What is Employee Compensation?

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  • Written By: Lainie Petersen
  • Edited By: Melissa Wiley
  • Last Modified Date: 14 August 2019
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Employee compensation is the payment made to workers in exchange for their labor. This payment usually takes the form of cash money that may also be combined with various nonmonetary benefits, such as health insurance or child care. Many businesses and organizations structure their employee compensation policies to attract, retain, and motivate their employees.

Perhaps the best-known and most accepted form of employee compensation is that of wages or salary, money paid directly to the employee in consideration of the employee's work. Some employees are compensated based on the number of hours they work per week or receive a salary for which they are expected to discharge specific duties. Some companies pay their employees on the basis of performance. For example, an employee who works in sales may be compensated partly or entirely through commissions on their sales. In other organizations, an employee may receive part of her compensation at the end of the year when her performance is evaluated, in the form of what is often called a year-end bonus.


Companies may also reward employee loyalty and performance by increasing employee wages and salary on a regular basis. In some organizations, employees receive annual increases in their compensation both to cover increased cost of living and also to enhance their employee compensation package. When employees take on new job responsibilities or are promoted within the organization, it is common for them to receive an increase in monetary compensation. Businesses frequently factor paid time off from work in an employee's compensation. Depending on pertinent labor laws, a business may be required to give an employee a certain amount of paid sick or vacation time each year, but may also increase a worker's access to paid time off in accordance with the worker's seniority and job responsibilities.

In addition to cash and paid time off, employee compensation often includes other benefits and services. In the United States, for example, health insurance is a very common employee benefit and is often a significant part of an employee compensation package. Companies may also offer employees other types of insurance, including life insurance and both short- and long-term disability insurance. Some companies also offer compensation in the form of child-care services, educational reimbursement, and employee discounts.

While many companies standardize their employee compensation packages, some companies are more flexible than others in modifying their compensation structure to recruit desirable employees. While care must be taken by companies in the development of creative compensation plans in order to avoid accusations of discrimination, doing so is often crucial in attracting top talent. As such, a strong human resources policy providing for such flexibility is an important part of a company's long-range plans and culture.


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