Compensation

What compensation means in HR, what a compensation package includes and how to build a compensation strategy

Compensation

What is compensation?

In HR, compensation is everything an employee receives from the company in return for their work, both financial and non-financial, regular and one-off. It includes base salary, bonuses and incentives, as well as benefits such as health insurance or paid training. Together these elements make up the compensation package.

The aim of compensation is to attract and retain the right people, motivate them to deliver results and pay fairly compared with the market and colleagues. A broader concept that also includes the non-financial value of work is total rewards.

Types of compensation

Type	What it covers	Examples
Direct fixed	guaranteed pay for work	base salary, hourly rate, allowances
Direct variable	pay linked to results (variable pay)	bonuses, commission, incentive pay
Indirect	indirect compensation in the form of benefits and services	employee benefits: health insurance, pension, meals, training
Non-financial	value not expressed in money	recognition, flexible working, career development

Direct fixed and variable pay plus indirect compensation are usually added up as total compensation. This is the figure worth showing to candidates and employees, rather than base salary alone.

How to build a compensation strategy

Evaluate jobs. Job evaluation sets the relative value of each role in the company.
Compare with the market. Salary benchmarking shows what competitors pay for similar roles.
Set grades and bands. Give each level a salary band with a minimum, midpoint and maximum.
Define variable pay. Specify which results earn bonuses and how much.
Choose benefits. Pick the benefits your people actually value, not only those popular in the market.
Write a policy. Set rules for pay reviews, merit increases and the level of pay transparency.
Track metrics. Compa-ratio shows how an employee's pay compares with the band midpoint, and pay equity analysis reveals unexplained gaps.

Compensation and equal pay rules

Compensation decisions must comply with equal pay law. In the UK, the Equality Act 2010 gives men and women the right to equal pay for equal work, and employers with 250 or more staff must publish their gender pay gap every year. In the EU, the Pay Transparency Directive requires member states to bring in pay range disclosure for candidates and gender pay gap reporting, with national rules due by June 2026.

In PeopleForce Core HR, base salary, its change history and additional compensation such as bonuses and allowances are stored in each employee profile, and access rights control who can see them. HR and managers get a complete picture of the team's compensation in one place.