Indirect compensation

Indirect compensation
See also
Indirect labor costs Money-purchase pension plan Additional voluntary contributions Ancillary benefits Net purchases Service cost Cafeteria system Cash Allowance Closing entry

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. Indirect compensation is the opposite of a direct compensation, which usually consists of the employee's base wage or salary and performance bonuses.

Examples of indirect compensation

Nowadays companies offer to their employees a wide variety of benefits, for instance:

• 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:

• 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.

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