Indirect Compensation

What Is Indirect Compensation?

Indirect compensation refers to the various forms of non-monetary payment offered to employees.

What Is the Difference between Direct and Indirect Compensation?

Direct compensation is the cash pay employees receive. This includes an employee’s hourly wages or base salary as well as applicable commission, tips, and bonuses. Direct compensation is the most commonly recognized form of payment.

In contrast, indirect compensation refers to the other types of compensation that employers can offer aside from cash. Indirect compensation commonly consists of health insurance and retirement plans which can affect an employee’s take-home pay (e.g., an employee’s 401(k) contributions). Companies may offer other fringe benefits that won’t affect an employee’s paycheck such as meals, paid parking, gift cards, and more.

What Are Other Examples of Indirect Compensation?

In addition to the above, other forms of indirect compensation can include:

• Life insurance
• Equity programs (stock options, profit sharing, etc.)
• Pension plans
• Tuition reimbursement
• Paid vacation
• Paid medical, family, and parental leave
• Adoption and childcare assistance
• Commuting benefits
• Company cell phones and laptops

Why Is Indirect Compensation Important?

The main objectives of indirect compensation are to:

1. Attract top talent. 68% of job seekers prioritize benefits offerings when considering a potential employer. If a candidate has two job offers with similar pay, a benefits package that thoughtfully addresses their holistic needs will likely be the deciding factor.
2. Boost employee morale. It’s inevitable to have rough days at work sometimes. Indirect compensation that promotes work-life balance such as gym memberships, pet-friendly offices, and online therapy can help keep your team’s spirits high even amid challenging times.
3. Improve retention. When employees feel valued as whole people beyond just the work they do for a company, they are more likely to stay. For large companies, it can cost $1 trillion to advertise for open roles as well as train and onboard new employees. So, employee retention is key to the productivity, quality, and profitability of a business.

How Can Indirect Compensation Be Successfully Implemented?

To strategically craft indirect compensation packages, employers should:

1. Be intentional. When it comes to indirect compensation, the possibilities are endless. Make sure to tailor your benefits to what your specific employee population needs and what aligns with your organization’s values.
2. Standardize benefits. Comparing your indirect compensation to other organizations’ offerings helps you stay informed and competitive. You’ll stand out to candidates while keeping your current employees happy.
3. Empower your managers. Provide them with the information that will help them answer questions from employees regarding the organization's compensation plan. This transparency can help increase trust with employees.
4. Educate candidates and employees. Creating a total compensation statement is a straightforward way to inform candidates and employees about what fringe benefits they can enjoy and how to take advantage of them. For indirect compensation, list the value of each benefit or the amount the employer is contributing.