Difference Between Compensation and Benefits

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


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Compensation vs Benefits

The difference between compensation and benefits is that compensation refers to a financial reward that is given to an employee based on his performance. Compensation is 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.

Compensation vs Benefits

Benefits are an exchange of value for the labor 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 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.


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.

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.


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.
Difference Between Compensation and Benefits


  1. https://www.coverfox.com/personal-finance/tax/basic-salary/
  2. https://careerwise.minnstate.edu/jobs/benefittypes.html
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