What are the main types of employee compensation?

As compensation usually take many forms, it is important that they understand how they will be compensated. For instance, there are various types of compensation that usually apply to the total value of their compensation package. However, even this seems like a complicating way of describing salaries, it will make sense once you understand the main types of employee compensation.

In this article, we will make sure you understand everything regarding employee compensation and the importance of a strong pay policy. In addition, you will understand why the type of compensation you offer your employees has a massive impact on your business. Certainly, the right type of compensation may depend on multiple factors. Let’s observe:

  1. What is employee compensation?
  2. What is the importance of a strong pay policy?
  3. Different types of compensation
  4. What is total compensation?
  5. How can ConnectHR allow you to access the best types of compensation in the UAE?

      1. What is employee compensation?

Certainly, compensation refers to any type of payment provided by a company to a worker during the employment period. Thus, the worker provides their labor, time, and skills. That is to say, companies give this compensation in form of:

  • Salary.
  • Bonuses.
  • Sales Commission.
  • Stock Options.
  • Hourly Wages.
  • Tips.
  • Incentive Pay.
  • Other Variable Pay.
  • Benefits (paid leave, healthcare, etc.)
  • Non-monetary compensation (meals, recognition, etc.)

Further, compensation is also known as remuneration. On the other hand, understanding the various types of worker compensation is essential to create a great remuneration package for your workers. Therefore, this will allow you to retain your brightest workers but it will allow you to attract new talent to your company; because you are setting yourself away from your competitors.

Payroll is so important when it comes to compensation, learn about the differences between manual vs automated payroll.

However, creating a strong remuneration strategy and conducting compensation research is the responsibility of the HR department and compensation and benefits professionals. However, when there is not an HR team in place, the business owner or managers. Therefore, in ConnectHR we are committed to assisting you in every step of the compensation process.  

      2. What is the importance of a strong pay policy?

A remuneration policy is created to distribute business a business salary budget fairly. Above all, it must take each worker’s performance and merits into account. That is to say, a strong pay policy is all about a set of ruling allocating wages, bonuses, award pay raises, etc.

However, this requires a policy taking the following areas into account:

  • Commitment.
  • Motivation.
  • Business costs.
  • Personal objectives.
  • Goals achieved.

Likewise, age, experience, and education are also important. But these must not be the only criteria, as many businesses have been doing. In the same, when you establish a broad evaluation system focused on rewarding work quality and individuality; you are able to keep the business’ best talent committed and satisfied.

This is why having a great employee compensation policy is so important. That is to say, this is perhaps one of the most influential satisfaction levels in your workforce. Similarly, well-being is directly linked to productivity, creativity, or motivation. Therefore, fulfilling this objective means your business will have an involved team in problem-solving, with a positive attitude, that works as a team.

In the same, this is crucial for each organization. On the other hand, establishing the right salary band is also important to achieve this.

      3. Different types of compensation

Compensation plans tend to vary from country to country. For instance, in the US, health benefits usually make up a large part of a worker’s benefits package and compensation. Whereas in parts of the Middle East, childcare, parental leave, and lunch expenses are more common.

However, there are 2 types of employee compensation:

  • Direct compensation (financial).
  • Indirect compensation (non-financial and financial).

Certainly, all parties involved in creating a payment structure and compensation plan must understand the difference between the types of compensation. This is because the organization is responsible for explaining the compensation plan to all employees and candidates. Similarly, it is really important during the hiring process, and salary reviews and performance.

If you want to keep learning, here is an article about why payroll is so important for a company.

In the same vein, there are many options available within the 2 types of compensation, similarly, workers can easily become confused.

Let’s observe the types of compensation in more detail. 

      Direct compensation

Direct compensation is a monetary (or financial) type of compensation. Thus, here are the 4 types of direct compensation:

      Hourly

This type of wage is provided to semi-skilled, part-time, contract, unskilled, workers in exchange for their labor and time. For instance, some of the industries that workers receive hourly wages include construction industries, retail, and hospitality. On the other hand, workers receiving hourly wages are usually able to earn overtime pay. Thus, this pay consists of additional hours worked outside their traditional contract.

However, you are setting your workers’ wages, you must comply with the minimum wage legislation of the UAE.

    Salary

Annual salaries are usually provided to most skilled employees or full-time employees and those occupying management positions. Likewise, this type of salary shows that the company invested in this employee in the long term.

Payroll is the cornerstone to employee payment, read our complete guide to payroll and payroll reductions.

Similarly, the types of workers receiving salaries include:

  • Accountant.
  • Teachers.
  • Doctors.
  • Hospitality and retail managers.

However, both salary and hourly wages make up a worker’s base salary or base pay.

      Commission

This is a common form of compensation provided to workers in sales positions. Further, it is based on a predetermined target or quota. For example, the higher the quota reached, the higher the commission. In the same vein, commission rates are based on several specified sectors; including profit and revenue margins.

On the other hand, some employees working on commission only obtain wages with a commission.

      Bonuses

Organizations usually offer bonuses to workers based on end-year business results of the individual meeting of their goals. However, sometimes the decision is the choice of the manager.

For example, you can pay bonuses quarterly, annually, or even after the completion of each project.

Similarly, both bonuses and commission are labeled under incentive pay as well as profit sharing, shift differentials, piece rate, and stock options. Certainly, some companies pay bonuses without the need to reach a particular meeting by the worker. For instance, if the company has had a good year and decides to reward all workers; then the bonus is classified as variable pay.

Further, tips are also a common way to compensate in people-based industries, especially hospitality. Moreover, another type of direct compensation is differed pay, which includes annuity and savings plans. In conclusion, merit pay is usually provided to workers meeting their targets or that perform well in their position.

      Indirect compensation

This type of compensation still is a form of financial compensation since it has financial value. But workers do not receive it in cash form. For instance, some types of indirect compensation are labeled as monetary, whereas others are not monetary. However, this tends to vary from organization to organization.

In the same vein, indirect compensation is also worker benefits of perks of the job.

For example, here are some common forms of indirect compensation:

      Equity package

Equity as part of the package basically means the worker is offered ownership in the organization, either through shares of stock or the availability to buy shares. In the same vein, equity is common in start-up businesses. Similarly, these companies may be low on funding or cash and need other incentives to retain and attract workers.

      Stock options

This type of compensation allows the workers to buy any amount of share at a fixed price after a certain time period. Likewise, this differs from the equity package since the worker does not obtain ownership in the company.

On the other hand, many stock options require employees to continuously work between 3 to 5 years before they are able to receive this compensation.

      Benefits

Typical worker benefits include life insurance, retirement plans, legal insurance, pet insurance, and health insurance. In the same vein, pension plans and retirement funds are also common benefits that workers tend to look for when considering a new role at a new company.

However, a recent survey found that 50% said they are more likely to apply for a job position that came with great benefits. So, the base you offer your workers is important, but thinking about your overall compensation package is crucial.

      Non-monetary compensation

This type of compensation includes benefits like:

  • Paid or non-paid time off.
  • Development and learning opportunities
  • Flexi-time
  • Company cars
  • Parental leave
  • Childcare
  • Phones or laptops.
  • Meals.

You may be thinking these forms of compensation seem superfluous or small, but they make a massive difference to your worker’s day. Therefore, this can improve their overall well-being in and outside the workplace.

However, it is important you offer several benefits that appeal to the different people you employ and are looking to employ in the future. For instance, if a worker of your business just becomes parents or is looking to start a family within the next years; they will greatly value benefits like childcare or parental leave.

On the other hand, certain types of compensation are viewed as a perk and a disadvantage, depending on the regulations you apply to it. For example, if you provide your workers with a laptop, and they are required to keep it for business purposes or they are allowed to use it for personal use.

That is to say, some individuals see having 2 laptops as a hassle. Meanwhile, others may not like the idea of the organization monitoring and tracking their browsing history. Thus, it is crucial to be clear on who is your core workers and what they want; before creating a compensation plan.

      4. What is total compensation?

Certainly, a worker’s total compensation consists of all applicable types of compensations listed previously. In the same vein, this compensation often includes different benefits and rewards at different job levels.

However, a total compensation statement will be helpful to your workers. Therefore, they will have a clear idea of what they are entitled to and the different types of employee compensation you are offering them. For instance, splitting out commissions, bonuses, and base pay will allow your workers to understand what they are entitled to and what they need to meet the targets.

That is to say, you can arrange worker compensation into 2 different columns:

  • Direct compensation.
  • Indirect compensation.

Or you can go further and split the compensation into sub-categories with health care, stock options, pension fund, healthcare, etc. On the other hand, all managers must have at least basic knowledge about the compensation packages your business offers. And they must be able to explain how it works.

Most importantly, research has shown that when a company is transparent and progressive with compensation management; turnover falls, engagement rises, and your business brand gets a boost. Therefore, HR teams must be calculative in the employee compensation packages their businesses are offering and how they provide it through the different steps of the employment and hiring process.

The staff of a business is crucial to determine its success, learn about the best way to access the best workers for your company.

The employment law of the UAE mandates a basic set of compensation so you must ensure with these ongoing changing regulations.

      5. How can ConnectHR allow you to access the best types of compensation in the UAE?

Employee compensation allows your workers to be productive and efficient at the workplace. Thus, if you offer a great compensation plan, you ensure their well-being and the focus on business activities. In ConnectHR we allow you to develop and plan the best compensation packages in the UAE.

The comfort of your workers is essential to ensure their productivity, learn about the 10-step guide to employee wellness.

On the other hand, when you decide to work with us you obtain various benefits. In addition, we will take care of your business in the next areas:

  • Insurances.
  • WPS – Payroll.
  • Attendance.
  • HR management.

Since 1998 we have been working with all types of businesses across all sectors of the UAE.

Would you like to contact ConnectHR to obtain more information about what are the main types of employee compensation?

You can call us on +971 433 16 688, and you will talk to one of our representatives who will answer all your questions.

Author avatar
Nakul
Nakul Sachdeva is Head of Recruitment at Connect Resources. His expertise has crossed multiple categories and channels with functional expertise in a variety of industries. He has 10 years of career in executive search firms and supported end to end Recruitment for Major Banks, Financial Institution, IT and Consulting firms based out of Toronto, Canada and Dubai, UAE. He manages end to end Recruitment at Connect Resources as well as serves as the client’s initial point of contact when seeking recruiting services.

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