What Are The Different Types Of Compensation? [Ultimate Guide]

Many people are confused by the term compensation and how it relates to employment. 

If you have ever wondered ‘what are the different types of compensation?’ we explain what they are and how they work. 

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Understanding Compensation 

Compensation is not simply what you are paid in monetary terms to do your job. It can include many other elements all of which are designed to recompense you for your time, labor and expertise. 

There are benefits, bonuses and non-monetary types of compensation all of which combine to make up a compensation package to attract employees. For any role it normally reflects the market standard for that particular job and industry sector. 

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Direct Compensation

While both direct and indirect compensation are financial in nature and can be either money or having an equal value to money there are important differences to understand. 

Direct compensation refers to the salary, hourly wage, bonus or commission payment an employee receives for their work. Think of direct compensation as a cash payment. 

Indirect Compensation

Indirect compensation is still a type of monetary reward as it has financial value, but it is not a direct payment like salary or wages. 

There are many types of indirect compensation such as 401k plans, health insurance, profit sharing or stock options. While they have a monetary value which benefits the employee they are not paid in dollars. 

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Types Of Compensation

So, what are the different types of compensation? The largest percentage of most compensation packages will include a salary or hourly wage. This may then be supplemented with other incentives such as bonuses, allowances or benefits. 

Salary

The salary for a particular job will vary depending on the responsibilities of the role, the required experience and education of the candidate and the industry. 

More often than not a salary applies to those occupying managerial positions or with a high level of education and experience. It is an annual amount that is invested in the employee by the company and typically paid monthly. 

Hourly Wages

For semi-skilled or unskilled workers an hourly wage is the more typical form of compensation. It is also the preferred method for temporary or contract workers. 

This is because hourly wages are compensating the employees for their time regardless of their output. Those on hourly wages are more likely to receive overtime pay if the tasks they need to perform are not completed in the normal work day. 

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Commissions

Commission is a common type of compensation in the field of sales and serves as an incentive to employees to improve their performance. This kind of compensation can increase according to the employee’s increased output so is directly affected by their efforts. 

There are various types of commission from salary plus commission, to straight commission which means the employee only earns commission. 

Other types include residual commission, which is paid on ongoing accounts, graduated commission which increases as sales increase and variable commissions which is a mixture of different types. 

Overtime Pay

This kind of compensation is mostly paid to hourly wage earners and is paid for extra hours worked. It can often be paid at above the normal hourly rate. 

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Stock Options

Stock options are a kind of indirect compensation in that you do not receive a direct payment in cash but instead are allowed to purchase a certain number of shares at a specified price. This is normally after an agreed term of tenure. 

Bonuses

A bonus is typically linked to performance much like commission. This is a direct form of compensation and is also seen as an incentive. 

Some companies will give bonuses to all employees if the business reaches certain targets while others will pay bonuses to those employees who have directly contributed to the company’s success. 

Incentive Pay

Incentive pay is offered to employees with an eye on future performance whereas bonuses are often the reward for past performance. 

This type of incentive can be either monetary or non-monetary in nature. An example of a non-monetary incentive is a gym membership or flexible working. Monetary incentives can take the form of stock shares or sign on bonuses. 

Housing/Travel Allowance

Another type of indirect compensation is the offer of a housing or travel allowance. This can often be used to attract employees to certain industries where there is a shortage of skills in a particular area and high competition for those skills. 

It can be used by businesses to encourage people to relocate or consider a role that is further from their home. 

Benefits 

Compensation in the form of benefits can take many forms. This could include healthcare, health insurance, retirement plans or pension plans. Benefits are seen as a way of improving the employee’s quality of life rather than a direct recompense for their work. 

Non-Monetary Compensation

There are many non-monetary types of compensation and many will be tailored to particular roles or specific industries. Paid time off, flexible working hours, company equipment or learning and development opportunities all form part of non-monetary compensation plans. 

How Is Compensation Different From Remuneration?

There is no difference between compensation and remuneration. Compensation is a term more widely used in the United States while remuneration is used elsewhere. 

This may be because in other parts of the world compensation is more often used to refer to a monetary award given to someone who has suffered a loss of some kind. 

Final Thoughts

The different types of compensation can vary depending on the industry as well as the role that it applies to. Typically, higher levels of responsibility and expertise will attract higher levels of compensation and more comprehensive benefit packages. 

It is good practice to know and understand the type of compensation that is being offered for the role you are applying for in your industry. This gives you more negotiating power when it comes to an offer of employment. 

While on the subject of your finances it is vital that your pay stubs are also in check. Our paystub generator will make sure that they are.

We hope this guide to the different types of compensation has been helpful to you.