Indirect compensation refers to all non-monetary benefits employees receive in addition to their base and supplemental pay.
Indirect compensation includes additional employee benefits that hold indirect monetary value, such as supplemental health insurance, retirement plans, life insurance, and sick leave.
Employers often offer indirect compensation as supplemental benefits to remain competitive in the hiring market and attract and retain talent.
Indirect vs. direct compensation
Indirect compensation refers to non-cash benefits an employee receives, while direct compensation refers to their monetary pay and benefits.
Indirect compensation supplements wages and provides employees with additional benefits and perks. An employee’s performance or experience typically doesn’t impact indirect compensation.
In contrast, direct compensation includes the monetary payments an employee receives for their work based on their role, performance, and experience. Direct compensation includes payments and incentives such as base salary, bonuses, commissions, and overtime pay.
Examples of indirect compensation
Depending on the country, some indirect compensation may fall under the local statutory benefits requirements. However, employee benefits vary from country to country, so many companies offer additional indirect compensation as part of their supplemental benefits packages.
Below are some examples of indirect compensation:
Supplemental health insurance
Health insurance is a statutory benefit in many countries and typically provides coverage for routine doctor appointments, hospital visits, and prescription drug costs.
However, health insurance coverage varies across regions and usually only covers basic needs.
As a result, many employers offer supplemental health insurance as indirect compensation to help lower deductibles and cover additional services, such as dental and vision care.
Retirement plans
Retirement plans enable employees to secure long-term financial security. Employers often provide additional retirement benefits on top of any local statutory pension plans.
These supplemental plans enable employers to make additional financial contributions to country-specific retirement programs or employees’ personal pension plans.
Supplemental paid family and medical leave
Employers may provide employees with job-protected, supplemental paid leave in addition to statutory requirements for specified family and medical reasons, such as paid maternity leave or disability leave.
Supplemental paid time off
Supplemental paid time off is paid leave offered in addition to an employee's statutory paid—or unpaid—time off benefits. Employers may offer employees supplemental paid time off to use for events like vacation, sick leave, or jury duty.
Childcare and wellness services
Employers may also offer indirect compensation that positively affects an employee’s health and well-being, contributing to their work-life balance. They may provide financial childcare assistance for employees, gym memberships, health stipends, or access to recreational facilities.
The importance of offering indirect compensation
Indirect compensation plays a significant factor in an employee’s total compensation package. It helps supplement wages and provides employees with additional benefits and assistance beyond their monetary pay.
Additional benefits to offering indirect compensation include the following:
Aligns with talent needs
Offering indirect compensation benefits that align with employee needs and priorities can make a company more attractive to top talent. A well-designed benefits package may influence a candidate's decision, especially if they seek benefits that support their work-life balance, health, and well-being.
Edges out the competition
Job seekers often compare indirect compensation when considering job offers. A company may gain a competitive edge in the global hiring market by offering a comprehensive and attractive indirect compensation package that appeals to top talent.
Employees are also more likely to stay with a company that offers competitive global benefits. By investing in indirect compensation, employers can reduce turnover and build a strong, long-term team committed to the company's success.
Improves talent retention
When employees feel valued and supported, they are less likely to leave their jobs for other opportunities and are more likely to engage and produce high-quality work. Comprehensive compensation shows employees they are valued and that their employer is committed to their success.
Boosts talent morale
Indirect compensation helps create a more positive and productive work environment.
Indirect compensation can boost morale because employees feel supported and valued, which leads to increased productivity, creativity, innovation, and company performance.
Ensures compliance
Some countries require employers to provide employees with specific indirect compensation benefits, such as retirement plan contributions and paid parental leave. Offering indirect compensation ensures compliance with local country regulations, and businesses must adhere to these laws to avoid fines and penalties.
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