Summary: Indirect compensation refers to all the things a company can benefit an employee but don’t become directly owned by the employee.
Indirect Compensation
Indirect compensation refers to rewards given to employees that are not directly paid into their bank accounts as compensation for their work. It refers to the recompense employees receive outside of their salary and other cash payments.
How does it differ from direct compensation?
Direct compensation is what a worker receives, usually directly into their bank account, for the work they perform. This includes salary and also things like bonuses, incentive payments, commissions, overtime premiums, tips, stock purchases or options, annuity, and other forms of compensation. What all of these items have in common is that they represent a direct transfer of funds in cash or in kind from the company to the employee. They don’t need to involve any third party; they’re owned directly by the employee.
In contrast, indirect compensation refers to all the things a company can benefit an employee but don’t become directly owned by the employee. An example would be health insurance. The company takes out a policy in the employee’s name and pays monthly premiums to the insurer. While buying health insurance benefits the employee, they don’t receive this benefit in the form of direct funds. Instead, they receive the insurance as indirect compensation for their work.
Indirect compensation can also include benefits that the employee receives directly but not in the form of cash payment. One example can occur if an employee travels for business regularly. While the company pays for the tickets, the employee may rack up frequent flier miles with one or more airlines. These miles become the property of the employee, who can then use them toward travel rewards in the future. It’s not a cash payment, so this is considered an indirect form of compensation.
Finally, indirect benefits can include perquisites, commonly known as the “perks” of a job. Free lunch in the staff cafeteria is an example of a perquisite, a special privilege a worker receives as part of their employment.
What are some examples of indirect compensation provided by employers?
Employers offer their workers indirect compensation in many different forms. Some of the most common examples of indirect compensation provided by employees include:
- Pension plans: Employers contribute funds into pension and retirement savings plans, giving employees money for the future. Since these funds are under the direct control of the employee until they retire, these are indirect benefits.
- Insurance: The most common form of indirect compensation is insurance benefits, which the employer contributes toward on behalf of the employee. These can include Social Security, unemployment, health, dental, and other forms of insurance.
- Company cars: Many employees use company cars for work-related transportation. If they are also allowed to use the cars after working hours for their personal transportation needs, this is indirect compensation.
- Workplace facilities: Many modern workplaces offer staff facilities to use in their downtime or after work, such as recreational and fitness centers, nap rooms, dining centers, and more.
- Childcare: Employers provide childcare services in-house or supplement childcare offsite for working parents.
- Education and development programs: Employers may support training, professional development, or even personal education options for employees.
- Vacation: Paid vacation days are a form of indirect compensation.
- Sick days: Most employers provide a set number of paid sick days to their employees.
- Coffee and snacks: Free or supplemented food and beverage service is common in many offices. Meals that are paid for as part of a daily stipend are also considered indirect compensation.
- Personal use of digital devices: Employees are often given company-owned devices like smartphones and laptops to work with. If they can also carry these devices for personal use, this is also indirect compensation.
- Recognition: Many employers celebrate their employees with recognition in the form of employee-of-the-month schemes or top-rated-seller programs.
- Flexible schedules and workplaces: As compensation, employees may receive flexible schedules or the ability to work from home or in hybrid systems.
What are the pros and cons of indirect compensation?
Some employees may prefer direct payments, but there are also advantages to indirect compensation, including:
- Pros
Attractive compensation packages
Indirect compensation can attract top talent.
Legal compliance
Morale boost
Small perks can keep morale high at a minimal cost.
Financial planning
Indirect benefits can help employees save their funds for the future.
- Cons
Salary competition
Indirect compensation may not be as attractive as a higher salary.
Measuring ROI
It can be hard to measure the return on investment when offering perks.
More admin work
Managing many added benefits can be an administrative challenge.
Authors:
Marcel is an experienced journalist and Public Relations expert with an honours degree in Journalism and bylines with a range of major brands.