Components of Employee Compensation

Components of Employee Compensation

Employees sell their services to entrepreneurs or employers in return for wages and salaries. Those wages and salaries are the remuneration given to the employees to compensate them for the value they add in the organisation. Compensation is a tool used by businesses to further the existence of the company. It is also a significant issue when it comes to industrial relations. The remuneration or compensation is based on the business goals, needs and available resources. Increasing and retaining morale is one of the its uses in addition to rewarding and encouraging peak performance. The components of employee compensation differ depending on one organisation to another.

Table Of Contents

What is Employee Compensation

Employee compensation is a systemic approach to providing monetary and non-monetary value to the employees of an organisation in exchange for the work done. It assists an organisation in terms of recruitment, job performance and satisfaction. Some of the components of employee compensation include salaries, wages, benefits and rewards to name a few.

Salaries and wages

The most basic components of employee compensation are salaries and wages. Salaries are paid out to permanent employees on a monthly basis and are often given to workers that offer support services such as marketing, accounting and management. Wages are paid to contractual workers or temporary workers on a daily, weekly or monthly basis and are often given to the labour directly associated with production. Salaries consist of the basic pay, house rent allowance, dearness allowance, leave travel allowance and other expenses.

  • Basic Pay

Basic pay is simply the basic salary obtained by an employee and the amount is dependent on the laws of the country and a company’s policy. The basic pay is the proportion of pay that is taxed.

  • House Rent Allowance

Some companies provide their employees with accommodation whilst some provide them with an allowance for rentals in addition to wages and salaries. In some countries, house allowance is not provided at all, instead the salaries that are paid out are meant cover for all the needs of the employees. The house rent allowance is calculated based on different forms, but it is commonly calculated based on the basic salary.

  • Dearness Allowance

In some countries the salaries are adjusted to changes in prices of goods and services. The dearness allowance is a component of employee compensation that caters for such. This way employees can adapt to the changes in living standards and conditions.

  • Travel allowance

Firms provide for leave and travel allowance only when the employees need to travel. Travel allowance can be included in the basic salary or as a separate component of employee compensation. Its calculations differ from one company to another, but proof of travel is normally required in any company. Sometimes employees use their own funds to cover for travel expenses but are reimbursed if they can provide proof.


Commission may be a component of employee compensation especially for those that earn their income based on sales revenue and business development. They are based on the sales revenue or profit of a company. Commissions are always a fixed percentage agreed upon by the employee and the employer. For some, they can be the only source of income especially for people who work in sales. Salespersons may be paid salaries and commission or commission only. Depending on the sales targets, commissions can be paid out on a monthly or yearly basis.


Benefits are another component of employee compensation. They can be monetary, non-monetary or both. Some of these benefits are housing, medical and recreational facilities. Benefits are normally provided by companies to their employees as a competitive compensation package in order to attract and retain the best talent. Examples of such benefits are fringe benefits, paid time off and Insurance programs.

  • Fringe Benefits

Fringe benefits are non-cash benefits which can be educational assistance, childcare, and flexible healthcare cover. Benefits such as company cars, paid vacation and gym membership can be included. Nonproduction benefits also make up part of fringe benefits. Some companies even go as far as providing entertainment allowances, discounted travel tickets and family vacation packages.

  • Paid Time off

Paid time off is another component of employee compensation. Employees can still receive their salaries when they take vacation leave or sick leave. Depending with the position of an employee some are given a privilege leave where they can still receive their salaries.

  • Insurance Programs

Other benefits which also make up the components of employee compensation include health insurance, hospital cover, family health insurance and disability cover among others. Some companies financially cover the death of an employee and provide financial support to the bereaved families.

Social Security

Social security is another important component of employee compensation. It aims at protecting employees against hardships that may come about as a result of accidents or death. The objective of social security is to improve the welfare of employees including their working conditions and the standard of living of the workers and their families. Examples of social welfare include employee provident fund, maternity benefits and workmen compensation. A portion of contributions from the salaries of employees are made to these funds.


Rewards are given to employees as a way to recognise their hard work and achievements. They are also a component of employee compensation. Rewards are also an incentive to keep employees motivated. Rewarding employees motivates them to achieve both personal and company growth. They can be in the form of yearly bonuses, awards, promotions, profit sharing and commissions. Both individual and group rewards can be given out.

  • Bonuses (Bonuses are a common way to reward employees. Individual and group bonuses for meeting sales targets, production requirements or for completing a project in time can be given to employees as a form of compensation for work done. )
  • Profit sharing (This is an effective way to compensate employees since they associate any increase in profits directly with their input)

Stock Options

Employee stock options are a component of employee compensation where companies grant equity to their employees and executives. The equity shares are issued by the company and cannot be sold. Stock options are benefits normally associated with young or start-up companies. They are also rewarded to employees and executives as an incentive for them to work toward growing the company. Employee turnover has been greatly reduced since employees are encouraged to stay because they own part of the organisation.

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