Direct compensation includes salary, bonuses, and allowances, while indirect compensation includes retirement benefits and flexible hours. Both types provide incentives to reward employees for their hard work.
Although there are several specific forms available, there are basically two main types of compensation, including direct and indirect. Direct compensation generally refers to any type of compensation that is earned as a direct financial gain to employees, including salary, travel and other activity allowances, and bonuses. There is also indirect compensation, which provides a benefit to someone, but may be less direct. These can include the potential for overtime pay, retirement benefits, and more flexible hours for employees.
The different types of compensation often boil down to various methods by which an employer can provide employees with benefits and incentives to reward them for their hard work. Many of these techniques fall into one of two basic categories: direct and indirect compensation. One of the simplest and most common types or remuneration is the salary that an employee is paid for her work. This is direct compensation that provides employees with a basic indicator of the value of their work, allowing them to recognize that the effort they put in is rewarded with financial gain.
Direct forms can also include bonuses that employees can receive for especially impressive performance. These types of pay are not always available, unlike a salary, and are often used as a motivation method for higher performance. This not only gives an employee a direct example of being rewarded for her work, but it shows others that they can be rewarded for more effort. Companies may also provide employee allowances, such as a financial stipend provided to an employee traveling on behalf of their company.
There are also some types of compensation that are indirect, meaning they don’t always provide an obvious monetary incentive to employees. For example, overtime pay is certainly a direct form, but the timing of such pay is indirect in that it is not necessarily paid. Many employees can find a more rewarding work environment knowing that the extra effort and overtime can be directly offset, even when they aren’t taking advantage of it.
Retirement benefits and flexible hours are also indirect types of compensation. Companies that offer retirement benefits often do so in a way that doesn’t directly provide employees with a monetary gain while they work, but that builds value in the long run and pays off in the end. Flexible hours do not inherently reward employees with additional money, as they are not necessarily paid more for working unusual hours. However, these schedules can allow employees to work a more rewarding number of hours and often give employees a sense of value.
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