Leadership teams will attempt to offer more competitive compensation packages to candidates to attract top talent as their organizations scale. Developing plans for direct compensation, such as salary and wages, is a relatively straightforward process. However, selecting an approach to indirect compensation is a complex decision that requires extensive research of the organization’s employees, talent market, and industry standards.
What is indirect compensation? While direct compensation is a well-known and well-documented concept, indirect compensation is more difficult to define.
Job candidates could assume indirect compensation means healthcare benefits. Healthcare is a prime example of indirect compensation, but it is not the only form that employers can offer to candidates and current employees. Indirect compensation plans can differ from company to company and are often designed to fit the needs of the types of employees working within a given industry.
This blog will outline the forms of indirect compensation and answer another commonly asked question among business leaders: Why is indirect compensation important to recruiting and retaining employees?
What Is Indirect Compensation?
Employers and candidates can only consider some types of indirect compensation. To best explore these offerings and learn about the benefits of each one, it’s critical to first define indirect compensation.
Indirect compensation is any form of employee compensation that a third party manages or provides.
Healthcare plans are the most commonly recognized type of indirect compensation. A company may contribute to an employee’s healthcare plan but not directly offer healthcare services. Employees can seek healthcare services from doctors, hospitals, specialty practices, and other healthcare institutions within their company plans. The services and the plans are managed by a healthcare provider partner that supports employees’ health and well-being.
These forms of compensation will never come from the employer directly.
In contrast, forms of direct compensation include salary, hourly wages, merit pay, bonuses, and incentives such as profit share, stock options, commissions, and tips. Deferred pay benefits are also considered direct compensation items. This includes savings plans such as 401(k) plans as well as stock purchase plans and annuities. Companies often leverage these plans as employee retention tools.
Types of Indirect Compensation
A few indirect compensation items can be found in standard benefits packages. Common examples include healthcare plans, life insurance, stipends, tuition or student loan reimbursement, disability, and retirement plans. These plans vary drastically by organization, industry, and geographical market, yet they are a core compensation element many people prioritize when evaluating new work opportunities. Firms that can offer the most competitive packages often succeed in recruiting the highest-quality employees. Most companies closely monitor their market positioning and offerings, as these benefits plans can be costly.
Wellness and hygiene programs also fall under the indirect umbrella. Perks such as on-site gyms and fitness centers, membership plans for gyms local to employees, and access to athletic complexes are some of the most overlooked and underrated indirect compensation offerings. Some firms will develop or pay for access to beautiful fitness facilities to encourage their employees to embrace a healthy lifestyle.
Health screenings and programs, such as diet counseling, heart rate and blood pressure checkups, and medical personnel on-site to answer general personal health and lifestyle questions, are also forms of indirect compensation.
Financial wellness programs can also be considered a form of indirect compensation. A prime example of this kind of benefit would be access to financial advisors for free consultations.
Workplace Environment Benefits
Workplace environment benefits are another category within indirect compensation structures.
Remote or hybrid working environments allow employees to either permanently work from their residences or choose a few days to work from home each week. This benefit is a strategic decision by the company that cannot be considered a form of direct compensation because the firm is not providing anything to the employees directly.
Flexible hours are often included in remote or hybrid environments, but they are not 100% synonymous. Flexible work schedules are another form of compensation that allows employees with varying responsibilities to create customized work schedules that fit their lifestyles. Parents with younger children can schedule to work earlier or later in the day to ensure they have time to drop off and pick up their children to and from school. Graduate school students can adjust their schedules to make time for classes that may take place during otherwise inconvenient time slots throughout the week.
Permitting employees to commute during non-rush hour periods would also qualify as an indirect compensation item. Commuting benefits enable employees to avoid traffic and decrease their stress over time. Some employers may also cover the cost of public transportation to and from the office.
As opposed to the fixed traditional approach to time-off, new PTO plans are all-encompassing, meaning vacation days, floating holidays, sick days, and personal days are all included under one plan. These plans are typically more empowering for employees and easier to manage for employers. Sabbaticals are also considered a form of indirect compensation. They are not as common in the era of fixed or unlimited PTO plans, but they still greatly benefit tenured employees who may want to take an extended break from work to study or travel.
Read More: The Future of Flexible Work and Employee Retention
Indirect Compensation and Employee Retention
Implementing quality indirect compensation plans is important for retaining employees and ensuring job satisfaction.
Companies that enforce strict RTO (return-to-office) schedules will likely see lower retention rates than those that opt for flexible schedules or hybrid or remote workplace environments.
Employers that provide quality healthcare insurance and make sizeable contributions to the premiums will likely retain employees with health issues. Those without pressing health issues will likely also consider the risks of losing said access as they evaluate new opportunities. Employers offering poor or costly insurance plans may force employees out of the firm as they seek more practical solutions to their healthcare needs.
Many professionals will become parents in their younger years, requiring them to find daycare assistance programs for their children. The fees associated with these services can be expensive out of pocket. Firms with on-site daycare programs or daycare stipend programs will reap retention advantages over those without.
Great PTO programs will also incentivize employees to stay. A PTO scaling system in which employees are granted more vacation days the longer they remain at a company can also help, as switching to a fixed time-off schedule at a new firm is less desirable.
Educational programs are another type of indirect compensation that can increase retention. Candidates highly seek out companies that pay for certifications, skill training, and continuing professional education programs. Tuition reimbursement and student loan debt repayment programs are also in high demand.
Cash Payments
It’s important to note that you can distribute some indirect compensation through cash payments. These payments should support benefits programs or cover expenses arising from the job’s nature.
Examples of indirect compensation include:
- 401(k) match
- Healthcare contributions
- Meal stipends
- Company cars and vehicles
- Transit passes
- Daycare assistance stipends
Stipends and other forms of cash payments can often be misconstrued as direct compensation, but these examples are not forms of direct compensation as they are not funds provided by the employer in exchange for services from the employee. Cash payments can only be considered direct compensation if they are issued in exchange for employee services.
Strategizing Your Indirect Compensation Plans
Now that we’ve established what indirect compensation is and why it’s important for recruiting and retaining employees, you can begin to assess what to offer in your indirect compensation plans and how to update your existing structure.
Your organization’s indirect compensation plan provides insights into the mindset of your leadership team and your company culture. Candidates are more likely to consider an opportunity when a recruiting or hiring manager prioritizes indirect compensation talking points during an interview. Mentioning them at the beginning of calls or in-person meetings and detailing all of the employee advantages demonstrates an executive-level commitment to the development and betterment of the workforce. It can help condense the hiring process and make your organization stand out from the competition.
Many firms are unsure how to implement or update their indirect compensation plans. Businesses should leverage an experienced financial advisor to assist with the budgeting process and avoid unnecessary spending.
Some of the newer indirect compensation types are not applicable across industries. This can result in companies hesitating to update their existing plans.
This can be a huge mistake. Having an outdated indirect compensation plan says as much about your company’s leadership team as an excellent plan that includes all of the newest employee benefits. Remember – your plan is a reflection of your culture.
Read More: The Advantages of Hiring Through External Recruitment
Daley And Associates
At Daley And Associates, our team of experts partners with clients to identify the types of indirect compensation that resonate with their employees and candidates. We help clients develop encompassing indirect compensation packages that create advantages for employees through comprehensive competitor and industry research.
Interested in building indirect compensation plans to increase employee retention and help attract your industry’s top talent? Connect with a Daley And associates team member today!.
