A Comprehensive Guide to Different Types of Employee Compensation

A Comprehensive Guide to Different Types of Employee Compensation

Do you have a business and need help managing the flow of compensation for your team? Understandably, employee salary is one of the most important decisions that are made when running any business. With this comprehensive guide on different types of employee compensation, CFOs, Finance Leaders and Compensation Leaders can gain insight into effective methods to manage salaries while achieving desired benefits in terms of long-term goals, organizational growth, budget management, and overall bottom-line success.

This article outlines what you should understand about various forms of payment structure so that you can determine which option suits your current situation best without losing sight of the big picture.

The 6 Types of Employee Compensation

Employee compensation can take different forms, and both employers and employees need to understand the benefits and drawbacks of each type. By understanding these different types of employee compensation, both employers and employees can make informed decisions about what type of pay structure works best for them.

  1. Base Salary: The fixed amount of pay that an employee receives regularly, typically in exchange for their job responsibilities and skills.
  2. Commission: An additional payment that employees receive based on the number of sales they generate, typically as a percentage of the revenue they bring in.
  3. Equity: Ownership or a stake in the company, typically granted to employees through stock options, restricted stock units (RSUs), or other forms of equity compensation.
  4. Incentives: Additional compensation provided to employees for achieving specific performance targets or goals, such as hitting sales targets or meeting project deadlines.
  5. Benefits: Rewards (often non-monetary) that employees receive in addition to their base salary, such as health insurance, retirement plans, and paid time off.
  6. Bonuses: A one-time payment that employees receive for meeting specific performance goals or achieving outstanding results, often tied to company-wide or individual performance metrics or can be in a new form of a vesting cash bonus.

Pros and Cons of Each Type of Employee Compensation

It's important as a Finance leader to weigh the advantages and disadvantages of each type of employee compensation to determine what works best for both employees and the company.

Base Salary


  • Provides a stable and predictable income for employees.
  • Helps retain employees and attract new talent.
  • Easy to budget and plan for both employees and the company.


  • May not incentivize employees to work harder or achieve better results.
  • May become stagnant over time without merit-based increases.
  • Limited by salary bands & can cause internal conflict with fellow employees
  • Limited immediate value to employee



  • Motivates employees to work harder and generate more sales.
  • Rewards employees for their hard work and performance.
  • Results in higher earnings for high-performing employees.


  • Can create competition and conflict among employees.
  • Can incentivize undesired behavior, such as if employees prioritize sales over customer satisfaction.
  • Earnings can be unpredictable, making budgeting and planning difficult for both employees and the co



  • Aligns employee interests with the success of the company.
  • Can provide a significant financial benefit if the company does well.
  • Can help retain employees and attract new talent.


  • Employees may not fully understand the value of equity compensation.
  • Can create tax complications for employees.
  • Can result in dilution of ownership if too much equity is granted.
  • Provides 0 immediate value to employees, and can take many years for value to be realized (if ever).



  • Encourages employees to work harder and achieve specific goals.
  • Helps to improve employee performance and productivity.
  • Can be customized to align with the company's goals and objectives.


  • Can create a competitive and stressful work environment.
  • Can lead to employees focusing solely on achieving incentive goals instead of long-term growth and success.
  • May not be feasible for all roles and departments.



  • Helps to attract and retain employees.
  • Provides a sense of security and stability for employees.
  • Can improve employee satisfaction and morale.


  • Expensive for the company to provide.
  • Difficult to tailor to individual employee needs.
  • Can be difficult to manage and administer.
  • Often underutilized and undervalued by employees.



  • Encourages employees to work harder and achieve specific goals.
  • Provides a financial reward for outstanding performance.
  • Can be customized to align with the company's goals and objectives.


  • Can create a competitive and stressful work environment.
  • Can be perceived as unfair if not distributed fairly or transparently.
  • Can be expensive for the company to provide.

Ensuring Your Employees Understand Their Compensation Plans

As an employer, it's important to make sure that your employees understand their compensation plans. This can help to prevent any confusion or misunderstandings down the line. One way to achieve this is to provide clear and concise information about the compensation plan, including the various components and how they work together. 

Communication is key - take the time to explain the plan in person or through a detailed document. Additionally, be sure to answer any questions that employees may have to ensure that they fully comprehend the plan. By taking these steps, you can help to ensure that your employees are informed and satisfied with their compensation.

Using Data to Drive Your Compensation Plans

In today's competitive job market, employers must stay informed and adaptable to attract and retain top talent. One crucial tool in their arsenal is data analysis. By gathering and analyzing data on industry standards, employee performance, and market trends, employers can make more informed decisions about their compensation plans. Rather than simply relying on guesswork or the status quo, data-driven decisions ensure that employee compensation is both equitable and competitive. 

Employers can also use data to identify performance trends and high-performing employees, allowing them to reward top performers and adjust compensation plans accordingly. With the right data and analysis, employers can make smart investments in their workforce that benefit both the company and its employees.


In conclusion, employee compensation is a complex topic that requires an understanding of the various options. Employers should never make assumptions about their employees' understanding of their compensation plan and should always ensure that the plan is clearly and accurately communicated. Employers can use data-driven insights to make more informed decisions and develop a well-rounded (or creative) employee compensation plan. 

A range of options allows employers to create a tailored approach and maintain alignment with their company goals. No matter what you decide on as far as types of employee compensation, always remember it's all about keeping your employees happy and motivated!

Learn more with the Ultimate Guide to Employee Compensation here.

Keep Financial offers a vesting cash bonus that can help incentivize employees to find a shared purpose and commitment to the organization that helps keep top talent on board. 

To learn how Keep Financial can help you deliver valuable, flexible compensation that fits the needs of today’s workforce, schedule a demo today!

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