What is Indirect Compensation? | Meaning & Definition | Akrivia HCM

Indirect compensation, also known as non-cash compensation, is a salary that an employee receives in the form of benefits rather than money. Common benefits offered are Life Insurance, Health Insurance, Disability insurance, 401(k) retirement plan, Medical savings accounts (MSA), and Dependent care accounts. Indirect compensation is a method of providing compensation to anyone who is not on the payroll of an organization. Indirect compensation has been proven to be more cost-effective than other forms of compensation for employers and employees alike. Indirect compensation can be a beneficial program for any company or non-profit entity. It promotes good customer relations and increases job satisfaction by offering rewards and incentives to non-exempt employees such as salespeople, mechanics, technicians, service writers, and many more. The benefits can be in the form of cash bonuses, gift cards, stock options, or even merchandise.

What is mean by indirect compensation?

Indirect compensation is a type of compensation given to the affiliates (end users) to sell specific goods or services. Indirect compensation may take the form of a commission, a kickback, or a combination of both.

list of indirect compensation examples are:

Indirect compensation is an arrangement where a salesperson receives a commission, bonus, or other incentive payments based on measuring the performance of the salesperson’s employer or another party.
Examples of indirect compensation include:

  • A company car for salespersons, or holiday and vacation pay.
  • Time off, including vacation time and sick leave
  • Pension or retirement
  • benefits stock options and other forms of equity
  • Gifts and other perquisites, including company cars and country club memberships
  • Health Insurance
  • Housing allowances, also known as “”locational”” allowances (paid to employees who are required to maintain two residences)

what are the pros of indirect compensation?

Direct compensation is a salary or wages paid directly to an employee. Indirect compensation is the benefits provided by the employer. Employees may receive indirect compensation in health insurance, retirement benefits, disability insurance, life insurance, or tuition reimbursements.

The most significant advantage of indirect compensation is that it can help reduce business costs and help provide important employee benefits without increasing an employer’s salary budget. For example, an employer might choose to give employees restricted stock options instead of an increase in salary to maintain the cost of doing business. However, the employees still benefit from the additional profits based on increased shares.

Indirect compensation offers several advantages:

  • it is cognitively less demanding and hence preferred by less motivated people
  • it simplifies employee monitoring, thereby reducing monitoring costs
  • it leads to less effort aggravation
  • it reduces the problem of inequity in the distribution of rewards
  • in some situations, it reduces the overall labor cost

Difference of Direct Compensation vs. Indirect Compensation

Direct compensation is money paid directly from the employer to the employee. Direct compensation can be either a salary or an hourly wage, depending on the needs of the company and employment contract. Both forms of direct compensation and discuss how they are calculated.

Indirect compensation is composed of two parts: non-financial compensation and indirect financial compensation. Non-financial compensation is anything other than money such as bonuses, health care, and paid leave time. Indirect financial compensation includes benefits such as sick days, vacation time, disability insurance, and retirement plans.

What factors contribute to indirect compensation being important to recruiting and retaining employees?

Recruiting and retaining employees stands a challenge for every business. Successful companies use a variety of strategies to attract qualified candidates and retain existing employees, including vacation and sick leave policies, retirement plans, health insurance, stock options, employee assistance programs, and many other perks.

Factors Contributing to the Importance of Indirect Compensation are :

One reason that indirect compensation is so important to the recruitment and retention of employees is the unequal distribution of pay between men and women. In the U.S., women earn approximately 77 cents for every dollar that men do. The gap in pay can be attributed to gender bias in hiring processes, which leads women to be underrepresented in higher-paying fields like engineering and computer science.

If a company offers generous benefits such as paid time off or flexible scheduling, it is more likely to attract female applicants. Another factor contributing to the importance of indirect compensation is that the average employee tenure has dropped from about nine years in the 1950s to 4.4 years today. This high turnover rate means that companies must compete for talent, offering more perks that appeal to their employees’ needs and preferences.

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