Direct compensation

Direct compensation is a financial (or monetary) form of compensation. Here are the four
main types of direct compensation:

Hourly
Hourly wages are often provided to unskilled, semi-skilled, temporary, part-time, or contract
workers in exchange for their time and labor.

Jobs where some employees receive hourly wage include the retail, hospitality, and
construction industries.

Employees who receive hourly wages are usually able to earn overtime pay. This pay consists
of any additional hours worked outside of their set contract.

When setting your employees’ wages, you need to be compliant with the local minimum wage
legislation.

Salary
Annual salaries are typically provided to most full-time employees or skilled employees and
those who fill management positions. A salary often indicates that the organization has
invested in this employee for the long-term future.

Examples of employees who receive a salary include teachers, accountants, doctors, and
retail and hospitality managers.

Both hourly wages and salary make up an employee’s base pay or base salary.

Commission
Commission is a common form of compensation provided to employees in sales roles. It will
usually be based on a predetermined quota or target. The higher the quota reached, the
higher the commission pay will be.

Commission rates are often based on various specified factors, including revenue and profit
margins.

Some employees will work on commission only or obtain a salary with commission.

Bonuses
Companies often offer bonuses to employees based on year-end business results or the
individual meeting their set goals. Sometimes, the decision is at the manager’s discretion.

Bonuses can be paid annually, quarterly, or even after the completion of each project.

Both commission and bonuses fall under incentive pay, along with piece rate, profit sharing,
stock options, and shift differentials.
However, bonuses can also be paid without an employee meeting a particular target. For
example, if the business has had a great year and decides to reward everybody. In this case,
the bonus would be classified as variable pay.

Tips are also a common form of compensation in people-based industries, particularly

Another umbrella of direct compensation is deferred pay which includes savings plans and
annuity.

Merit pay is often given to an employee who meets their targets or performs well in their
role.

Indirect compensation
Indirect compensation is still a financial form of compensation since it has a financial value.
However, employees do not directly receive it in cash form. That’s why certain types of
indirect compensation are viewed as monetary, while others are deemed non-monetary. This
often varies between organizations.

Indirect compensation is often known as employee benefits or perks of the job.

Here are some common examples of indirect compensation.

Equity package
Equity as part of a compensation package essentially means the employee is offered equity
(ownership) in the company, either through shares of stock or the option to buy such shares.

An equity package is common at start-up companies. These businesses may be low on cash
or funding and need other incentives to attract and retain employees.

Stock options
This form of compensation entitles employees to purchase a set number of shares at a fixed
price after a certain period. This is different from an equity package because the employee
will not have any ownership in the company.

Many stock options require employees to work between three to five years before they can
access this compensation.

Benefits
Typical employee benefits usually include health insurance, life insurance, retirement plans,
disability insurance, legal insurance, and pet insurance.

Healthcare is a common benefit in the US, as discussed, since it’s expensive to purchase.
Whereas, in the UK, healthcare is free on the NHS.
Retirement funds and pension plans are also common benefits that employees look for when
considering a new role at a new organization.

A survey found that 48% of job seekers in the US said they would be more likely to apply for a
job that came with good benefits. So although the base pay you offer is important, thinking
about your overall compensation package is essential.

Non-monetary compensation
Non-monetary compensation includes benefits like:

 paid or non-paid time off

Silicon Valley companies offer their employees a wide variety of ever-enticing perks, including
concerts, onsite yoga classes, massages, free accommodation stays while on vacation,
foosball tables, and catered lunches.

Although some of these forms of compensation seem small or superfluous, they can make a
tremendous difference to your employee’s day. This can improve their overall happiness in
and outside of the workplace.

It’s important that you offer a variety of benefits that will appeal to different types of people
you employ and are looking to hire in the future. For example, if any of your employees have
just become new parents or are looking to start or grow a family within the next few years,
they will highly value benefits like parental leave and childcare.

In addition, certain forms of compensation can be viewed both as a perk and a disadvantage,
depending on the rules you apply to it. For instance, if you provide all employees with a
company laptop, are they required to keep this solely for business purposes, or are they free
to use it for personal use? Some individuals could view having two laptops as a hassle. Others
may not like the idea of the company tracking and monitoring their entire private browsing
history. This is why it’s essential to get clear on who your core employees are and what they
want before creating a compensation plan.
Once again, there are differences in what counts as non-monetary compensation between
organizations.

Total compensation
An employee’s total compensation consists of a compensation package made up of all the
applicable types of compensation listed above. The total compensation can (and will) often
include different rewards and benefits at different job levels.

A total compensation statement is helpful for employees. They get a clear idea of everything
they’re entitled to from the start and the different types of compensation on offer. For
example, splitting out base pay, bonuses, and commissions will help employees understand
what they are automatically entitled to and what they need to meet targets to earn.

You could arrange the compensation into two different columns: direct compensation and
indirect compensation. Or you could go a step further and split the compensation out into
different sub-categories within each of those—such as healthcare, a company car, stock
options, and a pension fund.

Each new hire should receive a full, clear report of their total compensation and have a
manager to approach with any questions. This means that all managers should have at least
a basic understanding of the compensation package on offer. They should be able to explain
how it works, and answer any questions that arise.

Research has shown that when an organization is progressive and transparent with
compensation management, employee engagement rises, turnover falls, and your employer
brand gets a boost. Therefore, HR teams must be strategic in the total compensation
packages they offer employees and how they present this through all stages of the hiring and
employment process.

A basic set of compensation is required by law, so your team must ensure compliance with
these ever-changing laws state. A generous compensation package will inevitably help you
stand out from your competition and attract the right kind of talent to your organization, in
addition to helping you retain your existing employees.