Three Compensation Types That Attract and Retain Employees (With Examples)
Offering employees proper compensation is a vital part of attracting and retaining top-notch employees: Salary is the most important factor to employees considering a new position.
But salary is only one type of payment organizations can offer employees. And, while vital, it alone is not enough to support a corporate talent acquisition strategy. Employees across industries are looking for robust compensation packages that mix and match different kinds of remuneration and benefits.
A firm grasp of the different kinds of compensation you can offer employees is the first step in building a competitive plan for your organization. So let’s dig into your options and assess how to evaluate which tools your organization may want to adopt to enhance its compensation packages.
Understanding Different Compensation Types
Compensation refers to the total value of the wages and benefits offered to an employee in exchange for their work. This most notably includes annual or hourly pay, but also includes valuable benefits like paid time off, health insurance, and retirement contributions.
There are three types of compensation:
- Direct: Compensation of immediate cash value (e.g., wages or salary).
- Indirect: Compensation with a financial value but not a direct payment (e.g., stock options or retirement plans).
- Non-monetary: Compensation in the form of benefits that aren’t measured in dollar amounts (e.g., flexible work options or career development).
Each of these plays an important role inattracting and retaining the best talent for your organization. Let’s dig into each individually to see how they can contribute to a competitive compensation package.
Direct compensation is money employees receive for performing their work, like salary or hourly wages. While some companies offer competitive salaries that reflect an employee’s experience level or performance goals, others may provide wage increases based on job titles or responsibilities.
Base pay, or base salary, is the foundational element of direct compensation. It can be paid as either an hourly rate or a salary, depending on the type of job and the employer. It is typically the bulk of an employee’s total remuneration and directly affects their take-home pay.
Salaried employees generally receive a higher base pay than hourly workers, but all workers must be paid at least minimum wage. This compensation floor is the lowest amount an employer can legally pay an employee for their work. The federal minimum wage currently stands at $7.25 per hour, though some states and cities have higher floors.
Incentive Pay (Commissions and Bonuses)
Incentive pay is an extra form of compensation given to employees when they achieve certain predetermined performance goals or objectives, like bonuses or commissions tied to sales targets.
Incentive pay is also referred to as merit pay, performance pay, and pay-for-performance. They can be offered for individual contribution, team achievements, leadership qualities, and high performance.
Overtime pay is a form of extra compensation employers must provide their employees, based on theFair Labor Standards Act (FLSA). It is designed to compensate full-time employees who work beyond the standard 40 hours per week. Overtime pay is calculated at “time and a half,” or 1.5 times the employee’s regular pay rate.
Paid Time Off
Paid time off (PTO) is a critical component of any employee compensation package, supportingessential work-life wellness for both employers and employees and flexibility. Examples of PTO include vacation days, sick days, bereavement leave, and jury duty leave. This compensation type allows employees to address the demands of their personal life during normal business hours without taking a hit to their paycheck.
Indirect compensation is a form of compensation that has monetary value but is not part of salary or wages. This compensation is not a direct payment, so employees typically can’t cash in the value right away.
Equity and Stock Options
Equity is a form of ownership that can be granted through stock options, restricted stock units, or phantom stock. An equity package gives your employees part ownership of the company, which can result in large cash payouts for those who stay with the company longer.
Stock options give employees the right to purchase company stock at a set price within a specific time period. Stock options differ from equity as they do not grant any ownership to the employees. Both ideally increase in value over time, rewarding employees in the long term.
Health Benefits and Insurance Coverage
Health benefits and insurance coverage are other forms of indirect compensation.
- Health benefits provide financial protection for employees against potential medical costs that can arise due to illness or injury.
- Insurance coverage packages can include medical, dental, vision, life, disability, and other types of healthcare coverage. Medical insurance plans are typically provided either by employers or through private health insurance marketplaces.
Many employers also offer discountedgym memberships and other wellness initiatives, such as cycle-to-work schemes or workplace nutrition plans that help build awell-nourished workforce.
Retirement Plans and Pension Funds
Retirement plans and pension funds are effective indirect compensation that can help employees save for the future.
Retirement plans, such as401(k)s andRoth IRAs, are tax-advantaged investment accounts that allow employees to contribute a portion of their paychecks to save for retirement.
Pension funds guarantee a fixed, periodic payment after retirement and can be defined contributions or defined benefit plans. Defined contribution plans are arrangements where both employer and employee make contributions that are then invested on behalf of the employee. Defined benefit plans, however, guarantee a set amount of benefits when the employee retires.
Non-monetary compensation is a form of reward that cannot be measured in dollar amounts but is offered as employee benefits. It is intended to motivate and encourage employees to stay with a company and retain their best talent.
Flexible Work Options
Flexible work options, such as remote work and flexible hours, are popular non-monetary benefits for employees. Studies have shown that flexible work options can positively impact employee engagement, productivity, and morale.
In addition to flexible work schedules or environments, consider offering other perks that complement them, such as a home-office budget or lunch stipends.
Professional Development Opportunities
Professional development offerings provide a great way to foster a culture of continuous learning and growth. Employers have numerous options in how they structure such opportunities, such as providing access to courses, networking events, summits, or supporting fees for employees pursuing a degree or certification.
Additional initiatives include career planning, creativity workshops, or mentorship programs that empower employees to take ownership of their growth and career paths.
Commute & Family Assistance
Commute assistance ranges from public transportation vouchers to company cars or rideshare services. Family assistance programs might include childcare subsidies, parental leave programs, or access to on-site nurseries and daycares.
These secondary monetary benefits can remove a potentially huge employee burden and expense. By taking these logistics off your employees’ plates, you demonstrate your company’s commitment to employee wellbeing and provide valuable support for employees and their families.
How to Evaluate Your Company’s Compensation
A comprehensive compensation analysis is a process businesses go through to assess how the pay and benefits they offer employees compares externally, with market rates, and internally, in regard to equity.
This involves a thorough review of the company’s current total rewards strategy and an evaluation of its effectiveness in talent acquisition. It uses external data, such as the average salaries and equity options offered in your industry. It will also require company data, such as what the pay ranges offered across different grade levels. You will want to consider the full spread of an employee’s total remuneration, including wages and salary, benefits, perks, and other forms of recognition.
A thorough compensation analysis will determine how competitive your program is, as well as your opportunities you have to improve your compensation strategies.
Getting Creative With Your Benefits Package
Developing a competitive compensation package isn’t a straightforward endeavor. Whether you’re a startup offering awesome fringe benefits or an established legacy company covering college tuition, there are so many ways your human resources team can support your employees.
If you’d like help enhancing your compensation packages with flexible wellbeing benefits contact a Gympass wellbeing specialist today!
- Consolidated Minimum Wage Table. (2023). US Department of Labor. Retrieved on February 28, 2023 from https://www.dol.gov/agencies/whd/mw-consolidated.
- Digital Workers Say Flexibility Is Key to Their Productivity. (June 09, 2021). Gartner. Retrieved on February 28, 2023 from https://www.gartner.com/smarterwithgartner/digital-workers-say-flexibility-is-key-to-their-productivity#:~:text=Flexible%20work%20hours%20is%20key,them%20to%20be%20more%20productive.
- How Do Pension Funds Work? (April 29, 2022). Investopedia. Retrieved on February 28, 2023 from https://www.investopedia.com/articles/investing-strategy/090916/how-do-pension-funds-work.asp.
- Nearly 70% of Americans are looking for extra work to combat inflation. (September 27, 2022). CNBC. Retrieved on February 28, 2023 from https://www.cnbc.com/2022/09/27/nearly-70-percent-of-americans-are-looking-for-extra-work-to-combat-inflation.html.
- Overtime Pay. (2023). US Department of Labor. Retrieved on February 28, 2023 from https://www.dol.gov/agencies/whd/overtime.
- Roth IRAs. (2023). IRS. Retrieved on February 28, 2023 from https://www.irs.gov/retirement-plans/roth-iras.
- Wages and the Fair Labor Standards Act. (2023). US Department of Labor. Retrieved on February 28, 2023 from https://www.dol.gov/agencies/whd/flsa.
- 401(k) Plans. (2023). IRS. Retrieved on February 28, 2023 from https://www.irs.gov/retirement-plans/401k-plans.
The Gympass Editorial Team empowers HR leaders to support worker wellbeing. Our original research, trend analyses, and helpful how-tos provide the tools they need to improve workforce wellness in today's fast-shifting professional landscape.