The Indirect Compensation Trap

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It’s easy for employers to get carried away with offering exciting forms of indirect compensation to employees. And yes, indirect compensation is really important. But you can’t lose sight of the dollar figure that employees get to bring home every payday. 

That’s what they really care about. 

In a competitive job market, you’ll see employers offering lavish perks and costly allowances—and people still leave for better pay somewhere else. Indirect compensation just can’t compare to a livable wage. 

We’ll break down what we mean by indirect compensation—and when it actually matters to your employees.

What is Indirect Compensation?

Indirect compensation is any type of benefit that isn’t paid to employees in a regular paycheck. Think health insurance premiums, retirement plan contributions, and paid leave for new parents. 

None of these include direct payments to employees. But they are important. 

Employer-sponsored health insurance, for example, is one of the biggest draws for potential employees. Even though employees still have to pay part of the monthly premium, they don’t have to foot the whole thing themselves. 

With a retirement matching plan like a 401(k), employees can make huge strides in their retirement savings. 

And paid leave for new parents is one of the most valuable forms of indirect compensation the soon-to-be parents on your team could ask for.

Less common forms of indirect compensation are things like onsite gyms, company cars, and discounted meals. 

Here are a few more forms that indirect compensation can take: 

  • Paid time off (PTO)
  • Life insurance
  • Childcare assistance
  • Jury duty pay
  • Holiday pay
  • Tuition reimbursement 
  • Professional development
  • Student loan repayment help 
  • Coffee and snacks in the office

So if these are examples of indirect compensation, what’s direct compensation? 

Basically anything you’d pay an employee in a regular paycheck. Salary, wages, bonuses, commissions, overtime pay, and shift differentials are all examples of direct compensation. 

These are the types of pay that allow people to pay the rent or mortgage. Buy groceries. Fill up their gas tanks. Pay the electric, gas, trash, and water bills. 

And so on.  

If you provide excellent healthcare, retirement, and PTO benefits but pay a salary that’s on the lower end of the market, your employees will struggle to afford the basics. 

That’s why direct compensation, rather than indirect compensation, ultimately drives a person’s decision to join your company and stay for years—or leave for better pay. 

What Types of Indirect Compensation Actually Matter? 

Picking a few key types of indirect compensation—and doing them well—works better than an all-you-can-eat buffet of perks. At Stone Press, we’ve noticed solid retention by including four core types of indirect compensation. 

Of course, we also pay above-market direct compensation because we know that salary and wages matter more than anything. 

So keep that winning formula in mind. Above-market direct compensation + a few well-executed forms of indirect compensation = excellent total compensation.

Here are the top four types of indirect compensation that help us attract and retain the top talent at Stone Press.

Paid Time Off 

Nothing says you value work-life balance more than providing paid time off. We offer three weeks of PTO for every employee here at Stone Press, and we encourage everyone to use it. 

You might think that giving your employees the time to stay home or fly to a different country and get paid for it sounds completely wacky. What could possibly be in it for you? 

The truth is that PTO helps prevent burnout. And that’s a big deal. 

It might seem like having a highly engaged employee who puts in more than their fair share of work is a good thing for a company. 

But it’s a recipe for disaster, especially if you reward the employee for burning the candle at both ends. They’ll keep going until they burn out completely.

Most jobs come with tasks that require a level of “sustained physical, cognitive, or emotional effort or skills,” as a 2022 article in Business Horizons puts it. Over time, the body and mind begin to feel the effects of this constant stress. Particularly if the employer does not cultivate a work environment that encourages rest and balance. 

Burnout eventually causes a person to feel drained, unproductive, and detached from work. On a personal level, employees with burnout may experience

  • Decreased physical health
  • Depression, anxiety, and other psychological disorders
  • Increased conflict with family, friends, and colleagues

If the situation at their company doesn’t change, an employee may decide to leave the job. There’s a reason why industries with the most stress, the lowest pay, and the fewest (if any) PTO benefits see enormous turnover. 

Having a ton of turnover means your HR department constantly has to spend time and money filling positions. 

Instead, you should save that time and money and invest it in the health of your employees. And having a solid PTO plan that you encourage employees to use can help stop burnout in its tracks. 

If you do have a good PTO plan but people aren’t taking advantage of it, consider these top reasons why people don’t use their PTO

  • They feel like their bosses look down on them for taking it
  • They’re stressed about work piling up to unmanageable levels while they’re gone
  • Their company offers PTO cashouts if they don’t use the PTO, and they’d rather bring home more cash than take a break (this is why we do not offer PTO cashouts at Stone Press)
  • They worry they’ll be seen as replaceable 

The good news? You can fix all of these problems by making sure your employees feel fully supported in taking paid time off. And maybe making some changes to that PTO cashout program, though you’ll need to make sure you follow your state’s PTO payout laws if you do. 

For more tips, check out our guide to creating a PTO policy that employees will love. 

Health Insurance 

We offer health, dental, and vision insurance at Stone Press, and we scoured the market until we found the best plans we could. 

If there’s one thing almost every American can agree on, it’s that the price of healthcare in the United States is outrageously high. 

There’s a special dread that comes when you receive a bill in the mail from a doctor or hospital. You know that even with insurance, your out-of-pocket costs for an urgent care or emergency room visit are probably in the hundreds.

If you or a loved one had to stay in the hospital, whether it was three nights for the birth of a child or a week for a post-appendectomy infection, you can expect a four- or five-digit bill. 

This is why even though over 90% of adults in the United States have some form of health insurance, an estimated 72 million working-age adults live with medical debt. 

And for families and people with special conditions, medical bills multiply with staggering speed. Stories about people taking $20,000 out from retirement funds or having their credit knocked down due to unpaid medical debt are heartbreakingly common. 

That’s why providing the best health insurance possible is so important. 

(Dental and vision plans come separately, but they tend to cost employers a lot less—so definitely include those, too.)

If you don’t offer health insurance plans, your employees or potential new hires may find somewhere else to work. Enrolling in health insurance as an individual is a pain. The costs are baffling. The billing is arcane.

People don’t want to deal with any of it. They really feel the impact of employer-sponsored healthcare insurance, even though it is indirect. 

Retirement Plans 

When you set up a retirement plan benefit for your employees, you give them a huge step up in saving for the future. At Stone Press, we offer a 401(k) with a match. 

That’s the most common retirement plan, but it’s just one of the several plans employers can sponsor. 

All employer-sponsored plans fall into two categories:

  • Defined benefit plans: Also called a traditional pension plan, this type of plan requires employers to promise employees a specific amount of money during each month of retirement. The amount goes up according to the employee’s years of service for the company and salary history. Employers invest and manage the funds on behalf of their employees. 
  • Defined contribution plans: In this type of retirement plan, employees contribute to their own retirement and employers can match their contributions up to a certain amount. Employers can, and often do, invest the funds on behalf of the employees.

Defined benefit plans are going out of style because they’re a lot less portable than defined contribution plans. 

Let’s say an employee named Crystal works for Abracadabra Motors. She stays at the job for three decades, even though she’s more than a little tired of it. When she retires, she gets a nice pension. 

But she spent years hating her job in order to get it. 

So let’s say that Crystal rewinds time. She decides to leave Abracadabra Motors after four and a half years of service. Unfortunately for Crystal, her pension takes five years to vest. When she leaves Abracadabra Motors behind, she leaves her pension in the dust, too. 

Since it hadn’t vested yet, she can’t cash it out. And since it’s a pension, she can’t take it with her to her new job at Sparkly Modern Motors, which offers a portable defined contribution plan. 

Instead, she’s now almost five years into her career. And she’s starting her retirement savings from scratch. 

It’s easy to see why defined contribution plans are now the more popular choice.

Since 401(k) plans are the most common type of employer-sponsored retirement, let’s take a closer look.

A 401(k) plan is an employer-sponsored retirement savings account in which an employee contributes a percentage of each paycheck. Employers can match employee contributions, and they often do. 

In a traditional 401(k) plan, the employee contributions are made before the taxes are deducted from the check. This reduces a person’s taxable income but means they will have to count the withdrawals as taxable income later on. 

A Roth 401(k) means the money is contributed after taxes have been deducted. This means that the contributions don’t lower the employee’s taxable income. However, Roth 401(k) plans come with tax-free withdrawals. 

Employers can match up to a certain percentage of a traditional or Roth 401(k). 

Employees under the age of 50 are limited to a yearly contribution of $22,500 in 2023. But employers can match up to 100% of the employee’s contribution. This means that in 2023, the combined employer-employee contribution limit for under-50-year-olds is $45,000. 

That’s a nice chunk of change. And since it’s invested, it’ll grow as the years go on. 

Compare this to the most common individual (aka not-sponsored-by-an-employer) retirement plan, the traditional or Roth IRA. 

An IRA comes with a yearly contribution limit of just $6,500 for people under 50 years old. 

Yikes! See why offering retirement is so helpful to your employees? 

Plus, employers can deduct a portion of these contributions from their yearly income when it’s tax time. In addition, investment gains and elective deferrals are not taxed.

Paid Leave Policies 

We offer paid leave for jury duty, bereavement, and new parents.

Here’s why. 

Have you ever wondered if you get compensated by…someone…when you are compelled to leave work for an unknown amount of time to serve on a jury? 

Well, you don’t. Not by the state or federal government, anyway. 

Employers are required to at least give you protected leave to go on jury duty, but they’re not required to pay you. So for many people, jury duty equals lost income. 

Providing paid jury duty leave takes away this burden. Your employees can do their duty as needed without worrying about losing money. 

Paid bereavement leave is another crucial benefit. 

When a loved one passes away, work should be the last thing a person needs to worry about. So should lost income. Giving employees paid bereavement leave gives them a chance to grieve without these added stressors.

And finally, paid new parent leave is a huge help for, well, new parents. It gives them time to adjust to their new life without worrying about—you guessed it!—work or money. 

These benefits show your employees that you value their personal lives as well as their work lives. You know that life can, and will, interrupt work from time to time. With paid leave policies in place, you’re ahead of the game. 

You’re planning for these events before they ever happen. 

When Is Indirect Compensation Enough? 

If you’re not having a ton of trouble attracting qualified candidates or experiencing high turnover, your indirect compensation is probably good enough. Keep your finger on the pulse of your organization. Be ready to make changes if you notice that your benefits aren’t cutting it. 

If you are experiencing these problems, I recommend reviewing your direct compensation first before looking at the total compensation package. 

Are you paying a fair salary? What’s the compa-ratio for each employee? 

If you’re sure that direct compensation is not the problem, see if your competitors are offering significantly different compensation packages. You might have to make adjustments in this case. 

Roll Out New Indirect Benefits After Extensive Review 

Indirect benefits can be a great tool for attracting and retaining employees. But this is only true if you implement them with a lot of thought. 

You have to make a strong and watertight case for providing any benefit across the organization. It has to align with your payroll budget. Remember: it’s a lot easier to thoughtfully roll out a new paid leave policy than it is to yank that policy away when you realize you can’t afford it. 

And whatever you do, don’t gab about new benefits before the ink is dry. The last thing you want to do is promise and not deliver. 

If you need help creating a payroll budget, we’ve got you covered in our guide.

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