What Does Direct Compensation Include?

As an employer, you may give employees several types of compensation, including direct compensation. So, what’s direct compensation? And, what are the different types?

What is direct compensation?

Direct compensation is the monetary benefit a business offers its employees in return for their service. This includes an employee’s base pay (hourly wage or annual salary), performance-based variable pay, bonuses (rewards for special occasions or exceptional performance) as well as stock options (a right to purchase a part of business as a reward for exceptional service).

Basically, direct compensation is everything you give an employee for their time worked. On the other hand, indirect compensation includes benefits you offer to employees (e.g., health insurance).

Types of direct compensation

Not sure what type of compensation is classified as “direct?” Check out the types of direct compensation below.

Salary and wage

Direct compensation includes basic annual salaries or hourly wages paid to workers in return for their services to the company account. It refers to the money an employee receives for work done for a specific duration like an hour, a week, a month, or a year.

Car allowance

Companies may offer their employees the use of a car and/or a fuel allowance. They may also cover the cost of parking, public transportation, or cab fare for the employee.

Housing allowance

If workers have to relocate because of work, companies may provide their workers with a housing allowance or another type of relocation assistance.

Medical reimbursement

Companies may offer workers medical reimbursements for medical claims covering not only workers themselves, but also their family members. The claims include reimbursement for medical bills as well as health insurance.

Leave travel allowance

Some organizations provide their employees with leave and an allowance for recreational travel. These allowances are scaled based on the employee’s position and length of service with the company.

Special/Other allowance

Direct compensation also covers some special allowances. These include things like:

  • Meals
  • Commissions
  • Mobile phone expenses
  • Travel expenses
  • Club memberships
  • Insurance
  • Reduced interest loans

Other compensation options include incentive pay linked to exceptional performance and occasional bonuses for special occasions.

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This article has been updated from its original publication date of June 12, 2012.

This is not intended as legal advice; for more information, please click here.

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