How Indirect Compensation Makes You an Attractive Employer

Learn how indirect compensation, such as health insurance or childcare, can make it easier for you to attract and retain top talent at your company.

For a time, startups were able to draw talented job seekers just with their industry-changing ideas, open-concept offices, and sheer growth potential. But that’s not always the case anymore. 

Let’s face it. 

You’re still competing with large corporations for top talent. You may not be able to match every Fortune 500 salary offer out there. But you can start to level the rest of the hiring playing field by leveraging indirect compensation.

Let’s look at direct and indirect pay and see why you need both to create competitive compensation packages that help you attract and retain the best people.

Here’s what we’ll cover:

  • What Is Indirect Compensation?
  • Indirect Compensation vs. Direct Compensation
  • Indirect Compensation Examples
  • Benefits of Offering Indirect Compensation
  • Final Thoughts: How Indirect Compensation Makes You an Attractive Employer

What Is Indirect Compensation? 

Indirect compensation is the term used to describe any non-monetary pay you offer employees, such as insurance plans or retirement funds. It’s also referred to as employee benefits or fringe benefits. 

Offering indirect compensation on top of an employee’s salary can help you attract and retain top talent. You can also use employee benefits to improve job satisfaction, motivation, and productivity.

Before we get into examples of benefits, let’s look at how it compares to direct compensation.

Indirect Compensation vs. Direct Compensation 

Direct compensation refers to money that you pay employees in return for their time or results. Time-based compensation includes base salary, wages, overtime pay, and vested stock options. In contrast, performance-based pay refers to commissions, bonuses, and profit-sharing. 

Indirect compensation differs in two ways. First, it’s usually not monetary. Second, it doesn’t depend on hours worked or results achieved. 

For instance, sales associates don’t need to exceed their quotas to take advantage of benefits like an employee health insurance plan.

Together, direct and indirect pay make up total compensation, and both types are essential to most job seekers. If you want to be more competitive in hiring, here are some examples of indirect compensation to consider.

Types of compensation include direct and indirect.

Indirect Compensation Examples 

  • Health insurance: employer-sponsored coverage for medical, dental, and vision care
  • Life insurance: employer-sponsored life insurance plans.
  • Childcare: on-site facilities, subsidies, or discounts at outside childcare centers.
  • Flexible spend accounts (FSA) or health savings accounts (HSA): programs that allow employees to use pre-tax income to pay for qualifying uses such as insurance deductibles and copayments.
  • Paid time off (PTO): paid days off that employees can use for any reason.
  • Retirement benefits: savings plans that allow employees to deposit pre-tax income in a retirement fund.
  • Flexible work: the ability to work remotely. 
  • Professional development: skills-based training, support for continued education, mentorship network, or access to professional organizations.
  • Pension funds: an employer-sponsored plan that provides employees with retirement income.
  • Company technology: phones, laptops, or tablets provided to employees.
  • Company cars: vehicles paid for by employers for employee use.
  • Mental health days: the ability for employees to take time off from work for mental health reasons.

Indirect compensation examples include pay for time not worked, insurance, retirement, technology, and employee perks or services.‍

Benefits of Offering Indirect Compensation 

Money is important, but it’s not everything regarding hiring and retaining employees. The most competitive companies know that creating an indirect compensation plan is one of the best tools for hiring and retention.

Here are the main benefits you receive by offering non-financial compensation. 

Competitive Hiring Edge

If you’re an employer, indirect benefits are no longer a nice-to-have. They’re a must for anyone looking to hire qualified top talent.

PwC’s Future of Work Survey found that benefits are the number two reason employees look for new jobs. In other words, job seekers in the market aren’t just looking for salary increases. They are actively seeking companies that offer forms of indirect compensation.

After all, the same survey revealed that only 23% of executives listed benefits as a reason for employee turnover. That means there’s a gap in the job market when it comes to non-monetary compensation. 

Employers who put together competitive salary offers coupled with company perks can create an advantage in hiring. 

Better Employee Well-Being and Morale

Employee benefits have a direct relationship with morale. When the people you hire feel you support them in and out of the office, this can create a feeling of belonging and improve trust with leadership. 

Non-financial benefits are an excellent way to show that you care about employees and view them as human beings, not just cogs in a company machine. 

Not to mention, caring for your employees outside of work also benefits employers. 

Metlife’s U.S. Employee Benefits Trends Study found that holistically healthy employees are 74% more likely to feel satisfied with their current job, 59% more likely to feel more engaged, and 53% more likely to be more productive.

In particular, flexible work arrangements, such as the ability to work in-office or remotely, are connected with improved employee well-being. Employees with hybrid or flexible schedules are more likely to feel mentally healthy compared to people who work in-office or remotely full-time.

Lower Turnover Rates

A study revealed that the average turnover for organizations with no benefits plans is 157%. In short, ignoring indirect compensation can contribute to high turnover rates.

The good news is that the reverse is also true. Offering meaningful benefits plans can increase retention. The same study found that 72% of employees say that non-medical benefits customized to their needs would increase their loyalty to their present company.

In particular, long-term incentives such as retirement plans, childcare facilities, and career development opportunities encourage employees to stick around to receive the value. They can also signal to employees that your company can provide support during various life stages, such as starting a family.

Support for Inclusion and Diversity Efforts

Diversity, equity, and inclusion (DEI) in the workplace means that you demonstrate appreciation for employees from various backgrounds. It also means that the people you hire reflect the evolving demographics of the population. 

Indirect compensation is an excellent way to prove that you support DEI in the workplace because it's tangible. 

Non-monetary compensation can open up more work opportunities for individuals with different needs or priorities when choosing an employer. Examples of benefits that support diversity and inclusion efforts include flexible work schedules, healthcare plans, childcare, and fertility benefits

Final Thoughts: How Indirect Compensation Makes You a More Attractive Employer

Startups can be exciting and purposeful places to work. But, in a job market where you’re competing with large corporations or digital nomad lifestyles, you need to use every tool available to be more competitive in hiring. 

Indirect compensation represents significant opportunities for companies that want to attract top talent. Not to mention, non-monetary benefits can boost morale, improve productivity, and protect your company from high turnover rates. 

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