Compensation is any payment made by an employer to an employee during their employment. This compensation can come in salary, wage, benefits, bonuses, paid time off, pension funds, stock options, and other things. Understanding the various types of compensation is critical for creating an appealing compensation package for your current employees and for recruiting potential talent to your company. Know more about epf mobile number change here.

What are the various forms of employee compensation?

There are two types of compensation

  • Direct compensation (financial)
  • Indirect compensation (financial & non-financial)

1. Direct compensation

Direct compensation is a monetary form of compensation.

The four major types of direct compensation are:


  • Unskilled, semi-skilled, temporary, part-time, or contract workers are frequently paid hourly for their time and labor.
  • Retail, hospitality, and construction are examples of industries where some employees are paid hourly.
  • Overtime pay is usually available to employees paid on an hourly basis.


Most full-time or skilled employees and those in management positions are paid on an annual basis. A salary points out that the organization has invested long-term in this employee. Teachers, accountants, and doctors are examples of salaried employees.


Employees in sales roles frequently receive a commission as a form of compensation.

Typically, it will be based on a predetermined quota or target.


  • Companies often propose bonuses to employees based on year-end business results or the individual meeting their set goals.
  • Suppose the business has had a great fiscal year and fixes to reward everybody. In that case, the bonus would be classified as variable pay.
  • Another criterion of direct compensation is deferred pay which includes savings plans and annuities.
  • Merit pay is often offered to an employee who meets their targets or performs well in their role

2. Indirect compensation

  • It would still be a form of financial compensation since it has a monetary value. Employees, on the other hand, do not receive it in cash.
  • This is also referred to as employee benefits or job perks.

Package of equity

Equity as part of a compensation package essentially means that the employee is given equity (ownership) in the company, either through stock shares or the option to purchase such shares.

Stock Option

Employees who get this type of pay are liable to buy a particular number of shares at a specified price after a set time.


  • Health, life, legal, disability insurances, and retirement plans, are all expected employee benefits.
  • Employees frequently check for retirement funds and pension schemes when choosing a new position at a new company.
  • Non-monetary compensation can include things like:
  • Time off, paid or unpaid, flexi-time learning and development opportunities, parental leave, childcare, company cars, phones, or laptops, and meals

Compensation as a whole

An employee’s total compensation is made up of a compensation package that includes all of the above remuneration categories. According to research, employee engagement grows, turnover decreases, and employer brand improves when a business is innovative and transparent with compensation management.

A good compensation package is needed whether you are an HR or an employee. To know more about deferred salary, click here.