Types of Compensation: A Guide for Global Employers

In the span of a day, a hiring manager might talk to one candidate who’s curious about healthcare offerings, another who wants to negotiate more paid time off (PTO), and a third who’s hoping for more flexible hours. Each knows that base pay is one part of the picture in a comprehensive compensation plan.

For employers, creating effective compensation plans is a strategy for winning over talent. But, designing competitive compensation programs comes with challenges, especially for global organizations that have to contend with diverging labor laws and cultural expectations.

The key is to understand the elements of a competitive compensation package, along with nuances where your employees are based. Explore different types of employee compensation and learn how to offer benefits that attract and retain a strong global workforce.

What is compensation?

Employee compensation refers to the total rewards employers provide to workers for their contributions. This includes financial compensation and other non-monetary benefits.

While base pay is a critical component, a compensation package that includes both financial and non-financial rewards can help employers attract qualified candidates and support retention among existing employees.

Rather than focusing on salary alone, building compensation strategies that include a multitude of rewards can help you stay competitive in the global labor market.

What are the types of compensation?

Compensation is often divided into two broad categories: direct and indirect compensation. Organizations may define these categories differently, particularly when distinguishing compensation from the broader concept of total rewards. Many organizations combine both types to create total compensation packages.

Direct compensation

Direct compensation describes financial payments employers provide their employees. It’s often one of the first things candidates evaluate when evaluating a job prospect.

Examples of direct compensation include:

• Salaries. Employees receive these fixed annual amounts regardless of how many hours they worked or performance fluctuations.
• Stipends. Stipends are fixed payments that certain workers, such as interns and apprentices, receive to help offset living expenses.
• Hourly wages. Employees are paid based on the number of hours they work, typically at an established hourly rate.
• Bonuses. These additional payments may be tied to individual or company performance, milestones, retention, or other criteria.
• Commissions. This incentive-based compensation is tied directly to successful sales or revenue generation.
• Overtime pay. Employees receive additional payment when they work more than standard working hours, often paid at a premium rate.

Indirect compensation and other employee benefits

Indirect compensation refers to the non-financial rewards in an employee's total compensation beyond their salary, wage, or bonus pay. While these benefits aren’t paid in a specific dollar amount, they still provide value to employees.

Examples of indirect compensation include:

• Health insurance. Employer-sponsored healthcare coverage may include medical, dental, and vision.
• Retirement plans. Savings programs may include employer-matched accounts or pension plans.
• PTO. Vacation days, sick leave, maternity and parental leave, and paid public/statutory holidays, where applicable, allow employees to take time off while still receiving some or all of their standard pay.
• Wellness programs. Employer-funded programs support employee health and well-being, and may include gym memberships, mental health support, and wellness initiatives.
• Flexible work arrangements. Options for remote work, hybrid schedules, shorter workweeks, or flexible hours can factor into total compensation.
• Stock options. Employees get the ability to purchase shares in the company.

Many countries around the world require employers to provide certain statutory benefits. For example, in the United States, applicable large employers—generally those with at least 50 full-time employees and full-time equivalents—may be required under the Affordable Care Act to offer affordable, minimum-value health coverage to their full-time employees and dependents.

In France, employers need to give employees 2.5 days of paid leave for every month they work. Global companies need to understand regional requirements to maintain compliance across borders and foster retention.

How to build an effective compensation strategy

A competitive total compensation package makes it easier to attract and retain talent. Research has associated direct and indirect compensation with job satisfaction, although the relative effects can vary by context.

Here are some key types of compensation management that can help you build well-rounded and sustainable compensation packages.

Benchmark compensation against the market

To ensure your offerings attract talent, research current market data. Routine salary benchmarking can help you gather information about the compensation plans your competitors are offering so you can adjust yours to stand out.

Researching average wage or salary by area can also be useful. A total compensation package may be highly competitive in one market, but fall below expectations in another.

These are some examples of competitive compensation packages in different countries:

• United States. Provide a high relative base salary, annual performance bonus, equity compensation, health insurance (including dental and vision), employer matched 401(k), at least 15 days of PTO, and hybrid or remote work options.
• United Kingdom. Give a lower relative base salary, workplace pension program with employer contributions, extended parental leave, enhanced PTO (over the minimum statutory 5.6 weeks of entitled holiday), and flexible working arrangements.
• Canada. Offer a moderate relative base salary, employer-sponsored retirement savings, such as a group Registered Retirement Savings Plan with employer contributions, extended maternity and parental leave, and statutory vacation entitlements that vary by province or territory, with many employers offering additional PTO.

Balance direct and indirect compensation

A strong compensation package offers a solid combination of direct and indirect benefits. It’s not one-size-fits-all; individuals value different compensation types depending on their personal situation and cultural expectations.

What attracts a candidate to a job won’t necessarily make them stay. A high base salary with fewer indirect benefits may initially win over a large swath of talent. But as employees settle into their roles, indirect benefits such as retirement programs and work-life balance initiatives can play a role in long-term workplace satisfaction.

Consider running employee feedback surveys to gain insight on their priorities. A strategic balance between the two compensation categories can help ensure you attract quality candidates and improve employee retention.

Align compensation with business goals

The way you approach compensation can reinforce employee behaviors that support business objectives.

For example, sales-focused companies may prioritize commissions to incentivize employees to close deals. Organizations may also choose to tie generous bonuses to revenue growth or other performance metrics. This motivates employees and also gives them clarity about your expectations.

Ensure internal pay equity

Internal pay equity means that employees performing comparable jobs receive fair and equivalent compensation, usually based on objective criteria such as experience, skill, performance, and scope of work.

Maintain transparency and use standardized pay bands to build trust with employees and ensure their pay is tied to objective metrics. For international organizations, global mobility compensation packages can help address currency and market differences for employees relocating overseas.

Review compensation regularly

Your compensation strategy will ideally evolve alongside external and internal changes. As labor markets, economic conditions, and statutory regulations shift, you should update your approach.

By performing routine compensation reviews, you can address retention issues and optimize workforce planning. You might incorporate a remote work option if employees say during exit interviews that they’re leaving for a more flexible role. Or, you might increase salary offerings for a department that’s been understaffed.

Compensation challenges for global employers

If you’re hiring employees across borders, you may encounter some compensation challenges that domestic employers don’t face:

• Varying statutory benefits. Many countries require employers to provide certain benefits, such as parental leave or pension programs, and this can differ significantly from place to place.
• Country-specific payroll requirements. Countries often have unique payroll reporting requirements, tax withholding obligations, and payment schedules.
• Exchange rate and currency considerations. Exchange-rate fluctuations can affect compensation costs, employee purchasing power, and pay-equity comparisons across markets.
• Different pay transparency laws. Countries have different laws and guidelines around pay transparency, creating varying obligations for employers. For example, the European Union (EU)’s pay transparency directive requires EU member states to incorporate certain pay transparency requirements into national law, including rules requiring employers to provide job seekers with information about starting pay.
• Internal pay equity management. You have to balance perceived equity with local markets and fair practices, which can be challenging.
• Worker classification differences. Worker-classification rules—including distinctions between employees, contractors, and freelancers—vary across jurisdictions, creating potential compliance risks.

Simplify compliant compensation across borders with Pebl

To create and maintain strong compensation practices, organizations have to account for market fluctuations and shifts in the company’s business goals. Global employers face even more complexity, contending with local tax and payroll regulations, statutory benefits, and worker classification rules across every country where they hire.

Pebl’s Global Payroll empowers organizations to pay employees accurately and swiftly across more than 185 countries. Global employers can manage payroll, compensation structures, and mandatory benefits in one intuitive platform.

With 99.9% timely and accurate payroll, HR teams can reduce administrative complexity and maintain sustainable compensation strategies around the globe.

Contact Pebl to request a demo and see for yourself.

FAQ

How is compensation classified?

Compensation generally includes two main categories: direct compensation and indirect compensation. Direct compensation refers to financial payments, while indirect compensation encompasses non-financial perks, such as health insurance, retirement plans, and wellness programs.

What are some examples of compensation?

Common examples of compensation include salaries, hourly wages, bonuses, commissions, PTO, insurance coverage, flexible work arrangements, and retirement contributions.