Employee compensation isn’t just about salary. It includes everything your company offers in exchange for someone’s time, effort, and expertise,from base pay and bonuses to stock options, insurance, paid time off, and perks like flexible schedules or development budgets.
Understanding what compensation really includes - and how to structure it- is essential for any employer looking to attract, retain, and motivate top talent.
In this guide, we’ll walk through:
- What employee compensation means
- How total compensation packages are structured
- The difference between direct, indirect, and non-monetary rewards
- How to calculate your employer costs
- And how to ensure your packages are competitive without being unsustainable
Whether you're reviewing an offer letter or rethinking how you pay a global team, this is your complete guide to making compensation work, both for you and your employees.
What is employee compensation?
Employee compensation refers to the combination of salary and wages, benefits, bonuses, and any additional perks employees receive for performing their job. To better understand everything employee compensation encompasses, let’s break down each of these components individually.
Salary and wages
Salary and wages are the most visible part of compensation. This includes hourly pay, annual salary, commissions, and any overtime pay. These are paid through payroll on a regular schedule and typically reflect an employee’s base income.
Benefits
Benefits cover employer-provided insurance (health, dental, vision, life), retirement plans, stock options, profit-sharing, and various types of leave. Some are legally required (statutory), while others are optional (supplementary), depending on location.
Bonuses
Bonuses are additional payments. They're usually performance-based or budget-dependent. While not always guaranteed, they can be powerful motivators. These are also processed via payroll but often paid out quarterly or annually.
Additional perks
Perks go beyond money. Think company lunches, paid parking, home-office stipends, flexible schedules, learning budgets, or wellness programs. While not mandatory, they often influence employee satisfaction and retention.
What is total compensation?
The terms “employee compensation” and “total compensation” are often used interchangeably, but they have slightly different meanings. While “employee compensation” could refer to certain types of compensation, total compensation is the sum of all compensation an employee receives. So, if you wanted to calculate an employee's total compensation, you would add the total monetary value of their salary and wages, benefits, bonuses, and any additional perks.
Types of employee compensation
There are three different types of compensation: direct, indirect, and non-monetary. An example compensation package might include any combination of these. Let’s take a closer look at each.
Direct compensation
Direct compensation is the salary and wages that are paid directly to employees, i.e., any monetary payment. Direct compensation can be viewed as an employee’s net pay vs. their gross pay as the latter is their total pay before any deductions (such as payroll tax). Direct compensation includes whatever method you use to pay employees, whether that’s an hourly wage or an annual salary, as well as variable compensation, such as bonuses, commission, and overtime pay.
Indirect compensation
Indirect compensation is compensation that has a monetary value but isn’t paid directly to employees, i.e., non-cash benefits. This includes any benefits and contributions that the employer covers. What’s included in indirect compensation can vary significantly based on your employees’ working locations because mandatory and customary benefits differ from jurisdiction to jurisdiction. For example, in some countries, you must pay into retirement plans, whereas in others, it’s left to the employer’s discretion. We outline country-specific employer costs in our OmniAtlas.
Indirect compensation also includes non-mandatory benefits like stock options and company profit-sharing plans.
Non-monetary compensation
Non-monetary compensation refers to any remaining employee compensation that doesn’t have a monetary value. Instead, it may contribute to better employee satisfaction and engagement. This includes some of the previously mentioned “additional perks” such as a flexible work schedule and company volunteerism.
What benefits are included in an employee compensation package?
Employee benefits are a core part of total compensation. Some are legally required (statutory), while others are discretionary, and are used to attract and retain top talent. The exact mix often depends on the country of employment, so it’s important to stay compliant with local labour laws.
Below, we’ve broken down the key categories of benefits and leave you might include in a competitive compensation package.
Common employee benefits
- Health, dental, and vision insurance - covers essential medical care and routine checkups.
- Disability and life insurance – provides income protection or a payout in the event of illness, injury, or death.
- Mental health coverage – includes therapy, counselling, wellness apps, or employee assistance programs.
- Retirement plans – employer contributions to pensions or retirement savings schemes, such as 401(k) or workplace pensions.
- Flexible working hours – allows employees to manage their schedules around core working times.
- Remote work options – supports fully or partially remote roles, often with tech or home-office stipends.
- Learning and development budgets – funds training, courses, or professional development opportunities.
Types of employee leave
Time-off policies show employees you value their wellbeing and work–life balance. These are some of the most commonly offered types of leave:
- Maternity, paternity, and parental leave – provides paid or unpaid time off for new parents after childbirth, adoption, or surrogacy.
- Annual leave – a set number of paid vacation days each year, often increasing with seniority.
- Sick leave – allows time off for short- or long-term illness, medical appointments, or recovery.
- Bereavement leave – grants time off following the death of a family member or loved one.
- Sabbatical leave – offers extended time off (paid or unpaid) for rest, travel, or study.
- Compensatory leave – gives time off in exchange for working overtime or public holidays.
- Unpaid leave – permits leave without pay, typically used for personal matters or extended travel.
How to determine employee compensation?
Once again, the most important step in determining how much to compensate employees is ensuring you’re staying compliant with the law. Most countries have laws dictating things like minimum wage requirements, mandatory benefits, and time-off/leave requirements, so it’s crucial that your employee compensation packages are at least meeting the minimum requirements set by the law.
But just offering the minimum of what’s required will likely make it challenging to attract and retain talent. One thing that can help you decide on what compensation to offer is performing market and competitor research. This will give you valuable insight into the compensation offered at competitor companies and what compensation expectations look like for your industry. You can also look at the compensation employees received in their previous roles combined with their years of experience to help dictate an appropriate amount of compensation.
Salary benchmarking is a highly useful process for employers to go through to ensure fair, market-aligned, and competitive compensation - especially for global teams.
While determining how much compensation your employees should receive, you should also be aware of employer costs you’ll have to pay.
What are the employer costs for employee compensation?
Calculating an employee’s total compensation can give you a rough idea of your employer costs; however, you’ll also need to take payroll taxes into consideration. Our Global Employment Cost Calculator can help you determine your monthly costs based on the employee’s annual salary and country of employment.
Understanding your employer costs for employee compensation is vital to your company’s success. Offering a comprehensive employee compensation package will go a long way in helping you attract and retain talent. Still, it’s best to balance what you offer employees with what your business can reasonably afford. If you don’t calculate your employer costs, you risk overpromising your employees compensation packages that you may not be able to deliver in the long run.
Additional employee compensation FAQs
We get a lot of questions from businesses about employee compensation in different markets. To round off this article, let's take a closer look at some of the common questions we tend to receive from business looking to hire internationally.
What’s the difference between compensation and salary?
Salary is just one type of compensation. Compensation also includes bonuses, benefits, paid leave, and non-monetary perks like flexible work or learning budgets. Salary is fixed and predictable — compensation reflects the full value of what an employee receives.
What does compensation mean in a job context?
In a job setting, compensation means the total rewards an employee receives for their work — including base pay, benefits, equity, time off, and extras. It’s a broader term than salary and helps reflect an employee’s full value to the business.
What is a total compensation statement?
A total compensation statement is a breakdown of all the compensation an employee receives — not just their salary. It often includes line items like bonuses, insurance, retirement contributions, and perks, typically issued annually to show the full value of a compensation package.
What are examples of non-monetary compensation?
Non-monetary compensation includes perks and benefits that aren’t paid as cash. Examples include flexible hours, additional time off, learning budgets, wellness programs, or remote work options. These can have a big impact on employee satisfaction and retention.
Why is total compensation important for employers to track?
Tracking total compensation helps businesses manage costs, benchmark against the market, and demonstrate value to employees. It also ensures consistency and fairness across roles, especially in global teams where benefits and requirements vary by country.
How do you calculate total employee compensation?
To calculate total compensation, add up all salary and wages, bonuses, employer-paid taxes, benefits, and the estimated value of perks. This gives a complete picture of what a role truly costs the business — not just what hits the employee’s paycheck.
Is equity considered part of employee compensation?
Yes. Stock options, restricted stock units (RSUs), or other forms of equity are part of total compensation. Their value can fluctuate, but they’re often used to incentivize long-term performance and align employees with company growth.
