Compensation is a worker’s salary or hourly pay. However, it also covers other types of wages, including overtime, bonuses, retirement benefits, health benefits, stock options, and any non-financial incentives.
Generally, employee compensation is either direct or indirect. Direct compensation includes the following:
- Hourly pay
- Annual salary
- Overtime pay
- Commission – either sales-based or performance-related
- Tips – especially relevant to the hospitality sector or for some personal services
Indirect compensation covers insurance, retirement, or health benefits. And it also includes company cars or mileage allowances, relocation expenses, paid time off, and company mobiles.
Employers use compensation to attract and retain staff and reduce turnover. Compensation is also used as a performance reward and employee motivation tool.