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LEGAL DICTIONARY

Compensation

What Is Compensation?

Compensation is the term for the money or other remuneration an employer gives to an employee for their services or harm suffered on the job. Compensation can include hourly wages, salary, pension plans, health insurance, vacation time, sick leave, and other company benefits. It is usually defined in a compensation provision in the worker’s employment contract.

Various federal and state laws govern compensation. Examples are minimum wage laws and laws that prevent discriminatory practices. Workers' compensation laws protect employees who are harmed in some way due to their work or their workplace environment.

Types of Compensation

The hourly pay or salary an employee receives is only one part of the compensation they receive for working for their employer. Compensation can include many other forms. In addition to the types of compensation listed above, here are some other examples.

  • Commissions
  • Tips
  • Overtime pay
  • Longevity pay
  • Bonuses
  • Profit Sharing
  • Merit Pay
  • Incentive plans
  • Achievement awards
  • Health plans, including medical and dental insurance
  • Stock options
  • Allowances for travel, meals, housing
  • Childcare services
  • College tuition assistance
  • Gym membership
  • Free lunches
  • Counseling
  • Legal advice
  • Other professional services

Why Is Compensation Important?

Compensation plans help businesses attract and retain top talent. Some forms of compensation also provide incentives at the workplace. Here are other benefits of compensation packages:

  • Increased employee loyalty
  • Higher productivity and profitability
  • Higher employee engagement
  • Improved job satisfaction

What Is Deferred Compensation?

Deferred compensation is a compensation plan that is set aside for the employee's future. These plans come in addition to the regular benefits the worker receives on a timely basis. In most scenarios, the employee does not have to pay tax on deferred compensation until they receive the money – often at retirement age.

Popular forms of deferred compensation include retirement, pension, and stock option plans.

The two primary types of deferred compensation are qualified deferred compensation and non-qualified deferred compensation.

  • Qualified deferred compensation: These plans include the 401(k) and 403(b) pension plans that are regulated by the federal government's Employee Retirement Income Security Act. They must be offered to all salaried employees, and they have caps on contributions. Independent contractors are not eligible.
  • Non-Qualified deferred compensation: Also known as 409(a) plans or "golden handcuffs," they are usually offered only to top-level executives and have no caps on contributions. Independent contractors are eligible.

The money set aside for both plans is tax-free until the employee withdraws it. (An exception is the Roth 401(k) or IRA, for which contributions are taxed when they are transferred with no further taxes due upon withdrawal.)

Two disadvantages of deferred compensation are that this money is out of reach until retirement age, and these benefits are not protected in the event a company goes bankrupt.

Helpful Resources:

U.S. Department of Labor - Workers' Compensation

Investopedia - What Is Deferred Compensation?

Cornell Law - Compensation

Black's Law Dictionary - Compensation: Definition & Meaning

Internal Revenue Service - 401k Plans

Internal Revenue Service - IRC 403(b) Tax-Sheltered Annuity Plans

What Is Compensation?

Compensation is the term for the money or other remuneration an employer gives to an employee for their services or harm suffered on the job. Compensation can include hourly wages, salary, pension plans, health insurance, vacation time, sick leave, and other company benefits. It is usually defined in a compensation provision in the worker’s employment contract.

Various federal and state laws govern compensation. Examples are minimum wage laws and laws that prevent discriminatory practices. Workers' compensation laws protect employees who are harmed in some way due to their work or their workplace environment.

Types of Compensation

The hourly pay or salary an employee receives is only one part of the compensation they receive for working for their employer. Compensation can include many other forms. In addition to the types of compensation listed above, here are some other examples.

  • Commissions
  • Tips
  • Overtime pay
  • Longevity pay
  • Bonuses
  • Profit Sharing
  • Merit Pay
  • Incentive plans
  • Achievement awards
  • Health plans, including medical and dental insurance
  • Stock options
  • Allowances for travel, meals, housing
  • Childcare services
  • College tuition assistance
  • Gym membership
  • Free lunches
  • Counseling
  • Legal advice
  • Other professional services

Why Is Compensation Important?

Compensation plans help businesses attract and retain top talent. Some forms of compensation also provide incentives at the workplace. Here are other benefits of compensation packages:

  • Increased employee loyalty
  • Higher productivity and profitability
  • Higher employee engagement
  • Improved job satisfaction

What Is Deferred Compensation?

Deferred compensation is a compensation plan that is set aside for the employee's future. These plans come in addition to the regular benefits the worker receives on a timely basis. In most scenarios, the employee does not have to pay tax on deferred compensation until they receive the money – often at retirement age.

Popular forms of deferred compensation include retirement, pension, and stock option plans.

The two primary types of deferred compensation are qualified deferred compensation and non-qualified deferred compensation.

  • Qualified deferred compensation: These plans include the 401(k) and 403(b) pension plans that are regulated by the federal government's Employee Retirement Income Security Act. They must be offered to all salaried employees, and they have caps on contributions. Independent contractors are not eligible.
  • Non-Qualified deferred compensation: Also known as 409(a) plans or "golden handcuffs," they are usually offered only to top-level executives and have no caps on contributions. Independent contractors are eligible.

The money set aside for both plans is tax-free until the employee withdraws it. (An exception is the Roth 401(k) or IRA, for which contributions are taxed when they are transferred with no further taxes due upon withdrawal.)

Two disadvantages of deferred compensation are that this money is out of reach until retirement age, and these benefits are not protected in the event a company goes bankrupt.

Helpful Resources:

U.S. Department of Labor - Workers' Compensation

Investopedia - What Is Deferred Compensation?

Cornell Law - Compensation

Black's Law Dictionary - Compensation: Definition & Meaning

Internal Revenue Service - 401k Plans

Internal Revenue Service - IRC 403(b) Tax-Sheltered Annuity Plans