What is compensation? Definition and examples

Compensation may refer to the direct and indirect benefits that a worker receives from an employer. The term also refers to how much somebody has to pay a victim for wrongdoing. That wrongdoing may have resulted in damage to property or injury to a person.

When it refers to an employee’s pay package, we call it compensation and benefits. Successful employers develop programs that outline equitable processes to reward their workers and executives.

Employers structure their pay and benefit packages to attract the best employees. They also try to structure them so that their workers stay in the company.

According to the Cambridge Dictionary, compensation is:

“1. Money that is paid to someone in exchange for something that has been lost or damaged or for some problem.”

“2. The combination of money and other benefits (= rewards) that an employee receives for doing their job.”

Compensation paid for work

The term refers to a systematic approach to providing monetary value to workers. In other words, it is money an employer gives in exchange for the work they do. It may help fill job vacancies, improve work performance, and enhance job satisfaction.

Compensation consists of a combination of an employee’s pay, vacation, health insurance, and bonuses. It also includes other perks, such as a company car, free parking, free or cheap meals, commuting costs, etc.

How is compensation determined?

Employers base compensation on several factors. Some companies get together and carry out salary surveys. The surveys help them determine what the market rate is for a job.

The survey firm then compiles the data and sends it back to the participants.

Other employers look at pay and benefit packages for certain positions on the Internet. There are many specialist websites such as salary.com or glassdoor.com.

The information on these sites is less comprehensive than carrying out a comprehensive survey. They are also not as accurate because they are self-reported by the workers.

Compensation and benefits, commonly known as C&B, is a sub-discipline of human resources. In most English-speaking countries, people refer to it as remuneration or total rewards.

Executive_CompensationExecutive compensation is the pay + benefits package senior executives receive from their employers. It is usually different from what the rest of the workforce receives. Companies may also offer stock options as a management incentive.

Employee compensation components

An employee’s compensation and benefits are divided into the following basic categories:

Fixed income

This income does not depend on how much business you generate. We also call it the base or basic salary.

Variable pay

This pay is contingent on performance. In other words, the results that you achieve. Examples include bonuses, commissions, and other incentives.


These are programs the employer uses to supplement a worker’s compensation. For example, a company car or medical insurance are benefits. Time off with full pay and a non-contributory pension scheme are also benefits.

Some employers may also offer company shares as part of the pay package.

Compensation for damages or injury

The term may also refer to damages. In other words, money for a person who suffered loss or injury. In common law, we categorize damages as punitive damages or compensatory (actual) damages.

Compensatory damages are broken down into special damages, which may include loss of earnings or medical expenses. It may also include property damage, and general damages which are non-economic, such as emotional stress, pain, and suffering.

A court awards compensatory damages to compensate the claimant. The claimant may have suffered injury, loss, or harm as a result of another’s action or inaction.

Compensation – other meanings

To make up for

To make up for something that makes us feel better when we have an unpleasant experience.

For example, diplomats say one of the disadvantages of embassy work is having to move around a lot. In other words, never having a long-term, permanent home.

However, there are compensations. For example, they experience new cultures.

Compensation in psychology

In psychology, the term refers to a strategy whereby individuals cover up something. When we emphasize a strength to make up for a weakness. We may do this either consciously or subconsciously.