Q&A: What Are Compensation And Benefits? (Plus Importance)

Updated 8 September 2023

Competitive compensation and benefits help employers attract qualified and quality candidates for vacant positions. Besides the basic health coverage, employers offer a variety of other perks and benefits like provident funds, leave travel allowance and bonuses, to name a few. Having an understanding of various compensation and benefits offered by a company can help a candidate understand whether to accept a position or look for other employment opportunities. In this article, we answer discuss compensation and benefits, explore various components of benefits and compensation and discover the importance of a compensation package.

What Are Compensation And Benefits?

The answer to "What are compensation and benefits?" is that these terms refer to the payment of monetary benefits a company provides to its employees for their service or labour. The most common form of compensation are wages, tips and salaries. Often managers work with the human resource department to raise the salaries of employees based on their supply and demand, competitive analysis, labour negotiation and cost of living in a particular area.

Benefits cover indirect pay an employee receives besides their compensation. It can include stock options, health insurance, retirement benefits, life insurance or maternity/paternity leaves. Many organisations offer a competitive package to keep and attract top talent. Smaller companies may offer fewer benefits. Usually, a government organisation offers many benefits compared to a private organisation.

Related: What Is Compensation? A Complete Guide

What Are The Components Of Compensation?

Apart from benefits, some common components of compensation are:


In a compensation package, salary is the most significant component and companies use salary to compare employees to a job role. The salary depends upon the employee's skills, experience and qualifications. Based on the employee's performance and value to an organisation, their salary increases. Whenever an employee receives a promotion, they usually see an increase in their salary.

Related: What Is Variable Pay And Why Do Employers Offer It?


Bonus is a compensation organisation provides to all employees that complement their base pay or salary. While many companies offer bonuses in cash, it can take any form provided it offer value to the employee. In most cases, companies link bonuses to the performance of an employee. This means that an employee receives a bonus from the employer on reaching their goal. Usually, companies pay a bonus at the end of every calendar year as a fixed percentage of an employee's salary. At the end of every year, companies may give out a lump sum amount as a bonus.

Related: What Is A Bonus? Definition And Types

Provident fund

Provident funds are retirement saving plans run by the government or private trust. An employer contributes a fixed percentage of an employee's salary in the PF. An employee contributes the same amount to their PF, though they may contribute more. A government agency or a fund manages the PF and provides an interest rate for the entire PF amount.

What Are Some Important Benefits A Company Offers?

A company offers many types of benefits. While some benefits are optional, others are necessary because of government rules and regulations. Some common benefits a company offers are:

Health and medical insurance

Health and medical insurance are benefits that a company provides to employees, irrespective of their salary or job role. When an employer pays for the health insurance, it financially helps an employer. Apart from covering the employees, a company provides a health insurance program to an employee's family members like spouse, children or parents.

Related: Indirect Compensation: Definition, Benefits And Importance


According to the Payment of Gratuity Act of 1972, a company has to provide gratuity to all employees who rendered continuous service for not less than five years. The company calculates the gratuity based on employees' 15 days' wages multiplied by the years of service an organisation completes. Both public and private sector companies offer a gratuity to all employees.

Holiday and annual leave

Organisations provide mandatory government holidays and leaves. Based on the state where employees work, the employer needs to provide holidays declared by the state government. Employees who work during these holidays receive twice the wages or a compensatory off day. Besides annual leaves, a female employee receives paid maternity leaves of 26 weeks.

Sick leaves

Many organisations provide sick leave or medical leave every month. A company provides these leaves based on sickness or in case of accidents. After availing a sickness leave of more than two to three days, many organisations request a medical certificate from the employee. This prevents misuse of sick leave.

Encashment benefits

The encashment benefit allows employees to cash the leaves they did not take in a calendar year. An employee cannot cash their sick leaves or maternity leaves. The leaves eligible for encashment vary from organisation to organisation.

Paid training and development

Many organisations pay their employees for attending training sessions that help in their professional development. Such companies allow their employees to attend development training and workshops without reducing their leaves. Also, an employer provides induction training to new hires and an employer pays for that training.

Travel expenses and leave travel allowance (LTA)

Many organisations employ executives who frequently travel to complete business assignments. In such cases, an employer covers the cost of travel, spending and lodging. To retain employees, many companies offer a leave travel allowance. LTA is an exemption of allowance an employee receives from the employer when travelling on leave.

Company transportation

Many companies provide vehicles for employees to use. Usually, companies in the construction and IT industries offer this benefit to their employees. Using a company's vehicle, these employees complete their job-related duties.

Investment opportunities

Many organisations and corporate businesses offer ways for employees to invest in a share, stock and profit growing opportunities. Getting shares of the company where an employee works provides an ownership feeling. As employees receive yearly dividends for their investment, it motivates them to excel in their workplace.

Company equipment

Employers offer company equipment like cellphones, computers, tablets and other computer-related accessories, depending on their role. Using this equipment, an employee performs their job duties. Usually, employees have access to the equipment for the entire duration of employment.

Fringe benefits

Fringe benefits are non-monetary benefits a company provides to attract and retain employees. Here are a few popular fringe benefits:

  • Wellness program: To retain employees, many companies offer a wellness program that includes discounted memberships to gyms, mental health assistance, employee assistance program and access to a nutritionist. When employers care about an employee's well-being, it results in employee satisfaction and improved morale.

  • Housing and relocation option: Many companies pay relocation benefits and reimbursement to employees who change their cities for work. This can include providing financial assistance to employees and helping them find rented accommodations in a new city.

  • Student tuition fee reimbursement: Many companies offer employees student tuition fee reimbursement programs to encourage employees to learn and improve their skills. Such benefits motivate an employee to pursue advanced degree courses.

Why Are Compensation And Benefits Important?

Some benefits of providing benefits and compensation to employees are:

Enhances profitability and productivity

When an employee receives good compensation and benefit, it increases employee morale. Employees high on morale are usually more productive. An employee who feels valued by the company shows enthusiasm at the workplace, enhancing productivity and increasing profitability. The longer an employee serves the company, the more efficient they are at work.

Increases job satisfaction

Often, compensation and benefits serve as major contributors to employee job satisfaction. Usually, an employee who reports high job satisfaction achieves higher productivity. The right compensation and benefits motivate an employee to excel in their work, which can help an organisation accomplish their goals. It provides employees with a greater sense of achievement and results in job satisfaction.

Boosts employee motivation

Employees who receive reasonable compensation and benefits feel valued by their company. Such employees care about their work and are ready to put in extra effort to achieve organisational goals. Also, when employees know they may receive bonuses at the end of every financial year depending upon their performance, they feel motivated to work and exceed expectations.

Attracts top talent

Providing a competitive salary and benefits package can help a company hire top talent for their vacant positions. Providing a competitive salary builds a culture of high output. Employees receive better compensation than others working in the same role at other companies, which motivates them to exceed expectations. Companies that provide a competitive salary are better at hiring suitable candidates for every job role.

Reduces absenteeism

When employees receive a competitive compensation package, they enjoy the office environment and are happy to spend time at their workplace. This reduces absenteeism from the office. Offices with low absenteeism and high motivation rate are the ones that are productive.


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