Difference Between Compensation and Benefits (With Table)

Compensation vs Benefits

Compensation and benefits are often used interchangeably in day to day conversation but the terms do not refer to the same concept.

The key difference between compensation and benefits lies in the fact that compensation refers to a financial reward that is given to an employee based on his performance.

Benefit refers to a non-financial reward given to an employee to appreciate his efforts in service. Compensations are provided to attract talented and qualified people to join their company, whereas benefits are provided to motivate an employee to perform well on the given tasks.

Benefits are an exchange of value for the labor provided.

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.


Parameter of ComparisonCompensationBenefits
DefinitionRemuneration given in exchange for labourSubset of compensation
FormMonetary and non-monetaryNon-monetary forms of value
TypesDirect and indirectIndirect form of compensation
ComponentsBasic pay, variable pay, benefitsHealth insurance, disability insurance, life insurance, paid time off, fringe benefits, etc.
Relevant FactorsLabour provided by and performance of the employee, industry standards, cost of living, minimum wageLegal requirements, desirability of benefit

 

What is Compensation?

The sum total of all that a person receives in exchange for their labor or the services they provide is called compensation. It is an umbrella term that covers both monetary and non-monetary remuneration. Monetary or financial compensation can be further divided into basic pay 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 usually calculated according to factors like the role of the employee 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 that 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 of 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 labor, variable pay takes the form of a reward for an employee’s performance which distinguishes them from the rest.

This incentivizes them to work harder because this is a reward that is based on certain targets being met and not just on actions.

Not only do employees become more efficient and goal-oriented but the company’s fixed costs are also reduced as these rewards only need to be given when the aforementioned targets are achieved.

Compensation can also be categorized into direct and indirect compensation.

The former consists of the money paid to employees for their labor and includes both 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, and pension plans as well as paid leave.

Calculation of Compensation
Calculation of Compensation
 

What is Benefits?

Besides the wages they receive as financial remuneration, employees are also given additional forms of value in exchange for their labor called benefits.

These are one part of the total compensation due to employees. Benefits are non-monetary rewards paid for by the employer and they 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 different kinds of benefits and some can be very valuable. Health insurance is one of the most sought after types as medical care and treatment can be prohibitively expensive.

Similarly, disability insurance is important as it compensates employees for the period in which they are unable to work due to some ailment or injury. Another major benefit is life insurance as it ensures a measure of financial support for the dependents of the employee in case of their death.

Many companies also offer retirement plans so that employees will 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.

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These are called fringe benefits and they range from education loans to child care to employee discounts and office gyms.

Employees are often provided company housing and transport to and from the workplace as well as 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 completely voluntary and it is solely the employer’s decision whether or not to offer any.

Types of Employee Benefits
Types of Employee Benefits

Main Differences Between Compensation and Benefits

  1. Compensation consists of all the monetary and non-monetary forms of remuneration due to an employee from the employer. Benefits are a subset of compensation.
  2. Benefits are solely non-monetary forms of value.
  3. Compensation can be direct or indirect. Benefits are an indirect form of compensation.
  4. Monetary compensation is divided into basic pay and variable pay.
  5. Non-monetary compensation consists of benefits that range from health insurance to paid vacation time to company housing and transport.

 

Frequently Asked Questions (FAQ) About Compensation and Benefits

What are the types of compensation?

The term compensation comprises of many things apart from monthly salary. It includes commissions, work overtime, merit pay, bonuses, base pay, stock options, travel allowances, meal allowances, boarding and lodging allowances.

Apart from these, some companies offer the company’s shares to their employees as a part of their annual pay.

What factors determine compensation?

The compensation of an employee depends on the following factors: Location of work, previous work experience, skill sets offered, supply and demand, previous education, type of job, level of the industry, the availability of stock options etc.

Apart from these, if the person is ready to do night shifts then additional pay needs to be incorporated.

What are the major types of employee benefits?

Taking care of their employees the top priority of any company. Employee benefits ensure that the employees are safe and happy working for the company.

These benefits include:
Medical coverages at the time of any accident or mishap, life insurance policy, disability quota for employees, retirement policy benefits and PF, etc.

What is the role of compensation and benefits?

The role of compensation and benefits is to ensure that the workers or the employees of any organization are happy and satisfied in working there.

Both these things ensure that the employees are getting paid in accordance with what they are offering to the company. More the compensation and benefits, the happier the employees will be.

Is compensation a benefit?

No, compensation is not a benefit. The compensation covers all the things which come under direct pay, that is, salary, overtime, bonuses, etc.

While on the other hand, a benefit is something that comes under indirect pay like medical insurance, life insurance, disability quota for employees, retirement policy benefits and PF, etc.

When should compensation be used?

The term compensation comprises of many things apart from monthly salary. It includes commissions, work overtime, merit pay, bonuses, base pay, stock options, travel allowances, meal allowances, boarding and lodging allowances.

So it should be used at the time when the monthly or annual salaries are being distributed to the employees by the company.

Why is salary called compensation?

All the things that come under compensation like commissions, work overtime, merit pay, bonuses, base pay, stock options, travel allowances, meal allowances, boarding and lodging allowances, etc. all come under the direct pay option.

The salary also is a direct payment which is paid around every month end, 12 times a year. Thus, the salary is called compensation.


 

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Compensation vs Benefits

 

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Conclusion

Compensation and benefits are both crucial to the functioning of any company or organization. Employees who are adequately compensated for their work perform better at all levels.

By providing them with an added safety net through benefits, companies can ensure that employees are happier individuals and give them space for self-improvement.

Moreover, by offering better benefits packages, employers can attract and retain more talent.  All of these factors combined contribute to the overall well being of the company and can greatly increase productivity and profits.


 

Word Cloud for Difference Between Compensation and Benefits

The following is a collection of the most used terms in this article on Compensation and Benefits. This should help in recalling related terms as used in this article at a later stage for you.

Compensation and Benefits
Word Cloud for Compensation and Benefits

 

References

  1. https://economictimes.indiatimes.com/jobs/what-is-variable-pay/articleshow/15525050.cms
  2. https://www.coverfox.com/personal-finance/tax/basic-salary/
  3. https://careerwise.minnstate.edu/jobs/benefittypes.html

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