What is indirect compensation?

Indirect compensation is a type of remuneration that typically encompasses non-monetary forms of payment. Direct compensation includes base pay, bonuses, commission, and incentives. Indirect compensation includes paid time off and overtime pay, as well as benefits that have financial value, but no cash value, such as:

  • Insurance plans
  • Parental leave
  • Technological devices
  • Stock options
  • Retirement planning and financial consultations

Except for government-mandated benefits, organizations can choose which forms of indirect compensation to incorporate. 

Why should HR leaders care about indirect compensation?

Understanding indirect compensation is essential for HR leaders. During the hiring process, candidates will want to know what the indirect compensation package includes and how the employer plans to deliver it. During salary and performance reviews, people will likely want to check that they receive their indirect compensation and that it’s easily accessible. 

Indirect compensation is integral to:

What can HR leaders do to successfully build an indirect compensation program?

Haphazardly compiling an assortment of potentially helpful benefits is not going to cut it. Instead, HR leaders can incorporate these practices to build an indirect compensation plan that will support an engaged workforce:

  • Clarify the purpose. Outline the long-term objectives and how the company plans to achieve these objectives through the specific payment options. For instance, to boost morale among seasoned, older employees, a company may want to implement more generous health insurance and retirement plans. 
  • Make the program relevant. Many employees can fall through the cracks with a one-size-fits-all approach. For example, an indirect compensation plan that includes childcare for all employees won’t be helpful if a company employs primarily young singles. Yet, segmenting the workforce and tailoring the indirect compensation program to target the needs of each employee group can aid HR leaders in developing a plan that speaks to everyone. 
  • Explain. During the hiring and onboarding processes, articulate the benefits people will receive through the indirect compensation plan. Tying indirect compensation to direct compensation will give employees context for their entire payment package. A holistic perspective of the compensation plan can encourage people to use their benefits optimally.  
  • Routinely evaluate. Regular assessments are necessary to maintain a competitive indirect compensation plan. An annual evaluation system can assist HR and finance leaders in syncing the indirect compensation plan with the compensation philosophy. HR leaders can also gather valuable employee feedback regarding the indirect compensation plan through pulse surveys and employee performance evaluations.

How can a successful indirect compensation program improve company culture? 

Indirect compensation is a fundamental component of the overall compensation plan. By offering attractive and pertinent indirect compensation options, companies can nurture a culture that values its people. When people feel that their organization appreciates through prioritizing their wellbeing, they’ll more readily bring dedication, loyalty, and enthusiasm to their work community.