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What Is Indirect Compensation?

Indirect compensation refers to non-monetary benefits that are offered to employees in addition to their normal pay. It is also known as indirect benefits.

How Does Indirect Compensation Differ from Direct Compensation?

Direct compensation is the money paid directly by the company to the employee through their salary or wages for the work they have done. Salary and wages typically fall under the base pay category, and any sort of commission or bonus structure falls under the variable pay category.

As mentioned above, indirect compensation is non-monetary and is not connected to a paycheck at all. These are benefits on top of an employee’s direct compensation. Although indirect compensation is non-monetary, its value can still often be calculated and, at times, is just as valuable – if not more valuable – than direct compensation.

Indirect compensation can also include non-financial compensation items that are difficult or impossible to calculate. For example, indirect compensation in the form of a company car has direct company costs tied to it, whereas flexible work hours, company awards, and training opportunities are more difficult to quantify.

Examples of Indirect Compensation

There are many examples of indirect compensation – and this list is by no means exhaustive. That said, here are some of the most common ways that organizations provide indirect compensation to their employees:

  • Pension funds
  • Cell phones
  • Annual leave
  • Overtime pay
  • Company cars
  • Life insurance
  • Childcare
  • Health insurance
  • Social security
  • Educational benefits
  • Flexible working hours
  • Retirement benefits
  • Housing benefits
  • Relocation benefits
  • Laptops and tablets

Whether you’re offering gadgets to assist in people’s day-to-day work or insurance (be that life or health), you need to ensure that the indirect compensation you offer is attractive to your employees – and the kind of employees you want to attract.

For example, a company car is not going to be attractive to an employee who doesn’t drive. It can sometimes be a good idea to tailor indirect compensation packages by department.

It’s worth noting that when you offer insurance or childcare benefits, by law, you have to provide them to all employees.

Advantages of Indirect Compensation

The main advantage of indirect compensation is how it can assist with management and HR.

Indirect benefits help:

  • Employee retention
  • Employee loyalty
  • Teamwork and motivation

If your organization provides attractive indirect compensation packages, it can help the company achieve bigger, long-term goals, keeping all employees happy and on the same page.

Why Is Indirect Compensation Important to Recruiting and Retaining Employees?

Indirect compensation improves your employee’s quality of life. Being able to earn a good living is one thing, but what really attracts and retains people is feeling like they’re part of an organization that cares about them. Offering things like health, dental, and life insurance benefits shows that you care about the wellbeing of both your employees and their family.

In addition, offering flexible work hours, the ability to work remotely, and a work environment free of micromanaging shows employees that you respect and trust them. Finally, retirement benefits and ongoing training show your staff that you’re investing in their long-term success – all of which will help you attract and retain top talent.

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