HR Glossary / Compensation

Compensation refers to any payment received by an employee in exchange for work, including salary, benefits, and bonuses. Compensation can also refer to money paid to compensate for a loss or an accident.

What Are the Types of Compensation?

The different types of compensation include:

  • Salary;
  • Hourly wages;
  • Commissions;
  • Overtime;
  • Bonuses;
  • Stock options;
  • Any type of allowance;
  • Benefits (insurance, leaves, retirement, etc.);
  • Tips;
  • Non-monetary compensation (recognition).

How Is Compensation Used?

Besides its function as an act of payment, proper compensation fulfills broader goals such as:

How Do Compensation Plans Work?

Compensation plans, also called compensation programs, allow organizations to ensure that employees are paid fairly through a transparent process.

Compensation plans are based on job requirements, budgets, reward strategies, and conditions of the job market. They are the reflection of the goals and the value of a company.

The steps to create an efficient compensation plan include:

  1. Setting the objectives of the program;
  2. Developing a compensation philosophy;
  3. Ranking each position based on their responsibilities;
  4. Establishing levels for seniority for each position;
  5. Determining the salary or hourly rate by position and seniority;
  6. Implementing benefits policies;
  7. Creating a communication plan;
  8. Monitoring and adjusting the compensation plan as needed.

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