Difference between compensation and benefits

Difference between compensation and benefits

Remuneration It is a term closely related to the labor market. When the supply of jobs is scarce in the market, better compensation can cover such a shortage. It contains both direct and indirect components. Compensation refers to the compensation a worker receives from his employer in exchange for the work and the contribution made to the organization.

On the contrary, the Benefits They involve the non-monetary reward that an employee earns as part of the employment relationship, in addition to the basic salary. It is also known as complementary benefits, hidden payroll, salary supplements, etc. Due to the relaxation in tax policies, most companies offer their employees the benefits.

When you want to know the actual CTC (cost for the company) of an employee, you should know the total compensation and benefits paid. In this article, you can find the difference between these two terms.

Comparative graph

Basis for comparisonCompensationBenefits
Sense Compensation connotes the total income received by employees, both as financial rewards and benefits. The benefits imply the non-financial rewards offered by the employer to the employee in exchange for the service provided by him.
Consideration Effective or kind In species
Nature Direct Indirect
Tax Fully taxable or partially exempt. Exempt or partially exempt
objective Attract and retain qualified personnel. Motivate employees to increase their performance.

Compensation Definition

Compensation can be defined as the monetary and non-monetary consideration received by an employee, from his employer, for the work done in the organization.

Compensation is divided into two parts, that is, direct and indirect payment, in which direct compensation represents financial compensation, including basic payment, lack of allowance, incentives, bonuses, overtime wages, commissions, etc. . On the other hand, indirect compensation includes benefits such as pensions, pension funds, health insurance, prerequisites, travel licenses, etc.

It plays a crucial role in attracting and retaining employees while complying with legal requirements. In addition, it is a reward system that motivates employees to raise their level of performance, which is based on a number of factors, such as salaries offered by other firms for similar roles, performance and productivity, qualification and employee skills, etc.

Definition of Benefits

Otherwise, they are called salary supplements, the benefits are the indirect and non-monetary compensation paid to an employee for the services provided to the organization. These are paid in addition to regular wages, which helps increase the economic security of employees. On the other hand, it also translates into worker retention.

It covers legal, non-statutory, welfare-oriented and social security benefits, such as free accommodation, car for personal use, food or subsidized food stamps, refreshments during working hours, club membership, domestic help (servants), laptops, family leave, life insurance, health insurance, educational subsidies, etc.

Key differences between compensation and benefits

The differences between compensation and benefits can be clearly established for the following reasons:

  1. Compensation is used to refer to the financial and non-financial reward paid to the employee for the services rendered by him / her to the organization. On the contrary, the benefits entail the non-monetary rewards offered to an employee as part of his salary package for his contribution to the organization.
  2. Compensation is a form of direct compensation, since it is related to employee performance. On the contrary, benefits are a part of indirect remuneration, which is offered as a condition for employment.
  3. While compensation is a payment in cash or in kind, the benefits are consideration in kind, provided by the services offered.
  4. Compensation elements are fully taxable or partially tax exempt. In contrast, the benefits offered by the employer to the employee are tax free or partially tax exempt.
  5. Compensation helps attract and retain qualified and talented personnel. On the contrary, the benefits induce employees to raise their level of performance, to take advantage of the best slots.


In the labor industry, labor benefits constitute about 20% of the total salary. An employer offers such strips to attract talented personnel, to induce a sense of commitment in the employees towards the company, to guarantee a better working environment and also to help create a good reputation in the market, etc.