Direct, Indirect & Non-Financial Compensation Strategies

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  • 0:01 Components of Compensation
  • 0:42 Direct Financial Compensation
  • 1:28 Indirect Financial…
  • 3:43 Non-Financial Compensation
  • 5:15 Strategy Considerations
  • 6:36 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

Most organizations can't get people to work for free. In this lesson, you'll learn how businesses and other organizations can use direct, indirect and non-financial compensation strategies to acquire and keep talent. A short quiz follows.

Components of Compensation

Anne is the vice president of human resources for a mid-sized manufacturing firm. Anne's company has a problem. A new factory has come to town and has been stealing away good employees. After conducting a sufficient number of exit interviews with employees going over to the new factory, Anne concludes that the company's current compensation package is no longer competitive and needs to be updated if the company wants to keep its best employees.

Employees at Anne's company are compensated through a mix of direct financial compensation, indirect financial compensation and non-financial compensation. Let's take a look at each of these types of compensation and how Anne can use each to keep and retain employees.

Direct Financial Compensation

The most well-recognized form of compensation, and probably the first type of compensation sought by most workers, is direct compensation. Direct compensation is the money directly paid to employees in exchange for their labor. Direct compensation includes wages, salaries, bonuses, tips and commissions.

One of the easiest ways for Anne to sweeten the pot to induce employees to stay with the company is to increase direct financial compensation. This may mean increased hourly wages or salaries. Alternatively, she may opt to increase variable pay, which is pay that has to be earned by performing to some standard. For example, she may offer performance pay for each employee that meets his or her quarterly performance goals.

Indirect Financial Compensation

Another tool available to Anne is indirect financial compensation. Indirect financial compensation is a benefit given to an employee that has financial value, but is not a direct monetary payment. It is often referred to as a non-cash benefit. In certain circumstances, these non-cash benefits may be more valuable to an employee than a high salary or wage. Let's take a quick look at some examples.

Group medical insurance coverage is often a coveted benefit. Employer-sponsored medical insurance may be the only way an employee with a sick spouse can afford health insurance and offers quite an inducement to come aboard and stay with the company. Anne can examine the company's current group plan and make sure it's up to par and perhaps beat what the other factory is offering. Supplementing group medical with group dental coverage, short-term and long-term disability insurance, and life insurance can provide employees with a sense of security for themselves and their families.

Retirement plans can also offer an attractive incentive. If a company offers a defined benefit plan, it's promising to pay a certain amount of retirement benefits to an employee upon the employee's retirement. You can think of it like a private-sector social security payment - a set amount each month for life.

On the other hand, if the company offers a defined contribution plan, such as a 401(k) plan, it will contribute a certain amount of money each year to the employee's individual retirement account. Offering a generous matching contribution to the employee's contributions to the plan can offer a great incentive. Most people don't want to work until they die, so Anne will want to make sure her company's retirement plan is competitive with other companies in the area.

Stock options and profit sharing programs are not only an incentive for employees to stay but also provide an incentive for employees to be more productive because employees share in the gains. An employee stock option is the right to buy company stock at a certain price during a certain period of time.

Anne can also extend the company's employee services. These are services that employees receive from the company, such as counseling, legal referral, career planning, wellness plans and fitness club memberships.

Non-Financial Compensation

Anne can also try to improve the company's non-financial compensation that it offers to employees. Non-financial compensation doesn't have any monetary value; instead, it involves the satisfaction that an employee receives from his work environment. This satisfaction can be emotional and psychological. Let's look at some examples.

Anne can try to make her employees' jobs more enjoyable and satisfying. Anne's company can do this by creating job duties that have variety and hold significance to employees. She can allow employees more autonomy and provide prompt and constructive feedback to them.

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