All The Different Types Of Compensation

By Chris Kolmar
Jul. 31, 2022
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If you’re in the middle of the process of searching for a new job, you’re probably beginning to encounter a lot of new vocabulary. In particular, you might be starting to see and hear a lot of new terms related to compensation.

As a job candidate, it’s essential to understand the definition of compensation, as well as all of the different forms of payment and benefits that the term encapsulates. In this article, we’ll talk about the three major categories of compensation, how the FLSA plays into your compensation, and the difference between compensation and remuneration.

Key Takeaways

  • The three main categories of compensation are direct, indirect, and non-monetary.

  • Direct compensation is what most people think of in reference to compensation, but all three types are important when weighing a job offer.

  • Compensation and remuneration refer to the same thing.

All the Different Types of Compensation

The Three Big Categories of Types of Compensation

There are three major, distinct types of compensation that you’ll need to be aware of. These are:

  1. Direct compensation. This includes any form of financial payment that an employer gives to an employee in exchange for their time and labor. Direct compensation can come in many different forms, including hourly wages, annual salaries, commissions, and cash bonuses (more on that later).

  2. Indirect compensation. This is also a financial transaction between an employer and an employee, but in contrast to direct compensation, the money does not go directly to the employee. Some common types of indirect compensation include 401(k) contributions, stock options, and employer-provided health insurance payments.

  3. Non-monetary compensation. This refers to any additional forms of employee benefits that cannot be measured concretely in dollar amounts.

    The option to work remotely or to be able to maintain a flexible work schedule are two common examples of non-monetary compensation that an employer might advertise in a job description.

    This final category of compensation, in other words, includes all of those non-financial workplace perks that are usually taken into account when a job candidate is deliberating whether or not they should accept a particular job offer.

A Closer Look at Direct Compensation

Understanding the three major categories of compensation (outlined above) can be incredibly helpful when you’re searching for a new job. This is primarily because every job opportunity will come with its own payment terms, employee benefits, and perks.

As a job candidate, your best strategy will always be to take each of those three categories into account when you’re weighing your career options.

Generally speaking, however, when most people casually talk about “compensation,” they’re usually referring to the first category listed above: direct compensation. As we’ve already seen, this category includes all of the different types of financial compensation that an employee can expect to receive on a regular and consistent basis.

If you’re on a lunch date with your friend, and she asks you about the compensation amount that you were offered during your recent job interview, she’s probably asking you about the hourly wage or the annual salary, and not the employer-sponsored 401(k) contributions or the catered lunches in the workplace.

With that in mind, it will be helpful to take a closer look at the most common forms of direct compensation. These include (as we briefly outlined above):

  • Hourly Wages

    Hourly wages are dispensed on (you guessed it) an hourly basis, and they’re most commonly associated with less technically demanding labor jobs, such as service industry jobs and retail positions.

    Jobs that offer hourly wages also tend to be much more flexible, making them an excellent option for college students or younger professionals seeking to balance their new job with their academic schedule or with a pre-existing job.

    Hourly wages also tend to be the most common form of compensation for temporary employees, gig workers, freelancers, and third-party contractors.

  • Annual Salaries

    Annual salaries, on the other hand, are typically made available through job opportunities that require a higher degree of technical ability, skill, or education. Most executive or senior management positions, for example, offer annual salaries and not hourly wages.

    One of the major reasons for this is that employers typically prefer employees who are in these higher-level positions to make longer-term commitments to their organizations.

    Providing an employee with an annual salary (as opposed to an hourly wage) makes it much more likely that the employee in question will stick around for the long haul – which is a good thing, especially when you’re trying to fill a role that requires an extremely specialized skill set.

    In contrast to hourly wages, annual salaries are typically offered to full-time employees who have signed on to work for an employer on a permanent basis.

  • Commissions

    Commissions are a form of payment available through a wide variety of positions (most commonly sales jobs). They can be offered either as an added bonus to an employee’s salary or as an employee’s primary (or only) form of payment.

    A commission is a type of direct compensation whereby an employee receives a certain amount of cash after successfully executing a particular task or project.

    In many cases, the amount of commission payment an employee receives will increase as they continue to achieve a succession of increasingly difficult sales checkpoints or goals.

    A real estate agent who oversees the successful sale of a home to one of his clients, for example, can expect to receive a commission from his employer after the sale has been finalized.

    In this case, the commission amount that the real estate agent can expect to receive will most likely be calculated by multiplying the home’s final selling price with a predetermined percentage amount.

    In many cases, an employer will offer commission payments to provide an extra incentive for employees to increase their productivity and improve their performance.

    Suppose you’re interviewing for a role that offers compensation based on commission payments. In that case, you should bear in mind that several different factors can affect the final dollar amount that you’ll eventually take home.

    It’s crucial, therefore, to have an in-depth conversation with your hiring manager about each of these factors before you decide to accept or decline a commission-based role.

  • Cash Bonuses

    Cash bonuses are another form of direct compensation that is often provided to employees at certain intervals throughout the fiscal year or throughout an employee’s tenure with a particular company.

    Many employers distribute holiday bonuses at the end of each year, for example, as a means of showing gratitude to their employees – incentivizing them to stick around for another year.

    Employers use a variety of different formulas to calculate the cash bonus amount that should be awarded to a particular employee (or a group of employees).

    In some cases, an annual bonus amount might reflect a prearranged sum that was determined at the beginning of an employee’s tenure within a company.

    In other cases, an employer might calculate an employee’s annual bonus by multiplying their total yearly sales revenue by a fixed percentage rate. It’s also possible that an employee might expect to receive bonuses on a quarterly or biannual basis, rather than only once per year.

    In addition, an employer might choose to award a “spot bonus” (also commonly referred to as an on-the-spot incentive) to an employee in recognition of their noteworthy contributions to a particularly important project.

A Closer Look at Indirect and Non-Monetary Compensation

While direct compensation is usually what people are talking about when they refer to compensation, indirect and non-monetary compensation are also important to understand. The lines between them can get blurry, as they both involve giving employees something of value that isn’t cash, but here are the typical breakdowns of each category:

Indirect Compensation

  • Company contributions to a 401(k) account

  • Stock options

  • Company-paid health, life, and disability insurance

  • Equity package

  • Tuition assistance

Non-Monetary Compensation

  • Paid time off

  • Flexible hours

  • Work-from-home options

  • Employee development opportunities

  • Meals

  • Company car

  • Phone and/or laptop

  • Company-paid gym membership

  • Childcare

What Is the FLSA and How Does It Affect Employee Compensation?

No conversation about compensation in the modern workplace would be complete without explaining the Fair Labor Standards Act, or FLSA.

The FLSA was initially passed by the US congress in 1938, and it has undergone several amendments since that time. Simply put, it’s the single most important piece of legislation ever to affect modern compensation laws in the United States.

In addition to protecting employees against unsafe or inhumane workplace conditions, it also established a strict set of rules pertaining to how much an employee should be compensated in exchange for their time and labor.

More specifically, the FLSA delineates when an employee can be considered to be “on the clock,” when they should be receiving overtime pay, and when they’re officially “off the clock.”

Before the passing of the FLSA, there were a dangerous number of glaring loopholes that employers could leverage to take unfair advantage of their employees’ labor. Today, thanks to the FLSA and several other modern labor laws, employees are protected by certain rights that ensure that they’ll be fairly and legally compensated.

To learn more about your rights under the Fair Labor Standards Act, check out the Department of Labor (DOL) website.

Compensation vs. Remuneration

In addition to the term “compensation,” you may have also heard the word “remuneration” tossed around throughout your job search. Is there any significant difference between the two terms that you need to be aware of?

The short answer is: No, there’s actually zero technical difference between compensation and remuneration. The two terms are synonymous and basically interchangeable.

If you hear one hiring manager talk to you about compensation and another hiring manager talk to you about remuneration, they’re both talking about the same thing – namely, the sum total of the forms of payment and benefits that you can expect if you’re offered a particular job opportunity.

The only significant difference between the two terms is geographical preference. Here in the United States, people typically prefer to use the term “compensation.” In most other countries around the world, job seekers and hiring managers tend to say “remuneration” more commonly.

Final Thoughts

Compensation is a much more complicated subject than many job applicants tend to believe. In addition to the dollar amount you’re allowed to take home at the end of the month or the end of the year, a “compensation package” also technically includes all of those employee benefits and workplace perks that make a job opportunity more (or less) attractive.

As a job candidate, it can be tricky to navigate the complexities and subtleties of fair labor laws and compensation packages. This is particularly true if you’re just getting started in your career and you’re still trying to understand the industry you’re entering into.

At the same time, however, it’s essential to familiarize yourself with the subject of compensation. Such an understanding will provide you with a much clearer idea of the amount of payment or benefits that you’re entitled to at various stages of your career.

It will also make it much easier for you to accept those job opportunities that are conducive to your professional and financial goals and reject those that aren’t.

So the next time you’re interviewing for a job opportunity, make sure you broach the subject of compensation with your interviewer before you accept the role. In many cases, a hiring manager will bring this subject up organically during the first or second interview. In others, you may have to bring it up yourself.

This can feel a bit awkward, but bear in mind that it’s a crucial detail for you to consider in your job search. Remember that every employer has an obligation to fill you in completely on all of the details regarding the payment, benefits, and perks that you can expect to receive if you’re ultimately hired.

When it comes to finding a new job, earning the most amount of money possible does not necessarily need to be your number one goal. Financial security, however, should be treated as a top priority.

It’s essential, in other words, to find an opportunity that will provide you with the financial compensation, benefits, and perks that you’ll need in order to maintain your physical, mental, and financial health.

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Chris Kolmar

Chris Kolmar is a co-founder of Zippia and the editor-in-chief of the Zippia career advice blog. He has hired over 50 people in his career, been hired five times, and wants to help you land your next job. His research has been featured on the New York Times, Thrillist, VOX, The Atlantic, and a host of local news. More recently, he's been quoted on USA Today, BusinessInsider, and CNBC.

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