Compensation and benefits are often used interchangeably in day to day conversation but the terms do not refer to the same concept.
Compensation vs Benefits
The main difference between compensation and benefits is that compensation refers to a financial reward that is given to an employee based on his performance. Compensation is provided to attract talented and qualified people to join their company, whereas benefits are provided to motivate an employee to perform well on the given tasks.
Benefits are an exchange of value for the labor provided. Benefit refers to a non-financial reward given to an employee to appreciate his efforts in service. For example, in addition to the monthly salary paid to an employee, they may also be eligible for paid vacation days, health insurance, company transport, etc.
Comparison Table Between Compensation and Benefits
|Parameter of Comparison||Compensation||Benefits|
|Definition||Remuneration given in exchange for labour||Subset of compensation|
|Form||Monetary and non-monetary||Non-monetary forms of value|
|Types||Direct and indirect||Indirect form of compensation|
|Components||Basic pay, variable pay, benefits||Health insurance, disability insurance, life insurance, paid time off, fringe benefits, etc.|
|Relevant Factors||Labour provided by and performance of the employee, industry standards, cost of living, minimum wage||Legal requirements, desirability of benefit|
What is Compensation?
The sum total of all that a person receives in exchange for their labor or the services they provide is called compensation. It is an umbrella term that covers both monetary and non-monetary remuneration. Monetary or financial compensation can be further divided into basic pay and variable pay.
Basic pay is the minimum amount of money that is due to an employee for their work without taking into consideration other factors like bonuses, incentives, and overtime.
This is usually calculated according to factors like the role of the employee in the company, industry-wide standards, costs of living and legally mandated minimum wage.
It is a fixed, taxable amount that forms the core of all that the employer is liable to spend on the employee.
Unlike basic pay which is the same for all employees
of the same designation regardless of their contribution to the company,
variable pay is given based on the performance of the individual and of the company
as a whole.
As competition across industries rises, variable pay is becoming a sought after mode of compensation by employers. Rather than just compensation for labor, variable pay takes the form of a reward for an employee’s performance which distinguishes them from the rest.
This incentivizes them to work harder because this is a reward that is based on certain targets being met and not just on actions.
Not only do employees become more efficient and goal-oriented but the company’s fixed costs are also reduced as these rewards only need to be given when the aforementioned targets are achieved.
Compensation can also be categorized into direct and indirect compensation.
The former consists of the money paid to employees for their labor and includes both variable and basic pay. Indirect compensation, on the other hand, is made up of non-monetary benefits provided to employees at the cost of the employer.
This includes security schemes such as worker’s compensation, health insurance, and pension plans as well as paid leave.