Compensation: Definition & Impact on Your Organization

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Perform a quick online search for “compensation definition” and you’re bound to yield thousands of results. The Oxford Dictionary defines it as “the money received by an employee from an employer as salary or wages.” But is that really all compensation is? Let’s find out.

In the world of HR, compensation takes on a more significant meaning. It’s not simply what you pay your employees in terms of salary; rather, it encompasses all of the ways in which you compensate your employees. In his book Human Resource Management, Gary Dessler defines compensation more precisely, stating that it consists of “all forms of pay going to employees and arising from their employment.”

Since there’s more to compensation than just base pay alone, it may be helpful to break it down in the following ways:

Direct Financial Compensation: As you may have guessed, this refers to base salary or wages. However, it can also include bonuses and/or commissions.

Indirect Financial Compensation: This includes any forms of compensation not included in regular pay, bonuses, and commissions. For instance, retirement plans, benefits, and compensation for continuing education would fall under indirect compensation.

Non-financial Compensation: In addition to monetary compensation, there are other ways an employer can deliver value to their employees. For instance, career development and training opportunities might be included in this category. Additional perks like recognition opportunities and work/life balance could also fall under non-financial compensation.

When you consider the robust nature of compensation, you can begin to see how base pay is just one factor in the “big picture.” While it’s certainly something that will play a role in attracting and retaining talent, you can also leverage the other elements of compensation – including both financial and non-financial aspects – to establish yourself as a competitive employer. In fact, building a strong compensation strategy is one of the most powerful resources HR professionals have at their disposal to impact performance and retention. Thoughtful, data-driven compensation planning can be challenging to master, but with the right tools, it’s possible – and well-worth the effort!