefits can impact the working environment.
Compensation vs. Benefits
Compensation and benefits are very different, even though they frequently get lumped together.
| Compensation | Benefits |
|---|---|
| Financial payment given to employees for performing their job duties. | Nonfinancial or indirect payment incentives provided to employees for being part of the company. |
| Required by law to be given to all employees who work for the company. | Provided to improve employee well-being and motivation. |
| Can be paid out yearly, hourly, on commission, or in other time or productivity-based increments. | Not legally required by law, but they are important to employee job satisfaction. |
| Includes financial transactions like bonuses, overtime pay, or tips. | Include health insurance, retirement, paid leave, and disability insurance. |
Components of Employee Compensation
There are three components of compensation: financial compensation, indirect compensation, and nonfinancial compensation. There is some crossover between each of these categories.
Financial compensation includes base pay and variable pay. Base pay is the direct compensation an employee receives for their work. Variable pay is less consistent. It may include bonuses or incentive payments. Both of these involve the company providing money to the employee.
Indirect compensation offers monetary value that is not directly paid out. This can include employer contributions to a retirement plan, money toward continuing education, employee-sponsored health insurance, or company-paid memberships.
Nonfinancial compensation, which sometimes crosses over with indirect compensation, can include flexible work options, paid time off (PTO) or time off to volunteer, catered lunches, use of company equipment, or recognition in the workplace.
Popular Employee Benefits
A comprehensive benefits package includes benefits that cover the employee’s needs outside of their salary. Popular employee benefits include:
Health, Dental, and Vision Insurance: The employer pays for part or all of the medical insurance plan for employees and their dependents. Sometimes dental and vision insurance are included, or they may be provided at a discounted price.- Flexible Spending Account: The employee can allocate tax-free money into an account for medical expenses. Many employers may also contribute to these accounts.
- Disability Insurance: Disability insurance covers an employee’s salary if they can’t work due to an illness or injury. It does not cover the whole salary but will generally cover between 50-80%. There are both short-term and long-term disability options.
Short-term disability insurance typically covers anywhere from a few weeks to a year. This might cover a surgery or injury with a several-week recovery. This policy may also provide compensation after childbirth.
Long-term disability covers an employee for years, possibly even through retirement age. Policies will cover part of your salary during an extended illness or after a disabling accident.
- Life Insurance: Life insurance provides for employees’ dependents if something happens, so they don’t lose financial support. The amount paid out of the policy is different for every company, but it is usually a certain multiple of the person’s salary. Life insurance is often free for employees, and acceptance is automatic so pre-existing conditions don’t interfere.
- Family and Medical Leave: Employees may receive paid time off they can use for their own medical needs or those of their families. This also covers maternity and paternity leave. If an employer doesn’t offer this, the employee may qualify for the Family and Medical Leave Act, which guarantees job security but not pay.
- Retirement Plan: Employees can put money in special accounts specifically for their retirement. The most common version of this is a 401(k) account. The funds often come directly out of the employee’s paycheck pre-tax. Companies will frequently match employee contributions to retirement funds up to a certain percentage. So if the employee puts in 3% of their paycheck into their retirement account, the company may match that amount.
- Professional Development: Many companies pay for professional development benefits to increase their workers’ skills. These might include tuition reimbursement, conference or workshop stipends, extra days off to attend company training, or memberships to training programs. This provides more skilled workers for the company and may give employees a higher chance of promotion.
- Paid Time Off: Employees can accrue PTO during their time at the company that can be used for vacation or personal reasons. Some companies have different pools for vacation versus sick days, while others have one general pool. Additionally, employees may have paid holidays, paid bereavement time, or paid time off for time spent on jury duty.
- Flexible Workplace: A 2021 survey by Health Equity found that employees overwhelmingly valued flexible workplace benefits. An employee can design their working environment around their needs. This benefit has become even more important since the beginning of the COVID-19 pandemic, which led to significantly more people working from home.
Frequently Asked Questions About Compensation and Benefits
The worth of a benefits package depends on many factors. In general terms, a benefits package equals about 32% of an employee’s compensation. Larger companies may offer higher percentages because they have larger budgets and can buy their benefit packages in bulk.
Smaller companies sometimes offer less, but compensate by understanding and providing what their employees value. They may also provide perks such as snacks or local memberships.
The four major types of employee benefits are medical insurance, life insurance, disability insurance, and retirement plans. Other types that don’t fall under this category are PTO and family leave. Most companies will include some combination of these different benefits.
Some benefits, like medical insurance, are required by law if you work in a company with at least 50 full-time employees. Smaller companies don’t have to offer this. They are, however, legally required to offer worker’s compensation, Social Security contributions, and unemployment. Disability insurance is required, but not in every state. Many other benefits have the same location-specific legal status.
The four types of compensation are hourly, salary, commissions, and bonuses. Hourly pay is wages paid by the hour. This is common in service industries like retail. Salary is a fixed amount provided each pay period with the understanding that set responsibilities will be completed. Management positions most often, though not always, receive salaries.
Commissions are most common in sales. A sales employee will earn a percentage of their sales each term. Companies may provide bonuses at certain times, like during the holidays or when employees accomplish certain goals.