Why Is Indirect Compensation Important to Recruiting and Retaining Employees?

The primary reason people work is to earn a paycheck. However, a paycheck is just one part of an employee’s remuneration package, including direct and indirect compensation. While paychecks fall under direct compensation, several other factors influence employees to choose one organization over another.

Let us explore why indirect compensation is important to recruiting and retaining employees. We will also learn some creative ways to attract and retain top talent.

 

What is Indirect Compensation?

 

Any benefit the employee receives in addition to the salary or monetary compensation as part of the employment contract is indirect compensation. This compensation is popularly known by many terms, such as “perks,” “employee benefits,” or “additional benefits.”

Indirect compensation is different from the payroll for a designated employee. While most companies offer more or less the same pay packages, their indirect compensatory benefits are often the deciding factors that help employees choose their workplace.

Some common forms of Indirect Compensation include:

1. Healthcare benefits
2. Recreational spaces in offices
3. Membership to fitness centers
4. Partnerships with childcare centers
5. Insurance policies
6. Car leases or carpooling policies
7. Flexible working arrangements
8. Free or discounted lunches

And the list goes on. In fact, the number of options given as indirect compensation has been adapting and increasing over the years, especially after the COVID-19 pandemic. Options like working from home are benefits employees actively seek when switching to a new company.

How do employees determine the balance of direct vs indirect benefits and evaluate their choice? Let us see.

 

Direct vs. Indirect Compensation: What’s the Difference?

Direct Compensation refers to the employee’s gross pay on an annual basis, otherwise known as the salary. Most companies set standards or fix the salary ranges of employees based on their skill sets.

As a result, the salaries for most employees across competitor companies in a given designation for certain skill sets are roughly the same.

However, some companies become more preferable workplaces due to the quality and quantity of indirect benefits they offer. For instance, an employee who applies for the same role in two companies receives almost the same payroll compensation in both places.

However, Company 1 provides them with a full-time remote and occasionally hybrid work option, while Company 2 mandates working 4 days a week from the office. If the employee prefers working from home to working from the office, their natural choice will be to choose Company 1. This case is just an assumption, as work flexibility is just one of the indirect benefits.

In real-time, employees evaluate their company choices based on the number of indirect compensation entities and their long-term benefits.

Let’s look at some stark differences between the compensation options employers provide.

Importance of Indirect Compensation in the Workplace

   

A recent study shows that employees look for indirect benefits development and training opportunities, and organizational engagement initiatives before their incentives and compensation.

The worldwide trend after the COVID-19 pandemic has been offering the ability to work from home, flexible, or hybrid working options. Companies that provide such benefits are now becoming hotspots, while those not adapting to this trend are seeing huge spikes in employee turnover.

Here are some reasons why indirect compensation is important for recruiting and retaining employees:

1. Reduces employee turnover: Every company is ready to pay the right compensation for the best talent. But, losing a great employee can cost the company a lot. Monetary adjustments in compensation are not the only solution to prevent turnovers. However, implementing an initiative desired by several employees anticipating leaving can prevent a massive turnover.
2. Attracts fresh recruits: Benefits like work flexibility, fixed work hours, in-house fitness facilities, recreational areas, engagement initiatives, and more are some ways to attract the best talent from your peer companies who are looking for a better purpose in the workplace.
3. Cheaper than frequent recruitment costs: Providing indirect compensation may require more financial input from the organization. However, if you compare it to the costs of hiring employees who do not remain for a long term, the costs are very reasonable.
4. Improves overall productivity: More than their paychecks, employees cling to a job because of useful company benefits. Benefits like hybrid working, centrally located offices, better health insurance, and more set up a more favorable work package overall, thereby improving the quality of their work.

 

Types of Indirect Compensation That Drive Recruitment and Retention

   

Employees require constant motivation to perform consistently at their workplace. While monetary incentives are undoubtedly a prime driver to work, they are not sufficient to keep employees motivated all the time. Sources of motivation can vary depending on the work pressure and situations of the employees.

For these reasons, companies can devise indirect compensation strategies to attract new talent and motivate existing employees to stay and do their best work for the company.

Here are some common ways companies provide additional or indirect benefits to give employees a good reason to work.

 

Health and Wellness Benefits

Companies that value their employees will definitely ensure that they remain healthy while working for them. From physical fitness to overall mental well-being, companies must develop a good mix of health programs that employees can benefit from.

• Annual health check-ups
• Comprehensive health insurance policies
• In-house medical assistance or doctor visits
• Mental health helplines and in-house psychological assistance
• Gym at the office or membership discounts for offsite gyms
• Weekly wind-down activities and group outings
• Promoting ergonomic work aesthetics

The above are just some ways in which companies can ensure they prioritize the health of their employees, regardless of salary. Such health benefits are often the deciding factors for many employees when choosing or switching companies.

 

Retirement Plans

Ideally, all companies follow the labor laws of their country and state of operation. Most labor laws state clear rules for employees maintaining their retirement accounts.

In addition to this pension amount that employees will have access to upon retirement, companies can devise helpful plans that help employees worry less about retirement. Employees can even retire early during emergencies and be financially stable.

For instance, companies can help employees connect with financial advisors to learn how to invest their income, earn passive income, and more. This information and expertise can help employees be clearer about their retirement horizon and how they must contribute to their workplace to achieve their goals.

Some workplaces also allow employees to continue working post-retirement. They can be advisors, board members, or trainers to help existing employees with their experience. Smooth hand-offs, mental health counseling before retirement, and more are some ways to ensure retiring employees do not leave with a heavy heart.

 

Paid Time Off (PTO) and Work-Life Balance

A workplace preference survey shows that nearly 77% of employees are happy with the flexibility of working from home. After the COVID-19 outbreak, much employee turnover was due to a lack of work-from-home flexibility, which was seen as more productive!

It’s not surprising that employees prefer companies that offer such indirect benefits, like a flexible work schedule, to balance their work and personal lives. Similarly, companies offering extended periods of paid childcare leave or appropriate compensation see fewer turnovers among new parents.

Several companies are now encouraging employees to utilize their paid leaves rather than saving them for cashing out later. Holiday vouchers, resort partnerships, and more are helping companies let their employees unwind and rejuvenate before they get back to work.

Most companies are also using engagement initiatives, such as offering paid time off, letting employees have a team lunch at a cafe, coming up with fun activities for team bonding, and so on.

 

Professional Development Opportunities

Employees often reach a crossroads in their careers, where they find themselves stuck and unable to progress further. At such times, employees must “upskill” themselves to decide how to progress. Some make an impulsive decision to quit their current job, leading to a loss for their company.

To prevent such turnover events, companies must develop comprehensive Learning and Development (L&D) programs. These programs include workshops, training sessions, skill building, and more, both online and offline.

Companies can also partner with local universities to offer remote learning programs that employees can take while balancing their work goals. These opportunities help employees stay engaged during dry periods at work.

Companies can reimburse employees for payments made when they take paid online courses relevant to their work. Such indirect benefits show that the company values the employee's overall growth and work contributions.

 

Employee Recognition and Rewards

Recognition and rewards are factors that fall into several categories of employee retention. They are part of employee engagement and motivation and are also an integral indirect benefit provided by the company.

Employees look for the variety of options available when they receive rewards. Apart from just focusing on bonuses and incentives, companies can let employees choose their rewards. From cash to coupons, gift cards, and more, several companies are now using employee engagement platforms to facilitate a holistic rewards program.

Also, speeding up the rewards and recognition process is beneficial. Rather than providing the bonus/incentive every year, a mid-year award helps boost employee morale.

Furthermore, regular recognition at the team, group, and company levels helps employees feel they are valuable assets to the company.

 

Workplace Perks and Culture

Workplace perks and policies are among the deciding factors that help employees choose companies that offer equal pay packages and the other indirect benefits discussed above.

Employees are trying to find more concrete reasons to come to the office besides their work purpose. For instance, since the time spent at the office must be productive, employees wish to hold long meetings remotely rather than in the office.

Employees increasingly prefer workplaces that provide free lunches, a variety of cafeteria options, easily accessible pantries, accessible office spaces, sustainable practices, and more.

Flexible work or remote working facilities to maintain work-life balance are important benefits that many employees seek nowadays. Employees also look for companies that have an inclusive culture without bias toward particular ethnic or religious groups.

 

Best Practices for Creating an Effective Indirect Compensation Strategy

 

So far, we have seen that indirect benefits are crucial when disclosing the offer package when recruiting an employee. But how does a company know what indirect benefits are preferable?

How can companies create a good mix of indirect compensation benefits that sets them apart from their competitors? Let us see some strategies to learn more.

 

Understanding Employee Needs Through Surveys and Feedback

A questionnaire or a feedback survey from existing employees can help companies decide what makes employees feel happy and purposeful at work. Such surveys can also be anonymous, allowing employees to voice their concerns without fear.

Companies must conduct exit interviews with employees who choose to leave to understand how the company can improve or meet requirements that allow them to continue working here.

 

Offering a Mix of Monetary and Non-Monetary Perks

A good balance of direct and indirect benefits can help companies convince employees to choose them over their competitors. For instance, if companies find it difficult to offer a mid-year bonus, they can compensate it with reward options with an extended validity period. Such options can prevent sudden cash crunches for an organization.

Similarly, companies must study their competitors and what they offer as part of the payroll for a given job role. In addition to designing meaningful job roles, companies must spend enough time detailing the payroll package with meaningful employee benefits.

 

Ensuring Transparency and Communication About Benefits

Introducing new benefits must benefit all or a majority of an organization's employees. That is why it is essential to have open discussions and surveys where employees voice their suggestions and opinions to management. Companies can use an organization-wide intranet to facilitate such healthy discussions.

Similarly, team leaders must frequently meet with their teams to discuss the effectiveness of indirect benefits to their team members. Such sessions help leaders better understand concerns and provide valuable suggestions to management.

 

Periodic Evaluation and Updates to Benefits Programs

Any indirect benefits must be updated periodically based on employee suggestions and local labor laws. For instance, if the government mandates six months of paid maternity leave, the company must follow it. Additionally, based on employee feedback, the company can set rules for leave extensions and childcare.

Companies must not hesitate to update their existing programs to be ahead of their competitors. For example, lunch vendors accepting cards must be updated with the latest card offers, transactional discounts, digital payments, and more. Integrating their benefits program with engagement software helps companies monitor the quality and impact of indirect benefits on employees.

 

Conclusion

   

When joining the company for a designated job role, an employee is offered a package. Along with the payroll component, this package contains indirect compensation benefits that are important for recruiting and retaining employees.

The indirect benefits include healthcare benefits, work-life balance initiatives, workplace engagement strategies, recognition, and incentives. Finding out what benefits employees seek from companies can be a challenge for companies.

Revaluate180 helps businesses tackle this challenge by offering data-driven insights and consultative support to identify and address employee needs. With Revaluate180, you can improve employee engagement, reduce turnover, and create a workplace where employees thrive.

Contact us to learn how your company can benefit from our programs to attract and retain top talent.