Compensation

Compensation is the combination of wages, benefits, and other payments that workers receive in exchange for their labor. It's also known as «wage and salary». Compensation can take many forms: cash payments, benefits such as health insurance or retirement plans, bonuses, and stock options, among others.

There are different types of compensation that can be offered to the employee. The most common form is salary. This is the amount of money that the worker receives as payment for their work, and is usually paid on a monthly basis. Other forms include bonuses and stock options:

• Bonuses are one-time payments made at the end of the year or quarter based on performance or other factors specific to each company's policies (e.g., meeting sales quotas).
• Stock options allow employees to buy shares in their employer's stock at a predetermined price per share over time periods ranging from three months to five years after they were granted them by their employers; this benefit allows employees who hold these securities through retirement age without incurring taxes until then because no income has yet been realized from those securities until they're sold at which point any gains above what was originally paid will be taxed as capital gains rather than ordinary income tax rates.

Compensation also includes benefits such as insurance coverage, retirement plans, and life insurance. These benefits are often referred to as fringe benefits because they extend beyond basic salary payments into areas such as health care or disability coverage.

There are also direct and indirect types of compensation for employees.

Direct compensation is the pay that workers receive directly from their employers. It includes wages, salaries, commissions, and bonuses. But it also encompasses benefits such as paid time off (vacation), insurance, and retirement plans.

Indirect compensation is the value of benefits and services that are not considered part of the employee's wages. Examples include health insurance, retirement plans, vacation time, sick leave, and more. Indirect compensation is not taxed by the employer or employee.

Nonemployee compensation is a payment made to a person who is not an employee. It may be paid to independent contractors, such as consultants, or directors and other officers of corporations. The IRS defines non-employees as those who do not have an employer-employee relationship with the company paying them (i.e., they are self-employed). The following types of payments are considered non-taxable:

• Commissions paid by brokers or agents representing taxpayers in selling their property on commission;
• Prizes won in contests open only to employees;
• Payments for performing services as an artist under certain conditions;
• Royalties from copyrights for books written by authors while employed by others.

Companies use compensation as a tool to help them achieve their business objectives:

• To attract high performers: Companies may offer higher salaries if an employee has skills that are hard to find in the market (e.g., software engineers).
• To retain employees: Companies might offer retention bonuses when an employee achieves certain milestones with them (e.g., number of years at the company).

Compensation is a system of rewards, incentives, and penalties designed to encourage people to work hard and achieve organizational goals. It can be used as an incentive for performance or as a way of sharing the profits of success among employees. In other words: the more you pay someone, the harder they'll work for your company — and vice versa.