In addition to salary and wages, here’s how indirect compensation creates a more attractive compensation package for current and prospective employees.
There’s more than 1 way to get paid for work. And 2 overarching types of compensation are direct and indirect compensation.
Both are highly valued and come with their distinct advantages. While direct compensation is more well-known and finite, indirect compensation may boost morale and help with retaining employees. Today many employees planning to look for a new job seek better benefits and perks than they’d previously had.
Here we’ll shed light on indirect compensation, what it is, the differences between it and direct compensation, and why it’s necessary. We’ll also look at several indirect compensation examples.
What is indirect compensation?
In addition to being paid directly for their time and job performance, often employees are awarded non-financial compensation as well. These benefits, perks, or fringe benefits are considered indirect compensation.
What is the difference between indirect and direct compensation?
Direct compensation refers to the money paid directly from the company to the employee. Direct compensation examples are base pay, hourly wages, and overtime pay. Both companies and employees consider this standard pay for the agreed-upon work.
By contrast, indirect compensation doesn’t end up directly in the employee’s pocket. However, non-monetary benefits are still highly sought. In some cases, depending upon overall compensation philosophy, they’re as valued as a base salary.
Why is indirect compensation important?
Indirect benefits may be more difficult to quantify, but they go a long way toward rounding out the total compensation package. Granted, job seekers and current employees will always be concerned with monetary compensation. Still, strong nonmonetary incentives can increase job satisfaction and employee loyalty.
Examples of indirect compensation
There are dozens of types of indirect compensation. Some are small conveniences that make employees more comfortable throughout the day. Others help increase their long-term wealth and maintain their well-being. Here’s a look at 9 examples of indirect compensation.
Before a job candidate accepts a position, they’ll want to know everything about their benefits package. Several forms of indirect compensation fall under this umbrella, including:
- Health insurance.
- Prescription drug cards.
- Social Security.
- Sick leave.
- Paid time off.
- Unemployment compensation.
A benefits package should be considered additional compensation that can add hundreds, even thousands, to the total compensation package value.
While not as common as they once were, pension plans are designed to financially assist current employees once they stop working. The company stashes a set amount of funds into stocks and bonds. When employees retire, they take ownership of their pensions. A pension is one of the easiest ways to stay comfortable during retirement.
401(k) plans are offered at many companies and are a lucrative indirect benefit. These plans allow employees to add pre-tax deposits to their accounts. Many companies match up to a specific contribution, which helps the fund grow faster.
Employee perks are as varied and creative as the person thinking them up. They span the gamut from paid gym memberships to “bring your dog to work day,” free lunch, and on-site game rooms. Perks may not ever become the primary reason job seekers join a company. But they can infuse fun, lift moods, promote camaraderie, and boost employee morale.
An indirect compensation package may include stock options for the employee. This premise offers employees a chance to buy company stock at a certain price for a certain period. Stock options ultimately financially compensate staff who take advantage of the program. However, it may be years before the employee benefits from their participation.
Being able to use high-end laptops, tablets, and smartphones supplied by an employer can add up to significant financial value. Another common way employees, especially salespeople, benefit from this compensation is by securing a company car. When organizations pay for company cars, the employee indirectly saves money on car payments and possibly insurance premiums, gas, and upkeep.
Working parents who don’t have family members to care for their kids often face steep childcare costs. Some companies offer on-site child care or provide a stipend for off-site child care. This type of indirect compensation is a big hit with job candidates and employees who have small children.
A life insurance policy is intangible compensation but is valuable to the family if the employee dies. Sometimes life insurance premiums are expensive and exceed an employee’s budget. When organizations provide life insurance, employees and their families gain peace of mind that family will be provided for if the worst should happen.
One of the most sought-after indirect benefits today is flexibility at work. Many job candidates want to be able to work from home or enjoy a hybrid setup. In addition, employees prefer flexible hours to more traditional schedules. Companies that offer employees flexibility show their culture cares about their team members and supports a healthy work-life balance.
Indirect compensation is a vital aspect of the entire compensation package
While employees may not benefit from indirect compensation arrangements every pay period, they typically appreciate the positive returns throughout their careers. Top talent is increasingly demanding indirect compensation right along with a healthy salary. It’s a good best practice for companies to include both direct and indirect benefits in any job compensation plan.
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