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The Eight Types of Compensation

The Eight Types of Compensation

The job market continues to shift as companies realign their objectives, grow their operations, and focus on the needs of their employees. However, potential hires, and even your current staff, are driven in some way by the types of compensation available to them. While a healthy workplace culture and connecting with invaluable mentors certainly entices them to work for you, the monetary aspect of their roles remains top of mind.

And why shouldn’t it? Committing their skills, knowledge, and time to your business is no small feat. It requires dedication and vision, and that does not come cheap. Perhaps you have a basic sense of the types of compensation you can provide your employees or have heard various terms thrown around and are wondering how to incorporate them into your compensation structure. Throughout this post, we’ll explain all the details you need to know about pay, literally and figuratively.

What is Compensation?

Plainly put, compensation refers to the payment an employee receives while working for an employer. This could come in many forms and be divided into several categories. At the end of the day, it’s what your company invests in the people who work there.

What Affects Compensation Amounts?

Each industry is unique, and as a result, compensation can be affected by all kinds of things. Perhaps the most important is the type of organization. A sales-based profession may put more emphasis on commission as it relates to compensation, whereas a corporate environment might have stock options available. In addition, the employee’s skills, experience, and education could dictate their hourly wage or salary. 

Internal factors like company size and reputation and external factors like industry averages and cost of living can also play an important role. Pay equity should be top of mind when considering your company’s compensation structure, especially if you want to minimize risks and maximize your team’s potential. 

Direct Vs. Indirect Compensation

When reviewing your compensation offerings to employees, you’ll likely come across the terms direct and indirect compensation. Make no mistake, both types of compensation relate to monetary means, but they are not “paid” the same. Direct compensation is what is available on a paycheck or actual dollars that are given to an employee for their role. Indirect compensation has value attached to it but is not paid in cash and can be conveyed in a few different ways.

Direct Compensation

Most employees and employers will understand compensation as being direct. It might vary depending on your business, but for the most part, it falls into the following four categories.

Hourly

Some companies pay their employees an hourly rate as their base form of compensation. This accumulates over a set amount of time during the week, and often if overtime is involved, that wage increases to compensate for additional hours. This type of pay works well for part-timers and temporary or contract employees.

Salary

Staff who are salaried tend to work for companies that are invested in them for the long haul. They may be in executive positions, but that isn’t always the case. These employees likely have set hours that they work weekly and have a snapshot of what they earn in a year. This makes up their base pay.

Commission

Sales-based businesses offer a commission for their employees based on a set quota or target. It is a percentage paid out based on revenues or profits. It’s possible that people who earn this type of compensation may also be paid a salary.

Bonuses

Whether your staff have just completed a significant project or the end of the year is fast approaching, they may receive a bonus as recognition for their efforts. The amount of money that is paid is usually up to the manager of that individual. 

Indirect Compensation

If employees are looking for details regarding their indirect compensation, they likely won’t find it on their paychecks. It could be accessed through your company website, an app, or via HR. This type of compensation can include various aspects, such as the ones listed below.

Benefits Packages

The term benefits may refer to various types of insurance or plans available to an employee. Most often, this is associated with health insurance. Your company might offer a package through providers such as Manulife or Sunlife to cover the costs of common physicians or specialists. In addition, you may pay into a retirement or pension plan for your staff that might match contributions or involve percentages. 

Equity in the Company

You might offer equity, or ownership, in your company if you are first starting out and expect it to grow into something big. You could allow staff to own shares or have the option to buy them as a way to compensate them while you are getting off the ground.

Stock Options

Typically, receiving stock options at an established company takes a few years. However, employees can often purchase them at a fixed price and later sell them at a higher cost. Unlike the above type of indirect compensation, the employee would have no ownership in the company.

Non-Financial

Just because the term non-financial removes the concept of monetary value does not mean there isn’t any in this kind of compensation. This phrase may refer to time off (both personal and parental), training credits, an expense fund, company cars, or phones and laptops.

What is Total Compensation?

When employees look at the value their company places on them as a whole, they might see only the direct compensation they receive. However, total compensation looks at both the direct and indirect sides of things. With a comprehensive statement or proper documentation of all the compensation available to your staff, they might feel more valued and confident about their place in the company. 

Why is Compensation Important?

At the end of the day or pay cycle, people choose to work because they need the means to support their lifestyle. While your staff may love what they do or appreciate the skills they are learning, compensation must be in place to ensure their needs are met. Without proper compensation, your employees may look for other roles with better benefits or higher salaries. You could lose talented individuals simply because you didn’t have the foresight to ensure you could stay competitive in your market through your compensation plan. 

How Do You Develop a Good Compensation Plan?

What succeeded for a company you previously owned or worked for may not be the right fit for your current environment. It’s essential to look at compensation from all angles and consider what would benefit your employees the most.
At True North, we understand that navigating different types of compensation can be difficult. While you seek to retain the employees you have, you also want to attract talented individuals who are enticed by the offer you can put on the table. We will take the time to review your current compensation structure and dive into the details that can help make it better. Together, we can ensure that your employees are compensated fairly, and attract new staff eager to help you grow your business. Contact us today to get started.