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Terms and Definitions

What is indirect compensation?

Updated: May 15, 2024

What is indirect compensation?

Indirect compensation refers to any non-monetary perk or employee benefit that employers provide staff members or use to attract new hires in addition to a regular salary or competitive wages.

 

More about indirect compensation and its purpose

Not all compensation is in the form of a paycheck, and for growing companies or those looking to retain their top performers, indirect compensation could be worth a closer look. That’s because this type of “non-monetary motivator” can play an important role in employee retention, loyalty, and engagement.

 

Furthermore, these benefits can be a differentiator when companies are recruiting new hires and need to differentiate themselves from competitors vying for the same talent. Indirect compensation comes in various shapes and sizes and can include perks such as pension funds, company cars, and life insurance.

 

How do indirect and direct compensation differ?

An employee receives direct compensation in the form of regular wages or a salary for the work they do, which can include hourly pay, an annual salary, or commissions. It specifically refers to the direct financial remuneration given to employees for their services rendered to the company.

 

Indirect compensation, on the other hand, generally includes non-monetary perks like health insurance, flexible work arrangements, or even professional development opportunities that do not come in the form of a wage or paycheck.

 

Why is it important for employers to use indirect compensation to recruit and retain employees?

Some employers provide additional benefits beyond the basic paycheck, in an effort to improve an employee’s job satisfaction or to attract job candidates.

 

Tip the scales with top talent

Offering indirect compensation can sometimes help businesses stand out in a competitive job market and attract high-quality candidates. This is because potential employees frequently consider factors other than salary when evaluating job opportunities and the companies that advertise them. Offering non-monetary benefits in addition to a competitive base salary can be a sound strategy for companies looking to edge out competitors that are talking to the same job candidates.

 

Retaining top performers

These types of benefits can help retain high-performing employees. Employees are more likely to remain loyal to a business when they feel valued and supported by their employer. By providing perks like professional development opportunities, tuition reimbursement programs, employee recognition programs, and work-life balance initiatives, businesses can create a positive work environment that encourages employee loyalty and reduces turnover.

 

Examples of indirect compensation

Though we mentioned a few indirect compensation benefits above, there are many more that employers can consider when broadening the perks used to recruit and retain employees. Here are some more non-pay perks that employers use to sweeten the pot and set themselves apart from the competition.

  • Flexible work schedules
  • Options for remote and hybrid work
  • Comprehensive healthcare plans
  • Breakroom snacks and office lunches
  • Life insurance
  • Offsite events and holiday celebrations
  • Company car
  • Cell phone
  • Retirement plans
  • Childcare
  • Gym or health club memberships

 

Is indirect compensation taxable?

Indirect compensation can be subject to payroll taxes, similar to fringe benefits, depending on the perk the employee receives and if it is not included in the IRS’s exclusion rules.

 

While each organization has different goals and workplace cultures, in many cases, using indirect compensation can increase the likelihood of attracting and hiring high-quality candidates, as well as keep your top performers from looking to see if there are career opportunities with your competitors.

Using indirect compensation in a sentence

“Getting a pay raise is always nice, but it was not until I started working for this new company that I realized how valuable indirect compensation like a company car could be.”

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