Indirect Compensation

What is 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. 

What is the difference between Direct and 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. It is the most commonly recognised form of salary. 

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. These are differences between direct and indirect compensation.

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 employees’ needs are met and it 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. 

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What are the advantages of Indirect compensation?

Indirect benefits are becoming more important in long-established companies as HR departments and upper management recognise the value in things like employee retention, loyalty, engagement, and motivation. Employers can create a stronger incentive for employees to align not only with overall company goals and values, but also with critical HR initiatives, by offering additional, attractive compensation packages.

Another important goal of indirect compensation is to provide a competitive advantage over other companies that potential candidates may be considering. A large indirect compensation package offered by a company can indicate to a future hire that he or she is not only wanted by the company, but will also be well cared for as a future employee.