What is Indirect compensation?
Direct compensation gets an employee their pay check. But there’s another form of compensation that’s beneficial to employees, too - Indirect compensation. Indirect compensation are the benefits one receives as a part of their compensation. This type of benefit is often termed as “perks” or “employee benefits”. Quite simply, it is the non-monetary benefit offered to an employee.
Direct vs. Indirect compensation
Direct compensation is the money paid directly by the company to the employee in exchange for their services to the company. It can be in the form of hourly wages, set yearly salaries, bonuses, stock options, incentives, or commissions, and is the most commonly recognised form of remuneration.
Indirect compensation consists of two components - Indirect financial compensation and non-financial compensation. The former covers contractual obligations such as temporary leaves of absence, benefits, and retirements plans. Non-financial indirect compensation includes rewards or benefits that don’t affect an employee’s pay, like gift cards, paid parking, travelling concessions, etc.
Here’s a chart to give you an understanding of an employee’s total compensation and its breakdown.
What is the importance of Indirect compensation?
The focus of indirect compensation is to provide benefits for employees in an organisation. By providing employees with additional or non-financial compensation, the company shows that it is willing to go beyond basic offerings to ensure that its employees’ needs are met and illustrates how much the organization values its staff.
Candidates report benefits among their top considerations before accepting a job offer. Indirect compensation is of great importance to employees. They feel more valued, motivated and engaged, and it increases morale and retention rate. Organizations that provide indirect compensation attract the type of talented, dedicated, and hard-working employees that can best represent the company.