Understanding the various types of compensation is important if you are a compensation specialist, HR leader, payroll specialist, organization owner or manager. Businesses are legally responsible for compensating workers for their labor, of course, yet you are additionally responsible for explaining compensation to candidays and also employees. This is particularly crucial in the time of the hiring process, performance reviews, salary reviews, and also remain interviews. However before, the terms provided in the sector to categorize and also talk about compensation deserve to periodically be confusing.

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As compensation deserve to take many kind of forms, it is necessary that employees understand also how they are being compensated, the different kinds of compensation that use to them and the full value of their compensation package. Although this can seem choose an over-complex way of describing wages, it renders feeling once you understand that compensation gets nuanced as soon as damaged dvery own right into base pay, commission, tips, bonprovides, stock alternatives, benefits and also other kinds of rewards.

Let’s look at the various types of compensation in more information.

Definition: What is Compensation?

First, let’s begin with a definition for compensation. When talking around compensation, we normally expect the payment obtained by an employee from an employer in the create of a salary, wages, benefits and also variable pay. However, it’s vital to note that compensation can likewise refer to money that is paid to someone for somepoint that has been shed or damaged, such as “employees compensation” for unemployed or injured workers. It can likewise refer to a payout as the outcome of a lawsuit. In a much more basic sense, compensation deserve to expect anything of worth provided to comprise for a loss, such as a passist dinner to “compensate you for your time and trouble”. The word compensation comes from the Latin verb compensare, which implies to “weigh against”. In this sense, compensation is a counterbalance. Compensation normally takes the create of financial payment exchanged for time, labor and also expertise.

The various forms of compensation include:

SalaryHourly WagesSales CommissionTipsStock OptionsBonusesIncentive PayOther Variable PayBenefits (healthtreatment, passist leave, and so on.)Non-financial compensation (acknowledgment, meals, and so on.)


Determining a position’s compensation is not a simple task; there are many components that need to be considered in order to present an enticing and fair rate to potential job candidates. Common determinants companies usage to identify compensation include:

Required suffer and also education level of positionJob title and also responsibilitiesIndustry average pay of similar jobsJob location and cost of livingAvailcapacity of qualified candidatesCompany kind of size and reputation

How is Compensation Different from Remuneration?

If you’ve come across the term remuneration and also wondered what the distinction is between remuneration versus compensation, we’ll make it basic for you. Tbelow is no distinction. Remuneration is a synonym for compensation. They intend the very same thing. Remuneration is just supplied more commonly external of the United States. Compensation is the even more well-known term in North America. Because lutz-heilmann.info currently serves clients greatly in the United States and also Canada, we usage the term compensation fairly than remuneration.

Fun fact: Remuneration is generally misspelled renumeration.


One of the ways to categorize the various kinds of compensation is to identify straight compensation from instraight compensation. Both of these forms of compensation are financial, definition that the compensation takes the form of money or deserve to be valued as money.

Direct compensation includes money phelp to employees as cash, such as hourly wperiods, salaries, bonoffers and commission. Weras and salary commonly fall under the category of base pay whereas bonsupplies and also commission autumn under the category of variable pay.

instraight compensation

Indirect compensation is still financial in nature — meaning it has a financial value that have the right to be calculated — but is not a straight payment in the form of cash. What is taken into consideration instraight compensation have the right to differ throughout institutions yet generally has a lot of the benefits package that comes with employment, such as employer sponsored health and wellness insurance and employer contributions to an employee’s 401(k) retirement setup. Stock options and profit sharing also commonly fall under indirect compensation as can some various other employee benefits such as tuition assistance or a company-paid gym membership. What these examples have in widespread is a distinctive financial worth that is not phelp to the employee in actual dollars.

non-financial compensation

Not all compensation is necessarily financial. Non-monetary compensation contains time off, versatile occupational hours, coaching and training methods, acknowledgment and also awards, some fringe benefits and also various other perks (favor catered lunches or a agency car) that may not be measured in dollar amounts as component of a compensation package however are still helpful to employees and also make a distinction in the worklocation society and overall attractivity of the task possibility.

However, different organizations disagree on which benefits constitute indirect compensation versus non-monetary compensation. The line in between them is gray, specifically in institutions that carry out not share the cash equivalents of benefits with employees or have actually not calculated the cash equivalent at the individual employee level.

The Four Major Types of Direct Compensation: Hourly, Salary, Commission, Bonuses

When asking around compensation, a lot of civilization want to recognize around straight compensation, particularly base pay and variable pay. The four significant types of direct compensation are hourly wages, salary, commission and also bonprovides. In service-oriented markets, especially in retail and also accommodation, tips are additionally sometimes consisted of as one of the significant kinds of compensation. However before, as lutz-heilmann.info concentrates generally on expert occupations, we omit tips from our list.

Of the 4 major types of direct compensation, employees are phelp on either an hourly or salary basis. Weras, whether hourly or salary, are what consist of base compensation. Hourly wages are even more traditionally assigned to unexpert or semi-skilled labor while salary employees are usually the even more well-educated employees or employees who occupy monitoring positions. Hourly wages are additionally offered to compensate short-term, part-time or contract workers while salaries are even more prevalent for employees that the firm has actually invested in for the lengthy haul.

Of course, this is not universally true. Tright here are many kind of examples of extremely educated, extremely skilled, highly valued workers that are phelp hourly, and also these employees can often advantage from non-exempt status (i.e. eligible for overtime pay). Tbelow are also many type of examples of salaried employees who are not in monitoring positions and/or who are non-exempt. The rules for compensating these employees for overtime or minimum wage provisions are governed by the Fair Labor Standards Act (FLSA).

Commission and also bonuses are the other major form of direct compensation. Commission-based pay is most common in sales and is passist out as a percent of objectives met (or quota). Normally, the amount of commission paid rises as the goal increases. Commission purposes have the right to be based on different points. For instance, some sales goals are based on revenue. If a salesperkid does $100,000 worth of new service at a commission of 5 percent, then the salesperson will certainly take residence $5,000. Commissions deserve to also be based upon gross earnings or profit margins, wright here the greater you market a product or company for, the even more money you make. Tbelow might likewise be commission fees – dubbed placement fees – that pay out fixed amounts for each unit offered.

Tbelow are additionally many methods to framework commission as part of all at once compensation. Examples encompass salary plus commission, in which the employee renders both a salary and commission as part of in its entirety compensation package; straight commission, in which the employee makes just commission; residual commission, in which the employee continues to earn commission on recurring accounts; graduated commission, in which commission increases at greater sales volumes; and variable commission, which is a mix of commission types. Each of these kinds of commission has actually its advocates and also detractors. Which is right for a business counts on the specifics of the individual organization, its sector, and also purposes.

Bonuses are a tiny different. Although additionally a form of variable pay, bonuses are applicable to more than salespeople. Year-end bonprovides are a prevalent example wright here employees are passist a sum, or a percent of a sum, based on the performance of the business, the individual meeting established incentive-based objectives, or at a manager’s discretion. Bonuses have the right to be offered even more frequently, such as quarterly. Tright here are additionally spot-bonprovides, which reward performance at the discretion of monitoring in relation to a specific time-frame or project or achievement. Bonoffers can also be a mutual incentive separation across an office, department, region, area or team.

Is a bonus the exact same as inspiration pay? Not specifically, although a bonus is arguably a type of inspiration as soon as tied to establiburned metrics such as KPIs, MBOs, or OKRs for measuring objectives pertained to performance. The suggest of inspiration pay is to encourage employees to attain a greater typical. Bonsupplies deserve to be tied to metrics too, which is as soon as they are a form of catalyst pay, but bonoffers can likewise be phelp without any kind of quantitative performance measurement, such as in the instance of a Christmas bonus or once monitoring decides to reward employees spontaneously after a rewarding year, successful occasion or stressful duration. Typically, we say that bonuses are backward-looking while incentives are forward-looking. In other words, bonsupplies reward past actions while incentives encourage future outcomes.

Base Pay vs. Total Compensation Statement

Arguably, the most helpful means to communicate compensation to employees in a method that will make the many feeling to them is as a complete compensation statement or employee rewards report that separates base pay from commission-based pay, bonus pay, various other forms of variable pay, agency contributions to benefits and also other benefits of financial worth. This helps employees recognize what they can count on through eincredibly payinspect, what compensation hregarding be earned through performance and also the cash indistinguishable value of benefits and also various other rewards gave by the agency.

For an example, view the sample full compensation report below from lutz-heilmann.info’s Insight Lab product:


At the finish of the day, what matters when it involves the different types of compensation is just how you communicate it to employees. Ideally, you want to existing eextremely new hire with a summarized report of their compensation along with your company’s compensation ideology. In progressive institutions, this conversation is led by the employee’s direct manager, who is likewise the go-to reresource for inquiries around compensation and also career breakthrough as the employee matures with the company. This requires training managers on compensation, consisting of exactly how to talk to the various kinds of compensation, just how to describe the complete compensation statement and exactly how to answer concerns about variable pay and benefits.

Although many kind of establishments have actually yet to attain a truly progressive and also transparent technique to compensation monitoring, study on compensation ideal methods has actually presented that the reward for doing so is boosted employee engagement, diminished turnover and also a much more compelling employer brand.

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