Depending on the context, both compensation and benefits can have various meanings. For example, compensation might be something you get if you’ve been in an accident that was caused by someone else. When referring to benefits, you might be talking about the money given by the government to someone who is unemployed.
When it comes to the world of work, however, compensation refers to the remuneration given by an employer to an employee in return for the work they do. This payment can take various forms, such as salary, bonuses, hourly wages and commission.
It can sometimes be in non-cash forms like pension plans, stock options, health insurance, paid leave, training and development opportunities and a whole range of other perks.
Most people don’t work voluntarily, so the compensation they receive for their work generally has a major impact on their choice of job. Companies should invest in this if they want to attract and retain top talent. And they're starting to realise it.
Does compensation affect benefits?
Yes and no. In fact, to some extent, they are the same thing. Or at least, benefits are a form of compensation. Your remuneration package for a particular job will generally take the form of both compensation and benefits.
A really good benefits package might well be more attractive than a higher salary, as a range of useful additional perks will most likely save you money.
They can also help to boost your well-being by saving you time and effort in your daily activities. It can also help you to maintain that ever-important work-life balance, as is the case with FREENOW’s Mobility Budget, which supports your personal travel needs.
Types of Employee Compensation
There are five main types of compensation:
Salary
This is the fixed amount of cash money that your employer pays you for the work that you do as part of your job. We generally talk about salaries in annual terms and they can be gross (i.e. before tax) or net (i.e. what you actually get after the taxman has taken his share!).
Hourly wages
This refers to the amount an employee is paid for each hour of work that they do. This might be because they have a variable hours contract and work different numbers of hours each week or month.
In this case, they don’t have a fixed annual salary but are paid for the number of hours they have worked in the specified period — which might be a week, 2 weeks or a month. Hourly wages might also come into play if an employee works overtime and is then paid for these extra hours on top of their fixed salary.
Commission
In sales-related jobs, employees may receive commission payments that are a percentage of the money they, or their team, have brought into the company from clients and customers. Commission-based remuneration packages can either be 100% commission or a mixture of fixed salary and commission.
Bonuses
Bonuses are extra sums of money — over and above an employee's fixed salary, hourly wages and commission payments – that companies award to reward good performance or the achievement of certain specific targets.
They are generally used as an incentive to boost employee performance and increase retention. Bonuses do not always take the form of cash money, they might also be given as stock or stock options.
Benefits
Benefits are another way that employees can receive compensation from their employers for the work they do for them. Although some benefits may have a cash value at some point in the future (like stocks, pension funds, etc.), the term is used when talking about those parts of a compensation package that are non-cash in nature.
Although there are some exceptions, most benefits are either fully or partially exempt from taxation. For this reason, an excellent benefits package is usually very attractive to potential employees.
Benefits fall into two categories: monetary and non-monetary.
Monetary benefits are things that have a monetary value and that you might pay for yourself or which may convert to cash in the future. Some examples are:
Health insurance
Life insurance
Dental and eyesight insurance
Paid gym membership
Pension fund
Stock or stock options
Student loan repayments
Worker’s compensation plan
Free food and drink
A travel plan (like FREENOW’s Mobility Budget)
Non-monetary benefits are perks that have no monetary value, but can be invaluable in supporting well-being and work-life balance, i.e.:
Family leave (extended maternity and paternity leave and for bereavement)
Flexible working schedule (this can include flexibility in the hours worked and also the option of remote working)
Paid time off (over and above an employee's basic entitlement)
Training and development opportunities (either in-house or an allowance for external courses)
Use of company equipment (i.e. computers, mobile phones, tablets, etc.)
Internal or external break areas (comfortable areas to take a break from working and socialise with your colleagues, perhaps with equipment provided for games, exercise, reading, etc.)
What are the advantages of compensation and benefits?
The level of compensation we receive from our job (i.e. the amount of money paid into our bank account every month) is a very important consideration for all of us. We have bills to pay and may want to get a mortgage, buy things, go on holiday or put some savings aside.
Despite all this, we shouldn't undervalue the importance of a well-structured compensation and benefits function.
While it does take away the flexibility of choice to some extent, the actual value, both in monetary terms and in the time and effort it can save us, can far exceed the equivalent cash value that would be reflected in our compensation.
Want to learn what benefits employees really want? Download our survey of 500 employees from Irelandto help build compensation & benefits strategy based on facts - not assumptions.