4 Fundamental Differences Between Employee Compensation and Benefits
Published October 5, 2022.
Even though employee compensation and benefits are often used in conjunction, the truth is that they're quite different, both in purpose and functionality. Understanding the difference between employee compensation and benefits is incredibly important—both for the employee and the employer.
Despite their differences, employee compensation and benefits have one big thing in common—they're both part of the payroll process. So, a business's payroll compliance doesn't just mean calculating salaries correctly, but also consists of properly evaluating and reporting benefits. This is precisely why knowing the correct information regarding employee compensation and benefits is crucial, as all businesses are legally obligated to run payroll.
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What Is Employee Compensation?
Employee compensation is anything that an employee receives in exchange for their work. This can include wages, salary, bonuses, and commissions. However, it does not include things like vacation days or sick days—those are employee benefits.
The essential purpose of employee compensation is to help attract new and competent employees. After all, if employees aren't properly compensated for their work, they're likely to look for other opportunities—and businesses need to avoid that if they want to succeed.
There are a few different types of employee compensation, which are highlighted below.
Wages are the hourly pay that employees receive for their work. For example, if an employee is paid $15 per hour, their wage is $15.
A salary is a set amount of money that an employee receives for their work, and it's not based on the number of hours they work. For example, an employee with a $50,000 yearly salary would receive exactly $50,000 regardless of how many hours they worked.
A bonus is a monetary reward that an employee receives for their work, typically given out based on performance. For example, if an employee meets or exceeds their sales targets, they may receive a bonus. To properly administer bonuses, you must track workers' compensation and have a clear overview of their work history.
Just like a bonus, a commission is also a reward that an employee receives for their work, but it's typically given out based on results. In some companies, if an employee sells a product or service to a new client, they will receive a certain percentage of the sale as commission.
What Are Employee Benefits?
Employee benefits are anything that an employee receives in addition to their salary or wages. This can include health insurance, dental insurance, 401(k) plans, paid time off, and vacation.
The primary purpose of employee benefits is to retain employees by increasing their satisfaction with the company. Most employees would appreciate it if their employer offered them health insurance, for example, in addition to just a salary. So, by offering employee benefits, employers can keep their employees happy and reduce turnover.
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4 Fundamental Differences
Here are four of the most important differences between employee compensation and benefits:
The first big difference between employee compensation and benefits is how they're taxed. Employee compensation is subject to federal income tax, social security tax, and Medicare tax, while employee benefits are generally not subject to these taxes. This taxation difference is important to keep in mind, as it can impact your business' performance.
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2. Nature of Payment
Employee compensation and benefits also differ in the nature of the payment. Employee compensation is purely monetary—i.e., the employee knows how much they will receive after they get the job done and have appropriate expectations. But benefits bring more than monetary value, as they improve the employee's perception of the company they're working for.
Not all employees are eligible for all benefits, but all employees are eligible for compensation.
Usually, this eligibility depends on the type of benefit, the length of employment, and the employee's performance. Employees don't have much choice when it comes to choosing their compensation, as they can't determine their own salary. But they have some choice regarding the benefits they'll receive.
Employee compensation is typically administered by the employer, while employee benefits are typically administered by a third party which the employer pays. Administration is also an important aspect because it can impact how much time and money your business spends on each.
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Employee compensation and benefits are the two most important pieces of the puzzle when it comes to attracting new employees and retaining the old ones. While they share some similarities, there are also some fundamental differences between them—namely, taxation, eligibility, and administration.
As a business owner, it's important to keep these differences in mind as you develop your business's employee compensation and benefits programs since they can impact the way your business manages payroll as well as its functionality.