What Is Employee Compensation & How Do Compensation Packages Work?

Compensation is often thought of in strictly monetary terms; however, many other valuable forms of compensation exist. In terms of compensation offered to employees, financial compensation in the form of salaries and wages is no doubt crucial, but it makes up only one part of what’s known as an employee compensation package.

In this guide, we’ll walk you through everything you need to know about employee compensation, including what it is, the different types of employee compensation, what benefits are included in a compensation package, and more. Let’s get started.

What Is Employee Compensation?

Employee compensation refers to the combination of salary and wages, benefits, bonuses, and any additional perks employees receive for performing their job. To better understand everything employee compensation encompasses, let’s break down each of these components individually. 

• Salary and wages: The amount of money employees receive for their work, which is processed through payroll. This might be paid as an hourly wage or an annual salary and includes any commission employees receive. Salary and wages are paid to employees on regular pay schedules. 
• Benefits: Any employer-provided benefits that employees receive. This typically includes any insurance benefits (health, dental, vision, life, etc.), retirement plans, stock options, profit-sharing plans, and various types of leave. These benefits may be statutory (required by law) or supplementary (at the employer’s discretion).
• Bonuses: Bonuses might be paid to employees for exceeding sales goals or if the company has an excess budget at the end of the year. These, too, are processed through payroll but might not be paid out every pay cycle.
• Additional perks: This covers anything else employees receive for their work that doesn’t easily fit into any of the previously mentioned categories. This might include things like company-provided lunches, on-site parking, and other perks that don’t have easily measurable monetary values like flexible work schedules, professional development opportunities, stipends for employees’ home offices, and more. These perks are typically beyond statutory requirements, so are left to the employer’s discretion.

What Is Total Compensation?

The terms “employee compensation” and “total compensation” are often used interchangeably, but they have slightly different meanings. While “employee compensation” could refer to certain types of compensation, total compensation is the sum of all compensation an employee receives. So, if you wanted to calculate an employee's total compensation, you would add the total monetary value of their salary and wages, benefits, bonuses, and any additional perks.

Types of Employee Compensation

There are three different types of compensation: direct, indirect, and non-monetary. An example compensation package might include any combination of these. Let’s take a closer look at each.

Direct Compensation

Direct compensation is the salary and wages that are paid directly to employees, i.e., any monetary payment. Direct compensation can be viewed as an employee’s net pay vs. their gross pay as the latter is their total pay before any deductions (such as payroll tax). Direct compensation includes whatever method you use to pay employees, whether that’s an hourly wage or an annual salary, as well as variable compensation, such as bonuses, commission, and overtime pay.

Indirect Compensation

Indirect compensation is compensation that has a monetary value but isn’t paid directly to employees, i.e., non-cash benefits. This includes any benefits and contributions that the employer covers. What’s included in indirect compensation can vary significantly based on your employees’ working locations because mandatory and customary benefits differ from jurisdiction to jurisdiction. For example, in some countries, you must pay into retirement plans, whereas in others, it’s left to the employer’s discretion. We outline country-specific employer costs in our OmniAtlas.

Indirect compensation also includes non-mandatory benefits like stock options and company profit-sharing plans.

Non-Monetary Compensation

Non-monetary compensation refers to any remaining employee compensation that doesn’t have a monetary value. Instead, it may contribute to better employee satisfaction and engagement. This includes some of the previously mentioned “additional perks” such as a flexible work schedule and company volunteerism.

What Benefits Are Included in an Employee Compensation Package?

You may be required to provide employees with certain benefits and leave options depending on their country of employment. Requirements vary by country, so you must understand your obligations to remain compliant with local labor laws and regulations. 

Employers looking to craft an attractive and competitive compensation package might consider including some of the following benefits:

• Health, vision, and dental insurance
• Disability and life insurance
• Mental health insurance
• Retirement plans
• Flexible working hours
• Remote working opportunities
• A learning and development budget
• And more

Offering various types of leave and time-off opportunities is also vital to creating a well-rounded compensation package. More companies are seeing the value in offering their employees unlimited paid time off (PTO) or generous PTO policies, but here are some specific types of leave to consider:

• Maternity, paternity, and parental leave
• Annual leave
• Sick leave
• Bereavement leave
• Sabbatical leave
• Compensatory leave
• Unpaid leave

If you’re looking to hire talent abroad and require local expertise on which benefits are required or customary in the employee’s country, it can help to partner with a global employment provider like Omnipresent.

How to Determine Employee Compensation?

Once again, the most important step in determining how much to compensate employees is ensuring you’re staying compliant with the law. Most countries have laws dictating things like minimum wage requirements, mandatory benefits, and time-off/leave requirements, so it’s crucial that your employee compensation packages are at least meeting the minimum requirements set by the law.

But just offering the minimum of what’s required will likely make it challenging to attract and retain talent. One thing that can help you decide on what compensation to offer is performing market and competitor research. This will give you valuable insight into the compensation offered at competitor companies and what compensation expectations look like for your industry. You can also look at the compensation employees received in their previous roles combined with their years of experience to help dictate an appropriate amount of compensation.

Salary benchmarking is a highly useful process for employers to go through to ensure fair, market-aligned, and competitive compensation - especially for global teams. You can read more about "how to salary benchmark" here.

While determining how much compensation your employees should receive, you should also be aware of employer costs you’ll have to pay.

What Are the Employer Costs for Employee Compensation?

Calculating an employee’s total compensation can give you a rough idea of your employer costs; however, you’ll also need to take payroll taxes into consideration. Our Global Employment Cost Calculator can help you determine your monthly costs based on the employee’s annual salary and country of employment.

Understanding your employer costs for employee compensation is vital to your company’s success. Offering a comprehensive employee compensation package will go a long way in helping you attract and retain talent. Still, it’s best to balance what you offer employees with what your business can reasonably afford. If you don’t calculate your employer costs, you risk overpromising your employees compensation packages that you may not be able to deliver in the long run.

Additional Employee Compensation FAQs

Here are some additional FAQs regarding employee compensation.

What's the Difference Between Compensation Vs. Salary?

Simply put, salary is just one type of compensation that employees receive, but things like benefits and time-off are also considered compensation. Because salary is a type of compensation, the two words are sometimes used interchangeably, but keep in mind that salary isn’t the only type of compensation for employees.

What Is a Total Compensation Statement?

A total compensation statement is an employer-prepared statement that gives employees an overview of all compensation they receive. Typically, this is prepared as an annual statement to provide employees a detailed look at all the compensation they receive in a given year. The statement includes information on the different types of compensation employees receive along with the monetary values of each compensation.