By Entrepreneur Staff


Compensation Definition:

In financial terms, the salary and wages you pay to your employees for the work they do. Other, nonfinancial forms of compensation can also be offered to attract and retain staff.

Ask any human resources consultant where financial compensation ranks in the hierarchy of employee requirements, and you're likely to get a range of answers. Some say it's the most important thing. Others declare wages are the only important thing. Still others say that while financial compensation isn't the most important thing, it's important enough that if your pay isn't fair, all the other employee benefits in the world may not be enough to keep employees on board.

Obviously, it's important to know whether you're paying enough and how to get the most for what you're paying. In addition, you have to know how to bolster the actual dollars you lay out in salary and wages with nonfinancial compensation.

You don't pay employees in a vacuum. That's another way of saying that the level of compensation that will attract and keep employees is set primarily by other employers. While there's no formula that will tell you the ideal salary for each position within your company, there are appropriate ranges. Some of the key sources for determining suitable salary ranges for your employees are:

  • Classified ad listings for specific positions, both in your daily newspaper and on the internet
  • Professional and trade organizations for the specific fields in which you're hiring. Most organizations regularly publish salary data.
  • Human resources consultants
  • Specialized recruiters in the appropriate fields

While no one can discount the importance of financial rewards, keep in mind that today's job candidates are more concerned with corporate environment and quality-of-life issues than ever before. In an executive survey conducted by Robert Half International, corporate culture rivaled employee benefits in importance for candidates during job interviews. Many small businesses use this trend as a competitive advantage, offering such nonfinancial perks as flexible work schedules, casual dress days, additional vacation time and telecommuting opportunities. The costs of this approach are minimal, particularly when compared to the value-added benefits of improved recruitment, productivity and retention.

Regardless of the monetary and nonmonetary ways you compensate your employees, creating an employee-friendly environment and determining competitive compensation ranges take time. Both require being flexible and adaptable to changing workplace trends and local conditions. The investment is worth it--the difference between a good company and a great company is its people.

More from Employee Benefits

Cafeteria Plan

An employee benefit arrangement allowed by IRS Code Section 125, under which employees are allowed to pay for certain employee benefits on a pre-tax rather than an after-tax basis.

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In financial terms, the salary and wages you pay to your employees for the work they do. Other, nonfinancial forms of compensation can also be offered to attract and retain staff.

See full definition


A product or service's customer-oriented strengths; statements of a valuable product or service feature, with an emphasis on what the customer gets from the products

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A monetary payment made to an employee over and above their standard salary or compensation package

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