What Is Compensation? (Definition and Types)
Updated 18 March 2023
Compensation is the total payment an employer gives an employee, including cash and non-cash benefits, such as insurance and vacation time. Whether you're comparing multiple positions, asking for a raise or negotiating a new job offer, knowing more about different types of compensation can help you decide what you're looking for. Learning more about employee compensation can help you determine whether your compensation package is adequate. In this article, we answer, 'What is compensation?' with a detailed explanation and provide some examples to help you better understand this concept.
What is compensation?
Compensation is the total pay an employee receives when working. This includes a traditional salary, such as an hourly wage or annual pay. It also includes the value of all benefits, such as insurance plans, tuition assistance and bonus pay. It is the total amount that an employer pays you to work for them, which includes cash and non-cash incentives.
For example, if your base pay is $40,000, and your employer also offers you additional benefits, such as tuition reimbursement, totalling $20,000, your total compensation is a combination of the two, or $60,000. Knowing your total compensation can help you negotiate your salary and benefits and also compare positions. For instance, a new role might offer you a higher annual salary but a smaller benefits package. You can compare the total compensations to assess the different values.
What is base compensation?
Base compensation, also called base pay, is the salary you receive without including benefits or additional wages. Here are the four types of base pay your employer might offer you in your employee contract:
Hourly: employers pay hourly wages for each hour an employee works. For example, if you make $20 per hour and you work 10 hours, that means you made $200 before taxes.
Weekly: a weekly pay means an employer pays you a set amount each week. For example, they might pay you $900 every Friday.
Monthly: a monthly base pay may be the income you earn during that month. Some employers pay employees one time per month, or you can determine your monthly payment by dividing your annual pay by 12 months.
Annual: some employees earn an annual salary rather than hourly wages, and employers may pay this weekly, bi-weekly or monthly. For example, your annual salary could be $60,000, which is the total gross salary you make before taxes.
Different types of compensation
Compensation contains base pay and additional forms of payment. In addition to your base pay, you might also see the following types of compensation in your career:
Benefits are an important part of a compensation package. These benefits can vary depending on your employer and company, but common benefits include:
Long service leave
Some of these are mandatory but employers might offer additional benefits as a form of compensation. For example, in Australia, employers must pay Superannuation contributions and paid leave. This amount can change over time and vary depending on your sector. To attract new team members, employers might offer additional paid leave or make higher Superannuation contributions than the mandatory minimum.
Bonus pay is a type of compensation your employer might offer. Some employers offer performance bonuses. For example, if you exceed your sales for the year, your company might pay you a certain amount at the end of the period as a bonus. Other companies offer regular bonuses to reward and motivate professionals. For instance, some businesses provide an annual holiday bonus to all team members.
Commission pay is a form of compensation where an employee earns a salary based on what they sell or produce. This is more common in certain industries, such as:
Being paid on commission means you earn a certain amount based on your sales or production. For example, a professional who sells cars might earn 25% of each sale. You may earn a commission in addition to a base salary, or your employer might pay your entire salary on commission, depending on your location, company and sector.
In some sectors, you might earn additional income as tip wages. This is more common in hospitality and service-based industries. Some roles that may involve tips can include the following:
Hotel and events staff
If you earn an hourly wage, you may earn additional income in the form of overtime wages. In some industries, such as construction, retail and security, the government regulates when an employer must pay overtime hours. Typically, this is when an employee works on a holiday or works more than their determined schedule.
Employers may also offer overtime in compensation packages even if it's optional for their industry. For example, some companies might offer a higher wage for employees who work a long shift, overnight or work over the weekend.
Some businesses might offer compensation as stock options, which means they allow their employees to purchase shares of the company stock at a discounted rate. If your employer offers stock options, consider reviewing the contract carefully to determine how valuable it is to you. Factors that may affect the value include how much you expect the stock to rise and when you can sell the stock.
In a profit-sharing plan, an employee receives a certain percentage of the company's financial earnings for that period. For example, your company might pay 3% of their annual earnings as a form of profit sharing. If the company makes $100,000, you might earn 3% of that, or $3,000, as a one-time payment.
Some companies offer tuition assistance as an additional benefit for their employees. They may offer full or partial tuition reimbursements for certain schools or programs. For example, you might be able to work full-time and take courses at night to earn your bachelor's degree.
An employer may also offer compensation for training programs or advancement courses, outside of a traditional degree. For example, in a construction role, your employer might pay for you to learn about a new piece of equipment. This training can help you complete additional tasks and potentially earn a higher salary.
Additional non-cash incentives
Depending on your company and industry, you may earn additional non-cash incentives. These can include:
Employee Assistance Programme (EAP)
What can affect compensation?
When reviewing a compensation package for a new position, it's important to consider what factors can affect your compensation. Here are some elements that can affect compensation:
Average salaries and compensation can vary in different cities. For example, the cost of living might be higher in certain cities, and employers might offer larger compensation packages to match the higher costs. Consider researching average salaries for your desired role in your area to help you determine what's common in your city.
Your education may affect your compensation package, although this depends upon your role. Some employers prefer candidates who have an advanced degree, and they might offer more compensation for these positions. Earning an additional degree could also help you complete more technical duties, which can also raise your base pay and compensation package.
If you have relevant work experience, it could help you earn higher compensation. For example, an employer might offer you a higher compensation package if you have extensive experience in a similar role because you may not need training or assistance. During compensation negotiations, some employers also consider an employee's previous pay and this can affect the total salary.
Depending on your role and company, you might earn a higher compensation after a special achievement. Some employers may raise wages because of high performance. For example, if you excel in your current role, your manager might offer you an increase in your hourly wage during your annual review. Other companies offer incentives like bonuses for certain accomplishments. For example, if you have the highest sales in the department, you might earn a special, one-time bonus.
Your compensation may also vary depending on the regulations in your industry. Australia has a set national minimum wage that can change over time, but they also have industry-specific amounts for certain regulated sectors. As the minimum wage rises, your compensation may rise, depending on your initial payment.
In some industries, employers may offer compensation packages that compete with other companies in their market. For example, a tech company may try to attract new developers by offering more benefits than other tech companies in the area. Consider comparing the average salary and benefits at a few different companies in your industry to learn more about typical compensation packages.
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