A Guide to Compensation and Benefits

Learn more about compensation and benefits. Searching for a job? Our guide can help you know what to look for in a compensation package.

portrait of Anessa Kemna
by Anessa Kemna

Published on June 9, 2022 · Updated on June 10, 2022

Edited by Giselle M. Cancio
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A Guide to Compensation and Benefits
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Starting the job search is exciting — but it can also be overwhelming. Compensation and benefits are terms that may be unfamiliar to you, but they can have a major impact on the quality of any potential job.

Compensation and benefits refer to the money and perks you receive from your employer in exchange for doing your job. To understand whether a job offer is fair and beneficial, it's important to understand the total compensation package.

According to Aflac's 2020 WorkForces Report, when employees understand their benefits, they are more often satisfied with those benefits.

Why Are Compensation and Benefits Important?

A company's compensation package can give job seekers information about the work culture and whether employees are valued as much as profits.

In a 2020 survey on job satisfaction, 61% of employees ranked compensation as one of the most important factors in how much they liked their jobs. Fifty-six percent chose benefits as a top contributor to their job satisfaction.

It is increasingly important that companies invest in their employees and make them feel like valuable members of the organization.

One of the best ways to do this is with quality compensation packages. When people are fairly compensated for their work, they tend to perform better and are more likely to stay with the company.

A 2017 Glassdoor study revealed that increasing employee pay by even 10% raises the chances — by 1.5% — of employee retention and satisfaction. This illustrates how compensation and benefits can impact the working environment.

Compensation vs. Benefits

Compensation and benefits are very different, even though they frequently get lumped together.

Compensation Benefits
Financial payment given to employees for performing their job duties. Nonfinancial or indirect payment incentives provided to employees for being part of the company.
Required by law to be given to all employees who work for the company. Provided to improve employee well-being and motivation.
Can be paid out yearly, hourly, on commission, or in other time or productivity-based increments. Not legally required by law, but they are important to employee job satisfaction.
Includes financial transactions like bonuses, overtime pay, or tips. Include health insurance, retirement, paid leave, and disability insurance.

Components of Employee Compensation

There are three components of compensation: financial compensation, indirect compensation, and nonfinancial compensation. There is some crossover between each of these categories.

Financial compensation includes base pay and variable pay. Base pay is the direct compensation an employee receives for their work. Variable pay is less consistent. It may include bonuses or incentive payments. Both of these involve the company providing money to the employee.

Indirect compensation offers monetary value that is not directly paid out. This can include employer contributions to a retirement plan, money toward continuing education, employee-sponsored health insurance, or company-paid memberships.

Nonfinancial compensation, which sometimes crosses over with indirect compensation, can include flexible work options, paid time off (PTO) or time off to volunteer, catered lunches, use of company equipment, or recognition in the workplace.

Popular Employee Benefits

A comprehensive benefits package includes benefits that cover the employee's needs outside of their salary. Popular employee benefits include:

Frequently Asked Questions About Compensation and Benefits

What is the average benefits package worth? true

The worth of a benefits package depends on many factors. In general terms, a benefits package equals about 32% of an employee's compensation. Larger companies may offer higher percentages because they have larger budgets and can buy their benefit packages in bulk.

Smaller companies sometimes offer less, but compensate by understanding and providing what their employees value. They may also provide perks such as snacks or local memberships.

What are the four major types of employee benefits? true

The four major types of employee benefits are medical insurance, life insurance, disability insurance, and retirement plans. Other types that don't fall under this category are PTO and family leave. Most companies will include some combination of these different benefits.

Some benefits, like medical insurance, are required by law if you work in a company with at least 50 full-time employees. Smaller companies don't have to offer this. They are, however, legally required to offer worker's compensation, Social Security contributions, and unemployment. Disability insurance is required, but not in every state. Many other benefits have the same location-specific legal status.

What are the four types of compensation? true

The four types of compensation are hourly, salary, commissions, and bonuses. Hourly pay is wages paid by the hour. This is common in service industries like retail. Salary is a fixed amount provided each pay period with the understanding that set responsibilities will be completed. Management positions most often, though not always, receive salaries.

Commissions are most common in sales. A sales employee will earn a percentage of their sales each term. Companies may provide bonuses at certain times, like during the holidays or when employees accomplish certain goals.

BestColleges.com is an advertising-supported site. Featured or trusted partner programs and all school search, finder, or match results are for schools that compensate us. This compensation does not influence our school rankings, resource guides, or other editorially-independent information published on this site.

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