Indirect compensation
| Indirect compensation |
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Indirect compensation (also called fringe benefits, supplementary pay or employee services) is a kind of an indirect both financial and non-financial payments which employees receive for being employed with the company[1]. Indirect compensation is the opposite of a direct compensation, which usually consists of the employee's base wage or salary and performance bonuses[2].
Examples of indirect compensation
Nowadays companies offer to their employees a wide variety of benefits, for instance[3]:
- retirement programs,
- health insurance,
- paid leave (e.g. sick, holiday),
- wellness and sport programs (e.g. gym membership),
- child care,
- elder care,
- moving expenses,
- subsidized housing,
- subsidized utilities,
- mobile phones,
- company cars,
- company clothing,
- retail chains membership,
- vouchers and gift cards.
Advantages of indirect compensation
Introducing indirect compensation to the company has numerous advantages. The most significant profits are[4]:
- legal tax savings - if the employers move part of the compensation into benefits category, it is possible to cover such benefits from pretax accounts. Therefore, it creates the savings for the employees, who otherwise would have to pay for services included in benefit packages using their posttax income,
- value to employee is bigger than cost to employer - fringe benefits enable the employees to save money (e.g. on additional insurance, private healthcare or gym membership), therefore their total compensation increases with the relatively small costs,
- cost sharing - it is possible to share several fringe benefits among a few employees (e.g. car sharing or using one retail chain membership card), therefore the costs of benefits decrease,
- group rates - benefits can be purchased at lower group rates through the company (e.g. private healthcare or gym memberships). Therefore, it is more profitable for the employer to buy such services in bulk rather than increase the base salary,
- economies of scale - it makes sense to provide the employees with the benefit rather than increase direct compensation, when economies of scale are possible to achieve by offering the employee services to a big group of employees rather than having every employee take care of his needs individually (e.g. food services),
- on-site convenience - it can be for example a day care or company – operated gym. Such facilities near the workplace can help saving employee's time and energy, which can result in higher efficiency at work,
- motivation - benefits can be a motivational tool for the employees and have a significant influence on their work performance.
Limitations of Indirect compensation
Indirect compensation can provide significant benefits for employees, but there are several limitations to consider. These include:
- Limited budget: Companies typically have a limited budget for providing indirect compensation and may not be able to provide as much as employees would like.
- Lack of customization: Indirect compensation is often not tailored to the specific needs of the employee, which can make it difficult to meet individual needs and preferences.
- Difficulty tracking: It can be difficult to track the use of indirect compensation and measure the impact it has on employee morale and productivity.
- Tax implications: Depending on the type of indirect compensation provided, employees may be subject to taxes on the value of the benefits.
- Difficulty of communication: It can be difficult to communicate the details of indirect compensation to all employees, especially if it is offered in multiple forms.
Indirect compensation is an essential component of any employee's remuneration package, and can take on a variety of forms. In addition to traditional benefits such as health insurance and vacation time, there are a number of other approaches related to indirect compensation that employers can use to attract and retain quality employees. These approaches include:
- Employee recognition programs: Employee recognition programs involve publicly acknowledging the performance of employees for their hard work, dedication, and contribution to the success of the company. This can be done through awards, bonuses, or other forms of recognition.
- Flexible work arrangements: Flexible work arrangements allow employees to work from home or to adjust their work hours to better fit their lifestyle. This type of arrangement can help to reduce stress and increase productivity.
- Professional development programs: Professional development programs provide employees with the opportunity to further their education and training in order to become more valuable to the organization. This type of program can be used to increase the skill level of employees and make them more attractive to potential employers.
- Workplace amenities: Employers can also provide their employees with additional amenities such as onsite daycare, gym memberships, or subsidized meals. These types of benefits can help to make the workplace a more attractive and productive environment.
In conclusion, indirect compensation can take on a variety of forms. Employers should consider implementing a range of approaches related to indirect compensation in order to attract and retain talented employees. Doing so can help to create a more attractive workplace environment, improve employee satisfaction, and ultimately increase the success of the organization.
Footnotes
References
- Fogleman S., McCorkle D. (2009), Human Resource Management: Employee Compensation Guide, Agrilife Extension, Texas A&M System
- Manurung S. (2017), The Effect of Direct and Indirect Compensation to Employee’s Loyalty: Case Study at Directorate of Human Resources in PT POS Indonesia, "Journal of Indonesian Applied Economics", vol. 7, pp. 84-102
- Ruby M. (2012), The Impact of Indirect Compensation on Employee Productivity: A Case of Central University College', Master of Business, Institute of Distance Learning, Kwame Nkrumah University of Science and Technology
- Taras V. (2012), Direct Versus Indirect Compensation: Balancing Value and Cost in Total Compensation, “Compensation and Benefits Review, vol. 44, pp. 24-28
Author: Marta Łazarz
