What is the Difference Between Compensation and Benefits?

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Difference Between Compensation and Benefits

The difference between compensation and benefits is that compensation refers to a financial reward given to an employee based on their performance. Compensation is provided to attract talented and qualified people to join your company, while benefits motivate an employee to perform well in assigned tasks.

Compensation and benefits are often used interchangeably in everyday conversation, but the terms do not refer to the same concept.

Compensation vs Benefits 

Benefits are an exchange of value for the work provided. Benefit refers to a non-financial reward given to an employee to appreciate her efforts in service. For example, besides the monthly salary an employee is paid, they may also be eligible for paid vacation days, health insurance, company transportation, etc.

Compensation vs Benefits Comparison Chart

Compensation benefits comparison parameter

Definition Remuneration given in exchange for work Compensation Subset
To form monetary and non-monetary Nonmonetary Forms of Value
Types direct and indirect Form of indirect compensation
Components Basic pay, variable pay, benefits Medical insurance, disability insurance, life insurance, paid time off, fringe benefits, etc.
Relevant factors Labor provided and employee performance, industry standards, cost of living, minimum wage Legal requirements, convenience of the benefit

What is Compensation?

The total of everything a person receives in exchange for their work or their services is called compensation. It is an umbrella term that covers both monetary and nonmonetary remuneration. Monetary or financial compensation can be further divided into basic and variable salaries.

Base salary is the minimum amount of money an employee is owed for their work without considering other factors such as bonuses, incentives, and overtime.

This is typically calculated based on the employee’s role in the company, industry-wide standards, costs of living, and the statutory minimum wage.

It is a fixed taxable amount that forms the core of everything the employer is required to spend on the employee.

Unlike base pay, which is the same for all employees of the same designation regardless of their contribution to the company, variable pay is awarded based on the performance of the individual and the company as a whole.

As competition between industries increases, employers’ variable pay is becoming a sought-after compensation mode. More than just compensation for work, variable pay takes the form of a reward for an employee’s performance that sets them apart from the rest.

This incentivizes them to work harder because this is a reward based on meeting certain goals and not just actions.

Not only do employees become more efficient and goal-oriented, but the company’s fixed costs are also reduced, as these rewards should only be given when the goals mentioned above are achieved.

Compensation can also be classified into direct and indirect compensation.

The first consists of the money that employees are paid for their work and include both basic and variable wages. On the other hand, indirect compensation is made up of nonmonetary benefits provided to employees at the expense of the employer.

This includes security schemes such as workers’ compensation, health insurance, pension plans, and paid vacations.

What are the benefits?

In addition to the wages they receive as financial compensation, employees also receive additional forms of value in exchange for their work called benefits.

These are a portion of the total compensation due to employees. Benefits are nonmonetary rewards paid by the employer and vary in scope and availability from company to company.

Providing benefits incentivizes employees to perform better and increases company loyalty by providing an additional safety net and support system.

There are many different types of benefits, and some can be very valuable. Health insurance is one of the most sought after types, as medical care and treatment can be prohibitively expensive.

Similarly, disability insurance is important as it compensates employees for the period they cannot work due to illness or injury. Another important benefit is life insurance, as it guarantees a measure of financial support for the employee’s dependents in the event of death.

Many companies also offer retirement plans, so employees have a safety net to fall back on when they retire. Paid vacations are also available at almost all companies.

Along with these standard benefits, companies may also offer various benefits depending on your financial capacity.

These are called fringe benefits and range from education loans to child care, employee discounts, and office gyms.

Employees are often provided with company housing and transportation to and from the workplace and subsidized or even free meals.

Depending on the laws of each country, some benefits may be required by law. For example, most countries have statutes that require employers to provide social security, health insurance, paid maternity leave, etc.

However, fringe benefits are completely voluntary, and it is the sole decision of the employer to offer or not offer any.

Main Difference Between Compensation and Benefits

  1. Compensation consists of monetary and nonmonetary remuneration due to an employer or employee. Benefits are a subset of compensation.
  2. Benefits are only nonmonetary forms of value.
  3. Compensation can be direct or indirect. Benefits are an indirect form of compensation.
  4. Monetary compensation is divided into basic salary and variable salary.
  5. Nonmonetary compensation includes benefits ranging from health insurance to paid vacations, lodging, and company transportation.

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