Importance of Compensation in the Workplace

Free new skill training is a form of employee compensation.
i Digital Vision./Photodisc/Getty Images

Compensation covers everything an employer offers an employee in return for their work. Although the term is commonly associated with money, employee compensation also includes nonmonetary benefits, such as health insurance and a pension plan. Employee compensation often plays a significant role in different areas of the workplace and may affect everything from turnover rate to workers' morale.

Legal Compliance

    State and federal laws govern many aspects of the employee's pay and hours, including what the minimal rate is and how many hours they may work each week before they're entitled to overtime pay. Employers must pay workers in accordance with compensation laws to avoid lawsuits and actions by the state and federal governments. Some rules vary by state and by employee category. For example, a salaried employee isn't subject to all the same laws as an hourly worker.


    Compensation, whether monetary or in the form of benefits, is a draw for talent and part of any recruitment strategy. However, compensation isn't one size fits all. While competitive pay rates are important, some candidates may value non-cash compensation, such as extra vacation days, for personal reasons. For example, a person with a small child may be more drawn to a compensation package that includes extra sick days than a person without children. An employer must research potential talent to determine what they're interested in. Getting information about a candidate's salary and current job benefits may help the employer determine what they're looking for.

Employee Retention

    Proper employee compensation keeps morale high and ensures workers will stay put. Losing a good employee costs the employer money in terms of lost productivity, what they brought to the job and the expenses of hiring and training another person. By providing raises and ensuring employees have the non-monetary compensation they're looking for, such as retirement funding and health insurance, employers can keep turnover rates low.

Worker Motivation

    While many things, such as praise, may motivate an employee, compensation is usually a significant factor. Employees who can earn more compensation through good work and promotions will have a strong goal to work toward. For example, a person in sales who earns bonuses after selling a certain amount of products may work harder to hit that number. A profit-sharing plan might drive employees to perform better because if their employer does well, they'll get more money from the plan.

the nest