Indirect Compensation | Meaning and Definition

What is compensation?

Compensation refers to the remuneration awarded by the organization to employees in exchange for the services offered by them. The services may be in the form of time, skills, deadline commitment, and ability towards the assigned work.

The different types of compensation offered by the organization to the employees are overtime pay, bonus, incentives, awards, all types of allowances, health benefits, other types of non-cash benefits, commission, base pay, etc.

What is indirect compensation?

Indirect compensation, otherwise called employee benefits refers to some form of non-monetary benefits (non–monetary benefits given to employees include flexible working hours, peer recognition, voluntary time-off, experiential rewards, extra time off, and tangible rewards like a pen, water bottle, etc.) or pay that is offered to the employees.

 The indirect compensation that is offered to the employees will be in the form of Health and Life insurance, mobile phones, cars provided by the organization, pension funds, etc.

What is direct compensation?

The payment offered to the employees for the exchange of their work is called direct compensation, and this includes overtime pay, bonuses, salary, etc.

Some of the components of indirect compensation management include all or some of the following – Insurance, Pension, and retirement scheme, flexible working hours, hospitalization benefits, extra time off benefits, Leave Travel Allowance (LTA), leave policies, etc.

Importance of indirect compensation

Ø  Makes the company competitive – This makes your organization the preferred choice of new talents in addition to the direct compensation. Indirect compensation in the compensation letter will lead to more qualified candidates joining your organization.

Ø  Improves employee morale.

Ø  Reduces employee turnover.