With the growing numbers of regional, national and global businesses looking to recruit and retain employees, companies find it increasingly difficult to attract the best talent.
Through the years, the indirect compensation structure has provided companies with opportunities to compensate employees using alternative ways like bonuses, stock options, profit-sharing, or benefits such as quality, affordable health insurance, and other fringe benefits.
An indirect compensation structure aims to provide employees with incentives not tied to increased sales. In doing this, it increased individual incentive and company profitability through improved productivity and increased performance.
That’s why in this article, we will talk about the importance of indirect compensation and how it helps companies recruit and retain employees.
What is Indirect Compensation?
Indirect compensation refers to certain financial benefits to reward and motivate employees. These compensation types include bonuses, profit sharing, stock options, and other non-monetary benefits, which are usually not a part of direct financial compensation.
The main difference between indirect and direct compensation is that indirect compensation is not linked to the company’s revenue. While direct compensation is directly related to the company’s revenue.
After all, for an employee to get an incentive that is not tied directly to their company’s sales and profitability means the individual is more likely to take advantage of these benefits and derive a strong motivation from them.
Since indirect compensation improves morale, motivation, and engagement with your employees, that’s why many companies find it important to give their employees these kinds of benefits.
With this in mind, it becomes easier for companies to attract and retain employees, and with the right leadership culture in place, the employees will feel more motivated to perform well.
What Are The Types of Indirect Compensation?
Following are some indirect compensation examples that companies use:
Health insurance
Legally obligated health insurance plans can provide the employee with financial benefits to cover their medical expenses.
Some companies offer their employees a health plan with a pre-determined compensation package of benefits for additional incentives. This gives them the option to choose the most beneficial package for their own needs.
Life insurance
Life insurance is an effective indirect compensation option that provides employees with financial support at the time of their death. It is a financial benefit that many employees benefit from and helps them build a more comfortable retirement.
Cash bonuses
Cash bonuses are indirect financial compensation given to employees for exceptional performance or for overcoming challenges in the workplace. These benefits are obtained as part of an indirect compensation structure, which helps boost the morale of employees, attract and retain them.
Partnership grants and stock options
Companies may choose to give employees options on the stock of their own company. This is done in order to help motivate employees and build up a strong shareholder’s culture within the company. This can also encourage employees to remain with the company longer, because they now have an incentive to remain loyal and inside the organization.
Educational benefits and tuition reimbursement
Educational benefits and tuition reimbursements are important indirect compensation options that allow companies to reward employees for performing well or overcoming challenges in the workplace. This is very important because it helps them retain employees.
Housing benefits and relocation assistance programs
Many companies operate in a global environment, which can involve working with employees from different parts of the world. So, to keep their talent base intact, it is also important to provide housing options that enable employees to relocate with ease. These benefits are used as part of an indirect compensation structure that helps employees connect with the company.
Do you want to boost your employee retention?
Why is Indirect Compensation Important?
Here are some of the benefits companies get from implementing an indirect compensation structure.
Employee retention and recruitment
One of the biggest challenges businesses face is getting new talent to join the company. Sometimes companies use recruiting software functionality to smoothly organize the hiring process of the new talents, but it is not only about that. Research has shown that one of the biggest impacts on employee motivation is how well they’re compensated and incentivized.
This is why companies should look at ways to align the employee’s incentives with their corporate financial benefits. By doing this, employees are more likely to feel motivated and take advantage of the monetary rewards without exchanging their competitive nature or spending a lot of time on marketing and advertising. In doing so, companies have greater control over employee performance and can increase their productivity.
Reduced recruitment costs
One of the biggest costs that companies face is recruiting new talent. As a result, they often tend to focus on advertising, travel, and other administrative costs. The advent of indirect compensation structures has helped businesses save a lot on these costs.
The fact that this compensation is not tied directly to sales results means new employees will be more likely to take advantage of it if they see it as beneficial. In doing so, companies save a lot on their recruitment and training expenses by not spending them on marketing and advertising.
Increase loyalty
Generally, employees are loyal to their employers because of their benefits. Suppose a company rewards them with extra monetary compensation for doing their job well. That case shows that it cares about the quality of work and is committed to providing its employees with good working conditions. Such initiatives will encourage workers to be loyal and value the organization’s brand.
Promote productivity
When employees do not feel motivated, they are more likely to slack off. This can often result in them being bored and becoming disengaged, which is a productivity killer. Companies have greater control over employee performance by implementing an indirect compensation structure and aligning employees’ incentives with company objectives. This will also promote high levels of engagement which is vital to increasing the productivity of their staff.
Increase profitability
As we have seen above, companies are more likely to have increased profitability in times of increased productivity and loyalty. This can be attributed to the fact that operational expenses such as recruitment, training, benefits, and other operational costs are significantly less when using indirect compensation methods. This makes companies more competitive and able to compete against those that do not have these incentives in place.
Now is the time to implement indirect compensation and improve your recruitment and employee retention.
How can indirect compensation help in recruiting employees?
Now that we know all the advantages of indirect compensation let us look at ways in which they can be useful to companies when recruiting employees.
Attract the right talent
Companies are often put in an awkward position when recruiting new talent. They have to consider the costs of hiring and training new employees while becoming aware of the benefits they can provide to their prospective employees. Whether they choose to do this face-to-face or online, they will need to spend some assets for integrating clear processes through SOPs (Standard Operating Procedures), preparing questions and case studies beforehand, investing in online meeting apps and more. This can be a conundrum, but the use of indirect compensation can help in resolving it.
Validate the compromise
Companies often do not have the budget to offer their potential employees the full package that they would expect from a new organization. Because of this, it becomes difficult for them to tell whether they are making a good decision by offering less than what they originally proposed. The use of indirect employee compensation can help companies make sure that their new hires see the value of their package.
Save time
Companies who use indirect compensation in recruitment will find it convenient when looking for new talent to come up with a fair salary structure and a bonus scheme aligned with the company’s objectives. This ensures that they are attracting people who can perform well and provide value as soon as possible, which every organization strives for.
How Can Indirect Compensation Help in Retaining Employees?
Many enterprises make the mistake of rewarding their existing employees only if they remain within the company. Many believe that this is a way to retain employees. However, research has shown that this is not always true.
Former employees often see their compensation diminished by the time they leave a company because of the “reward” structure of the organization, especially if certain elements are implemented in their compensation plan.
Suppose a person’s compensation plan is not aligned with his or her job responsibilities. In that case, it will become difficult for them to remain motivated and loyal because of dissatisfaction with their compensation levels.
So instead of implementing a compensation plan that doesn’t meet the needs of their employees, businesses should design one that is aligned with their new hire’s job responsibilities. If you want to experience true team extension and retention, you want to tailor your company’s benefits to employees and not have a one-size fit all kind of approach.
When employers create an aligned plan and use it effectively to retain employees, they will maintain loyal and motivated employees who feel compensated fairly. Then performance will be sustained as well as the profitability of the organization.
Final Words on Why Indirect Compensation is Important to Recruiting And Retaining Employees
When it comes to recruitment, stand out from the crowd and offer something different. To do just that, you can utilize full cycle recruiting to find the right candidates and once you found them, do not hesitate to offer indirect compensation. It tends to be really appreciated.
At last, indirect compensation is crucial for the company because it has extra valuables. It both benefits the human being and also benefits the company itself. So, if indirect compensation is used in pay rises, bonus potential, or perks, employees may feel more motivated to stay in their jobs. Note that supporting employees beyond benefits by taking care of their mental health can go a long way. It will help them be more engaged and productive.
After reading this article, we hope that you now have a better understanding of what indirect compensation is, why it is important to companies, and how it can benefit their employees (directly or indirectly).
Growth Hackers is an award-winning digital marketing and growth hacking agency helping businesses from all over the world grow. There is no fluff with Growth Hackers. We help entrepreneurs and business owners improve their businesses’s recruiting strategy as well as helping them generate qualified leads, optimize their conversion rate, analyze data analytics, acquire and retain users and increase sales. We go further than brand awareness and exposure. We make sure that the strategies we implement move the needle so your business grow, strive and succeed. If you too want your business to reach new heights, contact Growth Hackers today so we can discuss about your brand and create a custom growth plan for you. You’re just one click away to skyrocket your business.
