4 Different Types of Compensation

4 Different Types of Compensation

There are four different ways to demonstrate to your employees that you appreciate their work using compensation. Today’s HR professionals and company leaders need to leverage all four methods to be effective, too. The days of salary promises alone are long gone. Today’s top professionals are looking for custom compensation options and flexible earning potential. Here’s more about the four pillars of compensation in today’s workforce and how you can be tapping into them to attract and retain your best teams.


Direct and Indirect Compensation

Typically, when you look at forms and methods of employee compensation, you can separate your core offerings into two categories, direct and indirect. Direct compensation is monetary, usually providing a financial benefit. Indirect compensation is usually a combination of financial perks and non-monetary benefits. And your company likely uses both of these different compensation types.


These methods of compensation are a direct exchange of pay for work performed and include the four primary compensation types, hourly pay, salary, commissions, and bonuses.


These types of compensation are benefits based and non-monetary, including equity packages, stock options, insurance benefits, and retirement plans.

Four Different Compensation Types

Start looking at how you’re currently compensating your teams. And separate your methods into one of four different compensation types. From there, you can consider improvements or more of a hybrid approach to pay to ensure you retain your best team members now and can continue to attract top talent into the future.

1. Hourly

As an employer, you may have different employee types, including temporary staff, part-time workers, and entry-level team members. Compensating these employee types with an hourly wage is common among employers. And it makes sense as a compensation strategy without investing in these types of employees beyond their direct work performance.

Pros: Hourly workers provide a cost-savings to employers. And workers expect guaranteed overtime pay should their hourly work exceed standard workweeks.

Cons: There is less job security for those in an hourly wage role, and these workers typically earn less than their salaried counterparts.

2. Salary

Salary pay, or an agreed-upon amount of annual compensation, is usually reserved for a full-time worker, often with more responsibility and skillsets. More technical positions, leadership positions, and highly educated staff typically earn a salary.

Pros: Salaried employees translate to simpler payroll processes for employers. And employees tend to enjoy a more flexible work schedule.

Cons: Overtime lines are blurred, and it can be more difficult to track salaried employees’ performances.

3. Commission

Another form of compensation is commission-based pay. And it’s most common in sales or performance-driven roles. This kind of pay usually represents a percentage of total goals met and serves as an incentive for employees to perform well. Commissions can also be based on profit margins.

Pros: Commission pay is ideal for businesses since it’s directly associated with revenue and performance. It’s an incentive, forward-rewarding method that also tends to drive improved sales.

Cons: Commission can lead to an overly aggressive sales team. And for some companies, it can lead to unpredictable expenses.

4. Bonuses

Bonuses are another form of variable pay and compensation, applicable as the name implies – a bonus. For salespeople or team members responsible for achieving company goals, bonuses are typically a percentage of a sum or established as a flat-rate payout.  Additionally some companies offer bonuses based on departmental performance, while others share bonus pay on a timeline of quarterly or annual results. Bonuses, however, don’t have to be incentive pay like commission. These can be associated with holidays and offered as a loyalty gift without any direct quantitative performance metric.

Pros: Bonuses are great for rewarding employees and fostering an environment of loyalty. It can be a motivating factor for teams to collaborate, too.

Cons: Bonuses represent an added company expense. And if mismanaged, it can lead to false expectations among employees.

Providing Transparent Compensation Statements

As an employer, you can change up how you structure your compensation efforts to create a more flexible, attractive, and results-driven employee engagement. Albeit you can develop a more effective compensation strategy that involves both direct and indirect pay, along with the four different types of compensation mentioned above. Additionally, from there, you can then create a transparent compensation statement, which is helpful for your teams to have a clear understanding of what to expect as compensation.

Today’s hiring and retention landscapes are vastly different. And to be more effective, you’ll want to look for ways to improve your methods of compensation. For more insights and all the support you need in transforming your employee engagement strategies, ExactHire can help! Connect with our team to learn more!

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