Chapter 3

Different types of compensation

When discussing compensation, people often refer to the money paid in return for completed  work. However, it is much more than an employee’s salary or a contractor’s fee.


Compensation typically falls under one of four possible categories, the specifics of which vary by country:
  • Direct compensation
  • Indirect compensation
  • Non-financial compensation
  • Incentive-based compensation
In addition to looking at the different pay strategies available to you, you may also consider implementing these different types of compensation for your remote work compensation policy, as part of a comprehensive total rewards strategy.

Direct compensation

Direct compensation, also known as a wage, salary, or contractor’s fee, refers to base pay and/or variable pay. Base pay is money paid regularly (e.g., hourly, weekly, monthly, or annually) as compensation for work completed; the amount is often set and doesn’t change. Variable pay, on the other hand, does change, typically based on employee performance.

Indirect compensation

Indirect compensation, also called benefits, refers to non-monetary compensation that comes with the position. These are often legally mandated, so they vary from country to country. In the US, this can include employer contributions to a 401(k) retirement plan, health and dental insurance, paid time off (PTO), paid leave, parental benefits, and the like. Some companies may also offer stock options and profit-sharing, although these are often tied to a worker’s tenure.
Do you think your company's remote pay strategy is transparent enough?

Non-financial compensation

When it comes to compensation, money is a motivating factor, but not the only factor – or even the most important factor. According to a 2021 State of Remote Work survey reported by USA Today, “Nearly 50% of workers in the U.S. say they would take up to a 5% pay cut to continue to work remotely at least part-time post-pandemic.” In other words, non-financial compensation – also called perks – often impacts a prospective worker’s desire to join a company (and an existing worker’s propensity to stay). Non-financial compensation involves things such as remote or hybrid work options, flexible hours, personal development budget, use of a company car, allowance for coworking space, etc.

Incentive-based compensation

Some companies offer their workers bonuses for a job well done, which means incentive-based compensation related to performance (i.e., the achievement of a specific goal) rather than hours worked. For example, a company may award bonuses or commissions to whomever hits a particularly high sales target in Q4.
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How to pay remote workers
Learn about each type of remote pay strategy and their pros and cons, with insights and recommendations from remote work experts.
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