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What is the difference between employee compensation and employee benefits?

Employee compensation and benefits play a vital role in attracting, retaining, and motivating the employees. Both seem to serve the same role however, different in definition and nature. Although intricately woven together, still there is a subtle distinction, so let’s see how compensation is different from benefit!


Compensation is a monetary or non-monetary consideration given by an employer to an employee for his/her work in the organisation. Compensation is pre-agreed rumination and part of CTC and organization can change the structured over time.

 It can either be in form:

  • Basic pay, allowances, incentives, bonus, etc- Direct part
  • Pension, Insurance, PF, etc- Indirect part

Key features:

  1. Compensation paid is either fully taxable or partial exempt
  2. Main purpose is to attract and retain the new talent
  3. Compensation can be either in cash or kind
  4. Compensation is performance based- either individual or organizational. Employees are paid bonus for their performance


Benefit is a non-cash or sometimes cash reimbursements (for health checks, Gym member ships, trips, mobile reimbursements) reward given to an employee by an employer to motivate him/her to do better. It is a given in addition to the basic pay with the thought to secure the employees financial security. Sometimes benefits depend on the one’s role/level in the organization.

It can be:

  • Reward/m-real coupons
  • Laptop/cell phone
  • Leaves
  • Life/health insurance
  • Memberships
  • Educational allowances, etc.

Key features:

  1. Usually helps to retain employees
  2. Main purpose is to motivate employees to do better
  3. The elements are exempt/ partially exempt from tax
  4. Offred on top of the cash pay
  5. Benefits are not performance based. Employees are entitled to benefits regardless of their performance

In nutshell, compensation and benefit though serve somewhat the same function, are different yet important for the welfare of employees. In order to know the exact CTC (Cost to company), an employee must talk to the HR and know the about the compensation and benefits paid.

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