What Is Employee Compensation? - Definition & Concept

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  • 0:01 What Is Employee Compensation?
  • 0:51 Types of Compensation
  • 2:13 Cost to an Organization
  • 2:44 Lesson Summary
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Lesson Transcript
Instructor: Paul Mckinney

Paul has been in higher education for 17 years. He has a master's degree and is earning his PhD in Community College Leadership.

Employee compensation is the total amount an employee can expect to receive when working for an organization. There are many different types of compensation packages that an employer will offer employees.

What Is Employee Compensation?

Employee compensation refers to the benefits (cash, vacation, etc.) that an employee receives in exchange for the service they provide to their employer. Employee compensation is generally one of the largest costs or expenses for any organization. Approximately 92% of the working population in the United States is made of employees earning compensation from their employer. There are many different types of compensation paid to employees. The following are a few examples of the compensation paid to employees:

  • Cash compensation consisting of wages or salaries
  • Retirement plans (employer contributions)
  • Employer-paid health insurance
  • Life insurance
  • Paid leave for vacation and sick days
  • Disability insurance

Types of Compensation

Let's look closer at some of the types of compensation:

Wage Compensation

Of all the different types of compensation, wages are the most common and the reason why most people work. Wages are often called the total cash compensation paid to an employee. Most employees are paid an hourly or annual salary. Others are paid a variable rate that is based on the performance of the employee. A great example of this is a car salesperson. Their wages (or commission) are based on the number of cars they sell during each pay period.

Vacation and Sick Leave

After wages, the next most common type of compensation offered to employees is vacation and sick leave. Most employers allow their employees to earn this benefit. For example, some employers will award their employees vacation and sick leave at the end of each month they are employed. Generally speaking, a new employee can earn up to two weeks of vacation per year and one week of sick leave.

Minimum Wage

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