Everyone works for a paycheck. That’s direct compensation. But, there’s another side of compensation that’s important for employees too – their indirect compensation. In this article, we’ll take a good look at the latter; why it’s important, what’s the difference between direct and indirect compensation, and what are examples of indirect compensation? Here goes.
What is indirect compensation?
That smartphone you’re using to read this article – who pays for it? If your company does, it’s part of your indirect compensation. Indirect compensation is any benefit to the employee that doesn’t come in the form of cash. You may not even realize the non-cash compensation that you have.
Indirect compensation provides the benefits side of “compensation and benefits” that employees receive. Sometimes, people use the word “perk” or “employee benefits” to describe this type of compensation.
Direct vs. indirect compensation
When you extend a job offer, it usually states the future employee’s salary – sometimes in an hourly rate, sometimes in a rate per pay period, and sometimes in an annualized salary. If a candidate asks your organization’s HR representative or compensation and benefits manager what their pension contributions will look like or if the company will match their 401(k) plan, these people can give them facts, figures, and actual dollar amounts.
For employees and candidates, their non-financial compensation isn’t always so clear. There’s rarely a list, and frequently employees at different levels of the company have various indirect benefits. If someone travels often, they may get to keep those frequent flyer miles that allow them to upgrade your trips – or get free personal trips. Their health insurance benefits, company car, or even free lunches can all fall under indirect compensation too.
When people compare job offers, they often look at the direct compensation figures and forget about the indirect compensation that comes with the job. It’s easy to say, “This job pays $X with a 10 percent bonus, and that job pays $X+10,000 with a 5 percent bonus.” And you can figure out which job will fill your bank account better.
But, it’s harder to quantify the little things when they can make a huge difference. In the United States, where companies typically pay a large portion of your health insurance, this non-cash compensation can make a massive difference to your budget, especially if you or a family member becomes ill.
Why indirect compensation matters
Would you take a job with no indirect compensation? You probably couldn’t, even if you tried. Many countries have laws that dictate some indirect types of employee benefits – such as health insurance or vacation time.
Other, non-mandatory indirect compensation can sway job candidates and can make the difference between a welcoming, warm environment and one that feels like the boss is Scrooge himself.
For instance, if your company provides you with a smartphone and a laptop, are you forbidden from using those tools to do anything other than work, or do you receive the indirect benefit of using them to check your personal email, shop online, and text your spouse?
Some people don’t want the company to have any of their personal information so that this indirect benefit wouldn’t attract them. In contrast, for others, the idea of carrying two phones is worse than the risk of the company getting insights into your favorite take-out restaurants.
Survey data bears out the importance of indirect benefits. A Harris Poll survey in 2018 found that 48 percent of US job seekers would be more likely to apply for a job that had good benefits, such as gym memberships and paid time off. Forty-four percent wanted transparency on pay and benefits.
What you offer your employees makes a difference in how attractive your company is. Silicon Valley realized this years ago and offered all kinds of crazy perks, including catered lunches, laundry services, concerts, massages, chiropractors, and vouchers for Airbnb stays (for Airbnb employees, of course).
Some of these may seem over the top and silly, but if you were choosing between two jobs with similar direct compensation, but one company offered free laundry services and daily lunch while the other didn’t have these perks, you would be swayed to the company with the best indirect competition.
Fractl surveyed employees and found out what perks they most valued. As they surveyed Americans, it’s not surprising to find Health Care benefits at the top, but employee benefits such as increased vacation, tuition reimbursement, and daycare also made it onto the list.
If your company fails to offer competitive indirect compensation, you may find yourself complaining about a talent shortage, as people will prefer your competitors.
Indirect compensation examples
Technically, anything that doesn’t directly hit your employees’ paycheck could be considered non-financial compensation. Here are a few examples that your company may offer or consider offering:
- Health care benefits. In some countries, health care is expensive, and Covid has made everyone keenly aware of how their health situation can change rapidly. Offering employees quality health insurance (including dental and vision) can make the difference between attracting qualified candidates and struggling to keep your current staff.
- Vacation/Paid Time Off. Many countries have strict laws around the minimum amount of paid time off companies have to offer their employees and how employees can use sick time. But, employees almost always appreciate more vacation time. In addition to providing this benefit, companies must ensure that managers allow and encourage their employees to take time off.
- Tuition reimbursement. Some companies support employees in earning a degree or taking additional classes that ultimately benefit both employee and employer.
- Meals. Some companies provide occasional pizzas when people work late nights, but others give this delicious form of employee benefits every day through free lunches. While it saves employees time and money, it’s also a sneaky trick businesses use to keep you at the office and not wasting time in restaurants.
- Phones and computers. These are necessary tools for many jobs, but they can also be a perk if you can use them for personal reasons and work.
- Retirement funds. While this is ultimately a cash payment, its deferred nature tends to put it in the indirect compensation category. Whether it’s a traditional pension plan or some other form of retirement savings, it’s a benefit employees often look for.
- Life and other insurance. Health insurance is not the only type of insurance companies can provide. Life, disability (short and long term), legal insurance, pet insurance, and even discounts on car and property insurance can be indirect compensation examples.
- Company cars. This perk is generally limited to salespeople and executives, but it can still be a powerful recruitment and retention tool.
- Stock and other company ownership plans. Again, while this ultimately is monetary compensation because it doesn’t immediately hit your paycheck many consider these essential compensation tools part of indirect compensation. Many of these plans require employees to vest – that is, work for three to five years (usually) before accessing any of the benefits from this perk.
- Childcare and private school tuition. Daycare is expensive. Companies that can offer free or subsidized daycare boost the disposable income level of their employees with young children. Companies that employ many foreign employees often cover some or all of the tuition for expatriate children to attend private schools. This is especially attractive to employees who don’t speak the local language and prefer to have their children educated in their native language or English.
- Silicon Valley-style perks: From foosball tables to laundry to massages and onsite yoga, these perks tend to cater to the startup business and aren’t as often found in older, more traditional companies.
You could come up with a never-ending list of indirect compensation examples. Your business could offer things that other companies do not – the sky’s the limit. The key is finding out what your employees value and keeping in line with your competitors. (Remember, your competitors for hiring are other companies that hire similar people – not just companies that make similar products.)
Indirect compensation can make a big difference for your employees and your business. Don’t forget about it.
Indirect compensation is any benefit to the employee that doesn’t come in the form of cash. It’s the benefits side of “compensation and benefits”.
Direct compensation covers employee pay, indirect compensation covers all other types of employee benefits.
Examples of indirect compensation include, among other things, health care benefits, vacation/paid time off, meals, retirement funds, company cars, childcare and private school tuition, and stock options.
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