What Are Compensation and Benefits? Definition and Importance

By Indeed Editorial Team

Published 12 October 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Companies may want to hire the most qualified professionals and keep them loyal and productive. To attract and retain their outstanding professionals, companies typically provide a competitive compensation and benefits package, which may include wages, salaries, commission structures and bonuses. Understanding the common benefits that companies offer can help hiring professionals attract quality job candidates. In this article, we discuss what compensation and benefits are, show why they're important and explore some of the common benefits that employers may provide.

What are compensation and benefits?

It's important to understand the difference between compensation and benefits. Here is more information about each concept:

Compensation

Compensation, also called wages, refers to the payment made to professionals in exchange for their labour or service. Managers often work with a company's human resources (HR) department to set and increase wages based on several factors, such as cost of living, supply and demand, labour negotiations, personal qualifications and competitive analysis.

Managers may negotiate compensation both with their new hire and the company. For example, they may make a case of paying you more than another by explaining why your skills and qualifications positively impact the bottom line of the company. The reason behind compensation can be complex, as managers may need to keep track of the competition and evolving trends to make sure you get fair pay.

Related: A Complete Guide To Understanding Salary Benchmarking

Benefits

Benefits are part of the compensation package, and they're typically worth a great deal to professionals. Benefits refer to any perks that an employer offers you besides salary. Many companies provide a competitive package of benefits to attract or retain quality team members. Smaller organisations may provide fewer components in the package, but larger organisations and government agencies usually provide a competitive and extensive benefits package. In addition to benefits, other elements of the compensation package include:

  • Wages and salary: In a compensation package, wages and salary typically make up the single biggest component, as they are what potential and current team members use as a common point of comparison.

  • Bonuses: Companies often use bonuses as incentives for outstanding work performance. They usually give bonuses out at the end of the year in a single lump sum.

Related: Contract Employment: Definition, Benefits, Example and More

Important benefits to consider

Some types of benefits are optional, while others are mandatory. The list of legally required benefits may vary depending on your employment status. Here are some of the most important and common benefits you might encounter:

Long-term incentives

A competitive compensation package may include stock grants or stock options that serve as a long-term incentive. A stock option is a type of alternative compensation that some employers offer as part of their compensation package. It allows you to buy shares in the company's stock at a pre-set price, typically reduced price over a certain period of time. The number of options that you can purchase may vary, depending on the company. It may also depend on your special skills and length of service.

Health insurance

This is fairly standard with medium and large-sized companies and some small businesses. When a company pays for health insurance, it can provide you with great value and save you money. This can give you peace of mind, as you know you can pay for your medical bills.

Life insurance

Life insurance protects your family in case you pass away. The insurance company pays your benefits all at once to the beneficiaries of your policy. You can purchase life insurance through your employer if it sponsors a group plan. You can also purchase it privately, but this is usually more expensive.

Disability insurance

Disability insurance replaces all or part of the income that's lost when you can't perform your duties because of an illness or injury. There are two types of disability insurance. These include short-term and long-term disability insurance. Short-term disability insurance covers situations or injuries that can put you out of work for a short period of time, such as a few weeks and a couple of months. Long-term disability insurance provides you with benefits when a long-term or permanent disability, illness or injury leaves you unable to do your job.

Retirement benefits

Retirement benefits usually refer to the money set aside to provide you with an income or pension when you retire from your jobs. There are two types of retirement plans: 401k plans and pension plans. In a pension plan, the amount of money you can get depends on your salary and years of service. In a 401k plan, the amount of money you can receive depends on the investment returns.

Time off

Time off includes holidays, personal days and bereavement. Employers that cannot offer competitive wages or salaries may provide you with more time off. The government rarely requires employers to pay you when you take time off, but many companies today offer at least some paid time off to compete for highly qualified professionals.

Related: Flexible Working Hours: Definition, Types and How to Request

Continued education and professional development

Another benefit that employers often provide is professional development opportunities. Some employers pay you to complete your degree or earn a degree in a new field. Also, some of them might pay you to take a certification exam, pursue professional training courses or attend technical lectures.

Dental and vision insurance

Employers may provide you with dental insurance. This type of insurance covers teeth cleanings, fillings and sometimes surgeries. It's cheaper compared to health insurance, so it might be an affordable option for both you and your employer.

Another optional but affordable type of coverage is vision insurance. It contributes to your bill for eye examinations and corrective lenses. If you have poor eyesight or if you wear corrective eyewear, vision insurance may be a great addition to your comprehensive insurance benefits package.

Fringe benefits

Fringe benefits refer to a range of non-cash payments used to attract or retain talented professionals. Here are some examples of fringe benefits:

  • Tuition reimbursement and student loan repayment: This is a way for companies to combat student loan crises. This programme can help ease your financial burden and encourage you to pursue advanced degrees.

  • Wellness programmes: More and more companies are investing in corporate wellness programmes, which can include mental health assistance, access to nutritionists, discounted gym membership and employee assistance programmes.

  • Housing options: Some employers offer relocation and housing options. This may include helping you move by providing you with financial assistance.

  • Work-from-home options: More and more employers are offering flexible work hours and telecommuting options to make it easy for you to perform your duties outside of the workplace. A professional is more likely to take a role that gives them the flexibility to perform their duties in their own time.

  • Commuter benefits: Companies may provide tax-free commuter benefits, which can reduce your costs of travel expenses, such as train tickets and work-related parking fees.

How to negotiate your compensation package

Here are the steps you can take to negotiate your compensation package:

1. Know your limitations and expectations

Enter a compensation negotiation with two numbers in mind: your target amount and the lowest amount you can accept. These numbers may depend on several factors, including your experience, education, geographic area, position you're applying for and industry. This information can help you negotiate for a competitive compensation based on these factors and make sure you properly assign value to your qualifications.

Related: How to Provide Your Expected Salary (With Tips and Examples)

2. Be flexible

Even if the employer can't provide the amount you want, they may be able to offer other forms of compensation. For example, you may be able to negotiate extra vacation days, more stock options additional work-from-home days or a sign-on bonus. Consider asking for alternatives in case the employer can't increase their compensation offer.

3. Research the market average

Knowing the market average can help support a more successful compensation negotiation. It can provide you with a good baseline for your compensation request. You can even use it as a justification. To determine the market average, consider using Indeed. This tool uses salaries listed from present and past job advertisements and data submitted anonymously by other users. As you begin your market research, consider the following points:

  • the national average salary for the job you're applying for

  • the average salary in your geographic location

  • how much similar companies in your area pay professionals in this position

Related: How To Include Salary Expectations in a Cover Letter (With Example)

4. Disclose the salary of your previous job

Disclosing the salary you received at your previous job may be a useful salary negotiation tool, especially if your previous company gave you a higher compensation than the compensation that's being offered by the employer you're being considered at present. You can say, "In my previous role, I made about $100,000 a year. I understand that the compensation offer is for $80,000, but I would like to consider compensation offers around $100,000 per year."

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