What Is Compensation?

What is compensation?

Compensation is something of value—generally money and benefits—given to employees in exchange for the work that they do. But while some organizations refer to “total compensation,” which includes consideration of the value of benefits, compensation is generally used to refer to monetary payment. That payment may be made on an hourly, or salaried, basis and may include commissions, incentives, or tips. The basis on which employees are paid depends on how they are classified through the Federal Labor Standard Act as meeting requirements for salaried or hourly compensation.

Minimum wage

While employers generally establish levels of compensation for their employees, the compensation paid to frontline or entry-level employees is also impacted by federal, state and local minimum wage laws with significant pressure recently to increase minimum wages from the current federal minimum wage of $7.25 to $15.00. Some states have already done this. 

Beyond these minimum wage requirements employers evaluate jobs and consider compensation based on a range of factors. Most recognize the importance of ensuring fair salaries and often review market data to adjust compensation as appropriate.

The use of market data

Employers and their HR leaders determine compensation based on a number of factors including the role, educational and experience required, skill set required, location, and benchmarking or market pricing.

While in the past, employees often received pay increases based on seniority, today most organizations take a market-based approach to pay to ensure they are able to effectively compete for talent, according to a 2019 Survey of Salary Structure Policies and Practices from WorldatWork and Deloitte—“96% of organizations reported tying midpoints to the market median.” 

As they evaluate market data employers consider whether they want to lag, lead or match the competition. Those considerations often relate to both how valuable the role is .

Compensation is often considered an important, if not the most important, determination of employee satisfaction and engagement—and a primary driver behind employees’ decisions to accept a job and stay with an employer.

But, while important, and while compensation does need to be fair and equitable, compensation is not necessarily the most important consideration for employees in terms of job satisfaction and engagement. 

The value employees place on compensation

Research conducted in 2021 by Gartner during what has been characterized as the “great resignation” found that 68% of employees indicated that they would consider leaving their employer for another company that took a strong stand on societal and cultural issues.” Harvard Business Review predicts that “fairness and equity will be the defining issues for organizations.” 

That fairness and equity can extend to whether employees feel they are being paid a “fair” wage.

An important driver of employee satisfaction with compensation is the extent to which they feel their compensation is fair from both an internal and external perspective. Are they paid similarly to employees doing similar work? How does they pay stack up against people in similar positions at similar companies?

Compensation considerations are important for all organizations and are impacted by a range of factors from laws and regulations to market considerations and competition for skilled talent.