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What is indirect compensation and why is it important for recruitment and retention?

Written by: Chase Charaba
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Published on November 17, 2022.

When it comes to attracting and retaining employees, offering a competitive salary sometimes isn't enough. Employees increasingly desire added benefits and perks thanks to a tight labor market, growing inflation, and decreased consumer confidence in the economy.

Offering indirect compensation, such as employee benefits, is an excellent way to attract top talent and improve the productivity of your current employees.

This article will cover what indirect compensation is, why it's essential for recruiting and retaining employees, and which benefits are crucial for your organization.

Looking for a way to easily provide personalized benefits for your diverse workforce? Learn more about employee stipends with our guide

What is indirect compensation?

Indirect compensation is a type of payment to an employee that doesn't involve directly paying a wage or salary. Examples of an indirect compensation arrangement include offering your employees health insurance, life insurance, or employee stipends (also called fringe benefits). Social Security, sick leave, a retirement plan, and paid time off (PTO) are also examples of indirect compensation.

This differs from direct compensation, which is the payment of money directly to your employees in exchange for their work. Direct compensation includes wages or base salary, bonuses, overtime pay, tips and commission, stock purchases, and other forms of additional compensation.

In the table below, we've provided both direct and indirect compensation examples.

Indirect compensation vs. direct compensation chart

Type of compensation

Examples

Direct compensation

Pay

  • Wages or salary

  • Merit pay

  • Bonuses

Incentives

  • Commission

  • Tips

  • Profit sharing

  • Stock options

Deferred pay

  • Savings plan

  • Stock purchase

  • Annuity

Indirect compensation

Employee benefits

Pay for time not worked

  • Paid time off (PTO)

  • Sick leave

  • Jury duty pay

  • Paid holidays

Other perks

  • Use of company car

  • Use of company cell phone

  • Personal use of company laptop

  • Paid meals

  • Use of recreational facilities, such as an on-site gym

Non-financial compensation

  • Remote work

  • Hybrid work

  • Employee recognition (though rewards are either direct or indirect compensation, depending on the gift offered)

  • Flexible schedules

Benefits that you can't attach a monetary value to are called non-financial compensation or intangible compensation. These benefits include flexible schedules and remote work. It can also include employee recognition and awards, as long as those awards don't contain some sort of prize like a gift card.

The combination of direct and indirect financial compensation and intangible compensation make up your employees' total compensation.

Why offer indirect compensation to employees?

While direct compensation is used to pay employees for their work, indirect compensation and non-financial compensation are used to supplement wages to build company loyalty and retain employees.

Reduce employee turnover

Employee benefits play a crucial role in reducing employee turnover. Compensation and benefits packages are among the top five reasons employees quit their jobs.

According to Pew Research Center1, 43% of employees who left their jobs in 2021 said poor or no employee benefits were a factor in their departure. Of all the survey respondents, 42% said their new employer offered better benefits.

Offering a comprehensive employee benefits package helps your organization compete for talent. To retain your employees, you need to understand your competitors and what they offer employees. If your competitors offer more benefits, your employees are more likely to apply.

If your employees receive benefits that fit their needs, they'll be less likely to leave in search of better opportunities.

Attract top talent

When hiring new employees, you need to make your organization stand out to job candidates. Offering employee benefits as part of your overall compensation package will help you attract the candidates you want.

According to our 2022 Employee Benefits Survey Report, 82% of employees said the benefits package an employer offers is an important factor in whether or not they accept a job offer with the organization.

You'll remain competitive even in a tight labor market by offering additional perks alongside a competitive salary.

Improve employee morale

Providing employee benefits can also boost productivity, and improve employee engagement and morale. When your employees are taken care of, they'll feel valued.

Employees who enjoy working for your organization and have high job satisfaction will be more likely to recruit others when you have a job opening, helping reduce your talent acquisition costs.

Keeps you compliant

It's important to note that offering indirect benefits is required by state or federal law in some cases.

For example, if your organization has 50 or more full-time equivalent employees (FTEs), you must provide a health benefit that meets minimum essential coverage (MEC).

Which employee benefits are most important for attracting and retaining employees?

Offering employee benefits is vital for recruitment and retention. However, providing the right employee benefits is even more critical. Your benefits package should reflect the needs and wants of your employees and the ideal candidates you wish to attract.

A great place to start is by conducting an employee benefits survey. You can use your survey results to determine which benefits your employees value most.

If you have an in-office staff in a large city, commuter benefits such as transit or parking passes would make a great perk. However, remote workers wouldn't find this beneficial. While you can offer benefits based on specific employee categories, such as location, it's best to provide personalized benefits that give your employees control over their benefits.

So, what are the top indirect compensation offerings for your workforce?

According to our 2022 Employee Benefits Survey Report, the most-valued employee benefits include:

  • Health insurance
  • Dental insurance
  • Vision insurance
  • Life insurance
  • Paid time off (PTO)
  • Retirement benefits
  • Flexible work schedules
  • Paid family leave
  • Mental health benefits
  • Professional development

We'll look at a few of these sought-after benefits in more detail in the sections below.

Health benefits for employees

Employers now have more employee health benefit options today than ever before. We'll look at a few common health benefits you can offer your employees.

Traditional group health insurance

Many organizations offer traditional group health insurance to their employees. However, recent cost increases and the growth of healthcare consumerism have pushed some employers toward more personalized health benefits.

There are group health insurance policies available for organizations of all sizes. If you have fewer than 50 employees, you may be able to offer your employees a small group health insurance plan. You can purchase these small business health plans from an insurance company or through a Small Business Health Options Program (SHOP) exchange.

Traditional group health insurance is an excellent employee benefits option for in-office employees and recruitment because employees are likely familiar with how group health insurance works.

But, group health insurance is a one-size-fits-all plan. It won't work for all of your employees' wants and needs.

Health reimbursement arrangements (HRAs)

Instead of offering a group health insurance policy, you can provide your employees a health reimbursement arrangement (HRA). HRAs can be a better fit for organizations than group health insurance because they give employees freedom over their healthcare.

With an HRA, employees get reimbursed by their employer for their qualifying medical expenses.

Three of the most popular types of HRAs are:

With a QSEHRA or an ICHRA, employees can choose an individual health insurance policy that best fits their needs. Then they can submit their monthly insurance premiums and qualifying out-of-pocket medical expenses for reimbursement up to their benefit allowance.

Health stipend

You can also provide your employees with a health stipend. Health stipends allow you to reimburse your employees for their medical expenses, similar to an HRA but with fewer restrictions.

There are no employee eligibility requirements and no minimum or maximum allowance amounts. Health stipends are taxable, so you must report this amount as income on your employees' W-2s.

A health stipend allows organizations to create fully customizable health benefits that best fit their employees' needs.

Offering wellness benefits

Wellness benefits are on the rise following the COVID-19 pandemic and the Great Resignation. According to MetLife's 2022 Employee Benefits Trends Survey2, 52% of employees said health and wellness programs like gym memberships are a must-have.

Providing your employees with a wellness benefit is important for reducing burnout and improving employee productivity.

One way that organizations accomplish this is through an employee wellness program. However, even offering a few wellness benefits can go a long way toward improving employee wellbeing and retention.

Some examples of wellness programs and benefits are:

  • Smoking cessation programs
  • Employee health screenings
  • Stress management classes
  • Gym memberships
  • Wellness stipends

If you want to provide your employees with a flexible wellness benefit, you should consider a wellness stipend.

Wellness stipends

A wellness stipend is an excellent indirect compensation option that allows you to reimburse your employees for their wellness expenses. You simply set up a monthly allowance for reimbursement and choose the expense categories you wish to offer, such as gym memberships or mobile wellness apps.

With a taxable wellness stipend, your employees can get reimbursed for the expenses they want, giving them more control over their benefits.

Conclusion

Providing your employees with indirect compensation such as employee benefits is a great way to attract and retain talent at your organization. Without an indirect compensation package, your employees are more likely to leave for other opportunities.

If you're ready to offer indirect compensation benefits, PeopleKeep can help! Our HRA and employee stipend administration software makes it easy to provide personalized benefits to your employees in just a few minutes each month.

Schedule a call with a personalized benefits advisor today to see how indirect compensation benefits can help you attract and retain employees

This article was originally published on April 27, 2022. It was last updated on November 17, 2022.

1. https://www.pewresearch.org/fact-tank/2022/03/09/majority-of-workers-who-quit-a-job-in-2021-cite-low-pay-no-opportunities-for-advancement-feeling-disrespected/

2. https://www.metlife.com/employee-benefit-trends/2022-employee-benefit-trends/

Originally published on November 17, 2022. Last updated November 17, 2022.
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