Compensation and benefits are often used interchangeably in day-to-day conversation, but the terms do not refer to the same concept.
Key Takeaways
- Compensation refers to the payment or reward provided to an employee in exchange for their work or services.
- Benefits refer to an employee’s additional perks and privileges, such as health insurance, retirement plans, and vacation time.
- Compensation is in the form of salary or wages, while benefits are non-wage compensation provided by the employer.
Compensation vs Benefits
Compensation refers to the monetary payments made by an employer and received by an employee in exchange for their work. Benefits refer to the non-monetary rewards that an employee receives as part of their employment package. Benefits can include health insurance, retirement plans, etc.
Benefits are an exchange of value for the labour provided. Benefit refers to a non-financial reward given to an employee to appreciate his efforts in service.
For example, in addition to the monthly salary paid to an employee, they may also be eligible for paid vacation days, health insurance, company transport, etc.
Comparison Table
| Parameter of Comparison | Compensation | Benefits |
|---|---|---|
| Definition | Remuneration is given in exchange for labour | Subset of compensation |
| Form | Monetary and non-monetary | Non-monetary forms of value |
| Types | Direct and indirect | Indirect form of compensation |
| Components | Basic pay, variable pay, benefits | Health insurance, disability insurance, life insurance, paid time off, fringe benefits, etc. |
| Relevant Factors | Labour provided by and performance of the employee, industry standards, cost of living, minimum wage. | Legal requirements, the desirability of benefit |
What is Compensation?
Compensation is the total of all that a person receives in exchange for their labour or the services they provide. It is an umbrella term that covers both monetary and non-monetary remuneration.
Monetary or financial compensation can be divided into primary and variable pay.
Basic pay is the minimum amount of money that is due to an employee for their work without taking into consideration other factors like bonuses, incentives, and overtime.
This is calculated according to factors like the employee’s role in the company, industry-wide standards, costs of living and legally mandated minimum wage.
It is a fixed, taxable amount that forms the core of all the employer is liable to spend on the employee.
Unlike basic pay, which is the same for all employees of the same designation regardless of their contribution to the company, variable pay is given based on the performance of the individual and the company as a whole.
As competition across industries rises, variable pay is becoming a sought-after mode of compensation by employers, rather than just compensation for labour, variable pay rewards an employee’s performance, distinguishing them from the rest.
This incentivizes them to work harder because this reward is based on specific targets being met and not just on actions.
Employees become more efficient and goal-oriented, and the company’s fixed costs are reduced as these rewards only need to be given when the targets mentioned earlier are achieved.
Compensation can also be categorized into direct and indirect compensation.
The former consists of the money paid to employees for their labour and includes variable and basic pay. Indirect compensation, on the other hand, is made up of non-monetary benefits provided to employees at the cost of the employer.
This includes security schemes such as worker’s compensation, health insurance, pension plans, and paid leave.
What are the Benefits?
Besides the wages they receive as financial remuneration, employees are also given additional forms of value in exchange for their labour, called benefits.
These are one part of the total compensation due to employees. Benefits are non-monetary rewards paid for by the employer and vary in scope and availability from company to company.
Providing benefits incentivizes employees to perform better and boosts loyalty to the company by providing them with an added safety net and support system.
There are many benefits, and some can be very valuable. Health insurance is among the most sought-after types, as medical care and treatment can be prohibitively expensive.
Similarly, disability insurance is essential as it compensates employees when they cannot work due to some ailment or injury. Another significant benefit is life insurance, as it ensures financial support for the dependents of the employee in case of death.
Many companies also offer retirement plans, so employees have a safety net to fall back on when they retire. Paid vacations are also available across almost all companies.
Along with these standard benefits, companies can also offer a variety of perks depending on their financial capacity.
These are called fringe benefits, ranging from education loans to child care to employee discounts and office gyms.
Employees are often provided company housing, transport to and from the workplace, subsidized food, or even free meals.
Depending on the laws of each country, some benefits might be legally mandated. For example, most countries have statutes that require employers to provide social security, health insurance, paid maternity leave, etc.
However, fringe benefits are entirely voluntary, and it is solely the employer’s decision whether or not to offer any.
Main Differences Between Compensation and Benefits
- Compensation consists of all the monetary and non-monetary remuneration due to an employee from the employer. Benefits are a subset of compensation.
- Benefits are solely non-monetary forms of value.
- Compensation can be direct or indirect. Benefits are an indirect form of compensation.
- Monetary compensation is divided into basic pay and variable pay.
- The non-monetary compensation includes benefits ranging from health insurance to paid vacation time to company housing and transport.
- https://www.coverfox.com/personal-finance/tax/basic-salary/
- https://careerwise.minnstate.edu/jobs/benefittypes.html
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
