A Complete Guide for HR: What is the Difference Between Reward and Compensation?

Employees who work hard and achieve accomplishments receive compensation in return. Whether this is in the form of a cash payout, equity, or some other benefit or perk, what a company gives to its employees can be classified into two - reward or compensation.

Whether you're working in HR or an employee looking to learn more about what your company is giving you in exchange for your hard work, it's important to understand the difference between reward and compensation.

What is Compensation?

When a person is working, they are offering something to the company — whether that's a service, time, or experience. In exchange, the receiving party compensates to fulfill this transaction's part.

Payout

The most basic form of compensation is a payout. This refers to the financial compensation provided to an employee after work is completed. A person works, so they get paid.

Regular employees receive payouts on a fixed schedule, usually bimonthly or monthly. For contractors, the payout is typically provided after the contract duration or when the service is completed.

Equity

Another form of remuneration is equity compensation. Employees may receive some form of stock option, company shares, or payment.

Unlike payouts, equity compensation is a way to compensate workers while motivating them to stay longer in the company, have a vested interest in its growth, and drive performance. It is an important tool to attract talent, especially at the executive level. Moreover, equity compensation offers the opportunity for larger compensation over time.

Benefits

Another form of compensation is through benefits. Benefits are non-monetary and non-equity offerings that a company provides to its employees. Examples of benefits offered by most companies include health insurance, life insurance, paid vacation leaves, paid sick leaves, and paid maternity and paternity leaves. 

Some less common benefits are dental insurance, vision insurance, clothing allowance, travel allowance, mental health coverage, living stipends, remote and flexible work arrangements, continued education, and paid training and development.

On top of basic pay, companies offer various benefits to attract employees, minimize employee turnover, improve employee satisfaction, and boost employee morale.

What is a Reward?

While compensation is purely transactional, the reward is an incentive. A reward is a benefit or a prize for achieving something. 

Unlike compensation, rewards are more dependent on the person receiving them. A reward is only effective if it is perceived as valuable by the recipient.

Also, since rewards are an addition to the usual compensation, their cost should be proportional to the recipient's contribution and within the company's budget. 

Intrinsic and Extrinsic

When discussing rewards, it is essential to distinguish between intrinsic and extrinsic.

Intrinsic rewards refer to the positive emotions one feels after doing something they enjoy or that brings them value. Some intrinsic rewards include feeling proud, appreciated, and recognized for one's work.

Employee appreciation is critical to a company's growth and success, as employees who feel valued and recognized are less likely to be looking for another job.

A company does not have to spend on intrinsic rewards as they are internally motivated and subjective to each employee. That being said, HR needs to consider the intrinsic rewards that come with roles and positions, as even the best-compensated employees can be unsatisfied with their roles if they lack intrinsic rewards.

Meanwhile, extrinsic rewards refer to anything a company provides an employee for their achievement, which may be tangible like a cash bonus or a device, or intangible like a promotion or time off.

Financial and Non-Financial

Rewards can also be financial or non-financial. Financial rewards are similar to payouts and equity compensation; hence, they are typically awarded as additional compensation.

Meanwhile, non-financial rewards are similar to benefits. Employees may be awarded additional paid leaves, purchase discounts, or flexible work arrangements that may make a job more attractive. This may work best with great pay programs and the assistance of salary managers.

Performance or Merit-based

Last, it's important to consider how much reward is for awarding an employee. The most common way to provide performance or merit-based rewards is through piece-rate pay plans. An example is commissions given to employees who exceed a quota or performance ceiling or bonuses awarded to employees who successfully perform special projects or tasks.

Compensation and Reward Consulting

Granting compensation and rewards can be complex, with no room for guesswork. To make it work for the employees and the company, you have to consider factors such as job performance, the company's budget, and business objectives.

Reach out to FutureSense to hire expert compensation and reward consulting services today!

About FutureSense 

FutureSense is a management consulting firm that provides integrated solutions to build and sustain human capital capacity. The firm can work with you by offering support and guidance to manage your workforce. To learn more about FutureSense, please visit FutureSense.com.