What Are Compensation and Benefits?

Compensation refers to direct payment from the employer to the employee in exchange for labor. You’ll also hear compensation referred to as direct monetary payment for work performed or, more simply, wages.

Benefits, on the other hand, are indirect forms of compensation that are not always monetary.

Compensation, or a compensation package, can also act as an umbrella phrase that includes salary, bonuses, healthcare plans and a variety of other types of benefits.

Related Reading on Built InWhat Are Fringe Benefits and How Do They Empower Your Team?

How Do Employers Determine Compensation and Benefits? 

There are many factors that go into determining an employee’s compensation and benefits. Each industry, organization, position and employee is different. Some common factors include: 

• Years of experience
• Tenure with the company
• Education — The highest degree earned and degree area
• Salary (for current employees)
• Job performance ratings (for current employees)
• Job title and responsibilities
• Job location and the cost of living
• Supply — The availability of qualified candidates
• Demand — The degree to which you need to fill a particular role
• Company size and stage of the company — Is this a startup, a mid-sized company or an enterprise corporation?
• Market standards — How much are competitors paying for similar positions?
• Skill sets — Will you need to be brought up to speed or are you coming in with more than what is required? Do you have in-demand skills?
• Full-time equivalent status
• Exempt vs. non-exempt status — Will you be eligible for overtime pay?

Certain roles may have different structures. Think about sales wherein the two major components of compensation are base pay and variable pay (i.e. commissions). For roles that are heavily commissioned, there will be a lower percentage of base pay and a higher percentage of variable pay. On the other hand, government institutions (e.g. federal workers, employees of state colleges, municipal workers) may have a formula they use to determine salary ranges. For example, a law enforcement officer’s rate of pay is based on geographic location, grade and step. 

2 Compensation and Benefits Models

1. Total Rewards Model

A total rewards model is all-encompassing and ties C&B together with personal growth opportunities. The model places an emphasis on career development opportunities, recognition for service and work-life benefits. A good analogy is a banana split. The banana is compensation (salary, commissions, bonuses — your direct compensation). The toppings are everything else included in total rewards — your indirect compensation, including work-life balance, recognition and career development opportunities. Most people would be pretty disappointed if they ordered a banana split and just got a plain banana!

Over half the workforce — 54 percent — say continuous learning is essential to keep up with workplace changes. Further, a whopping 94 percent of employees say they would stay longer if their company invested in their careers.

2. Warr’s Vitamin Model

Developed by Peter Warr in 1987, Warr’s Vitamin Model captures and describes what factors affect employees’ well-being and development. According to the model, just as every human needs a varied diet with a wide array of nutrients, so do employees require a variety of job characteristics to help them be productive and feel fulfilled at work. 

Warr’s vitamins exist in two discrete groups, constant effects (CE) and additional decrement (AD). 

Like vitamins C and E, CE characteristics will neither help nor harm employees once they reach the optimum level. In other words, an overly high quantity of any of these characteristics don’t add anything to employees’ well-being but they are, nevertheless, vital to an employee’s job satisfaction.

• Pay and financial rewards
• Physical comfort and security
• Adequate equipment
• Supportive and considerate supervision 
• Job security
• Value of work to society 

Alternatively, additional decrement characteristics (AD) – like vitamins A and D — can become toxic to employees if they receive too much of any one. Of course, too little of any one will yield likewise adverse effects for employees.

• Task discretion and autonomy
• Influence
• Skill use
• Difficulty of job demands
• Number of job demands
• Availability of feedback
• Range of tasks
• Amount of social contact

More From Built In ExpertsThe 4 Qualities Leaders Need to Build Trust and Boost Team Effectiveness

Why Are Compensation and Benefits Important? 

A job candidate’s compensation package is one of the most important factors they consider when making a job decision, and can also keep your employees from being poached by your competitors. Not only can a competitive total compensation package draw top talent into the organization, it will also motivate and engage the employees you already have and create an overall positive employee experience. Moreover, compensation and benefits together can help reward employees for their hard work and dedication while improving overall morale and company culture. 

Results of competitive compensation can include increased productivity, better customer service and employee retention, all of which can lead to achieving the organization’s growth and development goals. 

If you design a strong compensation and benefits program, you can align employee goals with company objectives. In this way, compensation and benefits are a critical part of delivering on your stated business strategies while achieving company objectives and key results (OKRs). 

Finally, great compensation and benefits can create company advocates. Your employees will begin recruiting people in their network to come and work for you. This kind of positive word of mouth can be huge for your reputation and employer branding.

Compensation and Benefits Example 

Nina has worked for the same company for the last seven years; this was her first job out of college. She’s a top performer so she was recently promoted. While she likes her job, she’s looking to stretch herself a bit more. 

Nina has two young children that she needs to pick up from school mid-afternoon two days a week, so she’s looking for a job with flexible work arrangements and schedules. Outside of that, her top priorities when evaluating compensation and benefits are the highest possible salary and the most attractive retirement plan. She wants to save aggressively for retirement over the next several years. 

Nina’s also been thinking about going for her MBA in business administration down the line, so if a company offers tuition reimbursement, that would be of interest to her. Her children are on her partner’s healthcare plan so that’s not as high of a priority.

Nina has interviewed with and received offers from three other companies: Company A, Company B and Company C. 

• Company A offers a much higher salary, a nearly 50 percent increase from her current salary. Unfortunately, they don’t offer a flexible schedule. They have a 401k, but no matching and only a basic health plan.
• Company B will increase her base salary by 30% but they also don’t offer a flexible schedule. They do, however, offer a 401k with a four percent match that will increase one percent every five years with the company. They have health insurance including dental and vision, which is 75 percent employer paid. 
• Company C offers the same base salary she has now with a bonus plan that could increase overall compensation by about 30 percent. Company C is the only one offering a flexible schedule. They also offer a 401k with a 6 percent match after 90 days with the company. They have health insurance including dental and vision, which is 100 percent employer paid, as well as the option for a health savings account (HSA).

Nina declines Company A. While the higher salary could pay for transportation and childcare, she enjoys time with the kids and having flexibility in her schedule is important to her. She would have to forgo the additional benefits of matching contributions to her tax-advantaged retirement plan and this would be too much to make up, even with her increased salary. 

Nina asks Company B if they have any way to arrange a flexible schedule. Remember, it’s important to ask. Don’t just accept the first offer. They say no, due to the nature of the job. They say it wouldn’t be fair to the team if she is off at certain times while the rest of the team is in the office. However, they would be willing to let her work from home on those days and reimburse any equipment up to $1000, but she would still have to be online and generally available. 

Nina counters Company C with a higher salary request. They say no and show her the salary bands for each position within the company and how those are determined. They make a good faith effort at transparency here. The hiring manager also remembered Nina mentioning her interest in earning an MBA at some point in the future during the interview. They let her know that while they can’t offer tuition reimbursement, if she completes an MBA and is in good standing with the company, they will increase salary by 15 percent in an effort to tailor Nina’s compensation and benefits package to her goals.

Which one should she choose?