What Is Indirect Compensation and Why Does It Matter?


Posted by: Altura Benefits in Money

What is indirect compensation

Employee compensation can come in many forms. One of these forms is indirect compensation. Indirect compensation is an important part of the total compensation package, and it includes many components that employees and job seekers value greatly. Here’s a look at what indirect compensation is and why it matters.

Direct Compensation vs. Indirect Compensation

To understand indirect compensation, it’s helpful to compare it to its counterpart, direct compensation.

  • Direct compensation is the money that is paid directly to the employee. This includes the base pay, which could come in the form of either an hourly wage or a set salary. Direct compensation also includes various forms of incentives paid directly to the employee. These incentives may take the form of commissions, bonuses, and other pay.
  • Indirect compensation is compensation that is considered non-monetary in nature. This includes many benefits that do not consist of money paid directly to the employee but nevertheless make up an important part of the total compensation package.

Examples of Indirect Compensation

Indirect compensation can take many different forms, including:

  • Insurance (Health, Dental, Vision, Life, Disability, etc.)
  • Retirement Plans
  • Paid Time Off
  • Mental Health Support
  • Parental Support
  • Company Cars and Phones

How Important Are Different Types of Indirect Compensation?

Indirect compensation is extremely important.

To understand the importance of indirect compensation, it’s important to consider the problem of turnover and the role that indirect compensation plays in employee satisfaction.

Employee turnover is expensive, triggering recruitment and training costs, as well as losses caused by reduced productivity. The total cost will depend on many factors, but the turnover of a single employee can easily cost a company tens of thousands of dollars.

According to the U.S. Bureau of Labor Statistics, 4.3 million workers quit their jobs in August 2021. This is an increase of 242,000 quits, and it put the quit rate at 2.9%. That’s a record.

More resignations may be coming. Business Insider reports that 73% of workers surveyed said they were considering quitting. Even if only a fraction of these workers actually go ahead and hand in their resignations, the turnover rate could be disastrous for many companies.

Indirect Compensation Can Boost Retention and Recruitment

Businesses need to find a way to retain their workers and to attract new workers. Indirect compensation is a big part of that, especially for top talent.

According to Statista, 38% of job seekers say that they consider overall compensation when looking for a job. As we’ve seen, overall compensation may include both indirect and direct compensation. Many job seekers cite indirect benefits specifically, as well, with 22% saying they consider healthcare and other benefits, and 24% saying they consider things like work-life balance and vacation time.

Indirect compensation is an important part of job satisfaction. Here are five reasons why employers should take a serious look at their indirect compensation package.

Reason #1: American Workers Depend on Job-Based Insurance

Many workers get their health insurance through a job. These workers depend on their job-based health insurance to provide coverage for both themselves and their families. In many cases, this is the only thing standing between a worker and resignation. According to MarketWatch, a survey found that 16% of workers with employer-based coverage are staying at their job because they’re afraid of losing their benefits.

Health insurance is the king of job-based insurance products, but it’s not the only insurance type that matters to workers. Many workers also get their dental insurance, vision insurance, disability insurance, life insurance and critical illness insurance through their work. These employee benefits are very important to workers.

Reason #2: Americans Need Help Saving for Retirement

Many Americans are woefully behind on their retirement savings, and the pandemic has set many people back even further. According to CNBC, 24% of survey respondents say they plan to delay retirement because of the pandemic, often by more than 10 years.

For workers who are worried about their retirement savings, a retirement plan with employer contributions has major appeal.

Reason #3: Parents Need Support

Working parents have a lot to juggle. Sometimes, it’s too much. CNBC reports that 9.8 million working mothers are suffering from burnout in the U.S.

In some cases, working parents may be forced out of the workforce. The U.S. Census Bureau says that many working mothers have left the workforce during the pandemic. In January 2021, there were around 10 million U.S. mothers with school-age children who weren’t actively working, an increase of 1.4 million compared to a year before.

Childcare benefits, paid parental leave and other forms of indirect compensation can help working parents stay in the workforce.

Reason #4: Stress and Mental Health Issues Are Common

The CDC says that one in five Americans is diagnosed with a mental illness each year, and more than 50% of Americans will be diagnosed with a mental illness at some point in their lifetime.

Many more Americans are stressed. The American Institute of Stress says that 31% of employed adults say they have difficulty managing work and family responsibilities, and stress-related healthcare issues and missed work cost employers $300 billion each year.

Indirect compensation can provide employees with the support and paid time off they need to improve their mental health and reduce their stress.

Reason #5: Workers Crave Work-Life Balance

People change jobs for many reasons, and it’s not always about wanting a higher salary. In fact, FlexJobs conducted a survey and found that the number one reason people cited for changing careers is wanting a better work-life balance. Of those surveyed, 56% said they switched careers in search of a better work-life balance, while only 50% cited a higher salary as their reason.

Workers want a good work-life balance. You can support this through indirect compensation – or you can lose workers to employers who do.

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