What's The Difference Between Payroll & Compensation? - The Full Guide

The largest expense of most companies is the remuneration that they pay to their employees. So it is important to understand the difference between different ways of paying workers. 

If you’ve ever wondered what’s the difference between payroll and compensation or been confused by the terms we’re going to examine them here. 

Also read: How to Do Bookkeeping 

Basics Of Payroll

Payroll is the distribution of paychecks to employees for their time and service for a specific period of time. This function is carried out by the payroll department and is one of the largest expenses in any organization. 

It involves the payment of regular wages and salaries, commissions and bonuses. Payroll can also refer to the office that deals with compensation as well as the list of all employees of the company eligible for payment. 

In this guide however, payroll is differentiated from compensation as a payment of hourly wages or annual salary. Payroll can be handled entirely in-house, or a company may outsource the payroll processing to an external specialist company. 

The intervals that companies process their payroll varies from company to company, but some will pay their employees weekly while others pay them biweekly, semi- monthly or monthly. 

Also read: How to Pay Employees of Small Businesses 

Understanding Compensation

Compensation is typically a package offered to employees which includes a salary as well as benefits and perks. Some of these are monetary, but others are not, serving instead as an added incentive or designed to attract desirable candidates for a role. 

In essence, compensation is the total cash and non-cash benefits given to employees of a company. The different types of compensation can include commission, stock options, flexible working hours or retirement plans. 

The type of compensation package will normally reflect the caliber of candidate that a company is trying to attract. In a competitive market where particular skills are in great demand but short supply an attractive compensation package can make all the difference. 

Companies trying not just to attract the best talent in their industry but also retain them will put a lot of thought into their compensation. This approach can also raise motivation levels, increase productivity and keep morale high in a company. 

Employees who feel valued will typically perform better in their roles compared to those who receive a basic salary. Including benefits and perks in an employee’s remuneration package often results in higher productivity and increased engagement with the role. 

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Difference Between Payroll & Compensation

The difference between payroll and compensation is the addition of benefits to the latter on top of the base salary. 

Payroll is typically the cash that an employer pays to an employee for their time and service during the payment period, whether that is weekly, bi-weekly or monthly. It is based on the work that employees carry out and the hours that they spend carrying out their tasks.

Compensation on the other hand comprises a base wage or salary but with additional benefits. These benefits don’t necessarily have to be monetary although most have a financial worth such as health insurance or 401(k)s. 

Non-monetary benefits can include learning and development opportunities, gym membership or extended vacation time. 

All financial benefits included in a compensation plan are classed as taxable income. Some exceptions exist such as government employees who work overseas and receive a cost of living allowance, this is normally tax free. 

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Do Employees Prefer Payroll Or Compensation?

Most people will take a job based on what the company is offering them for their time, expertise and efforts. Few have the luxury of doing a job mainly because they enjoy doing it and the majority of us want to be suitably compensated for our efforts. 

A good salary is the fundamental requirement of most employees, but more people are also looking for good benefits from their job. 

These would be in addition to some of the more basic benefits that most employees enjoy such as health insurance, paid vacation time and family leave. 

To attract and retain high caliber employees many companies offer additional benefits such as stock options, travel or housing allowances, dental plans or profit sharing. 

Some companies provide total compensation statements so that employees can see the value of the benefits that they receive as part of their compensation plan. This is designed to help employees feel more valued by the company. 

However if the benefits being offered by the company are not something that an employee would potentially use then they lose their appeal. Compensation plans which include things like gym memberships are not going to appeal to people who don’t exercise regularly.

Similarly a company which offers child care assistance will be of no use for those with no children. For some people it is more beneficial for them to have a higher salary rather than benefits they may never take advantage of or use. 

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Incentives As Compensation

Incentives are used in addition to salary and benefits to attract and retain good caliber employees. While salary and benefits have to be competitive within each industry and in relation to similar roles incentives can be the hook that grabs the best candidates. 

Benefits like bonuses are typically paid on attaining certain goals and paid retrospectively. An incentive however, is a forward looking payment and is mostly performance driven with a specific goal to be achieved in order to earn it. 

Incentives are used to motivate employees and influence their behavior. They can be either monetary such as gifts, or non-monetary in nature like extra leave. If the agreed goal is achieved then the payment of the incentive has to be honored. 

Final Thoughts

Compensation is different to payroll, or salary, in that it is the addition of extra monetary or non-monetary payments to employees. 

There are many things that can be added to a salary to create a compensation plan and these vary from one company to another and within different industries. 

Most companies will use the system that works best for their particular business whether that is payroll or compensation. 

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