Employee Compensation

Employee Compensation Advice for SMEs

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Employee compensation is an important factor, especially for small and medium enterprises, to attract and retain talent. In a highly competitive environment, businesses adopt a host of strategies to prevent employees from leaving for other companies. To this end, employee compensation plays a crucial role.

Employee compensation is not limited to the base salary and wages paid to the employees in return for their services rendered to the company. The components of employee compensation include bonus payments, incentives, and other employee benefits in addition to the annual salary and hourly wages. The employee compensation package must be tailored to comply with the legal requirements of employee benefits while being competitive enough to attract and retain talent.

The major components of employee compensation that SMEs should take into account have been discussed here.

Direct Employee Compensation

Direct employee compensation is money paid directly to the employees. The 5 common types have been mentioned here.

Salary and Wage

The biggest share of direct employee compensation is naturally made up of the base salary and wages. The main point of comparison for employees between companies is the basic salary. To decide the salary for a particular position, the company needs to determine the value of the said position to the company’s operations. There is also a need to have a clear idea about the market rate for the same position. 

The salary should increase over a period of time in proportion to the employee’s skills, performance level, and value of contribution to the company. Stagnancy in the salary spurs talented employees to look for greener pastures.


Bonuses make up an important part of direct employee compensation. Bonus is a lump sum amount paid annually to high-performing employees. Bonuses are paid for achieving goals by individuals, teams, or the company as a whole. Goals leading to bonuses should be clearly defined, such as successful project completion, achieving milestones, profitability, or good annual performance.

The bonus amounts should be of significance for the employees. It is a cash reward for the employees to recognize their good work.


Profit-sharing is another kind of direct employee compensation. Under a profit-sharing arrangement, a fixed percentage of the profit earned by the company is paid to the employees. Profit-sharing invests the efforts of the employees even more in increasing profits. The profit-sharing bonus is paid annually, usually in the form of cash. 


Commissions are paid to employees in return for securing the sales of products or services. A certain pre-determined percentage of the sale value is paid to the employee as commission. Commission can be paid either as the extra amount in addition to the base salary or as a straight commission without base salary.

Commissions are usually paid on reaching a specific amount of sales revenue or unit sales. Sales professionals are the main kinds of employees receiving commissions. 


A stock option is often offered as direct employee compensation instead of a high base salary. Under this scheme, the stocks of the company are offered to the employees at a fixed price. The benefit for the employees is profit in the event of the company’s stocks rising in value due to good performance. The employees must avail of this scheme within a fixed time period.

Indirect Employee Compensation

Indirect employee compensation has a monetary value but is not given directly to the employees. These are long-term benefits for the employees. These are non-monetary benefits because they are not cash benefits. Some of the major types have been discussed here.

Health Insurance

Health insurance is a common indirect employee compensation provided by small, medium, and large enterprises. Health insurance protects the employees against the high cost of medical treatment. Even the employees with pre-existing diseases are covered under a single policy.

Other Insurance

Apart from health insurance, a company can offer many other types of insurance to its employees. The common types include life insurance, personal accident insurance, and disability insurance. 

Retirement Plans

Retirement plans provide a cash benefit to the employees but the deferred nature of such plans places them among indirect employee compensation. The employer usually contributes the same amount invested by the employees in the retirement fund. The money accumulated in the retirement funds ensures a steady income for the employees after retirement. 


More time off from work for vacations, personal work and bad health without salary cuts come among major indirect employee compensation. The trend is not to categorize off-days based on purpose. Companies that cannot offer high salaries and wages often provide more days off in a year to attract and retain talent.

Recreational Activities

Many types of recreational activities such as group contests, excursions to exotic places, sporting events, and more are organized by companies as part of indirect employee compensation. Recreational activities break the humdrum of daily life and prevent stress.

Training Programs

Training programs for the employees help them learn new skills and become more professionally competent. Since the company takes a direct interest in the professional development of its employees, this is indirect employee compensation.

Benefits of Employee Compensation

The major benefit of employee compensation is attracting a talented workforce to the company. Talented people know the worth of their skills and knowledge and look for the right salary packages and other benefits accordingly. A good direct and indirect employee compensation plan helps get such people on board.

Employees getting good pay and other benefits are not likely to leave the company. Thus, employee compensation ensures the loyalty of the employees. Since high loyalty translates into better employee retention and a low turnover rate, the company saves a lot of resources to recruit and train new candidates.

Happy and satisfied employees put in more effort to benefit the company. In other words, their productivity is high. Since they continue in the company for a long, they have become more efficient.


An enterprise should create a competitive employee compensation package based on its budget, workers’ skills, and future business growth.

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