Typically, a compensation package includes a combination of salary, incentive compensation, and benefits. The term compensation in forms other than cash is fringe benefits. More widely used examples include health insurance, retirement plans, and paid leave, among many possibilities.

As part of total compensation, benefits help attract, retain and motivate employees. Different employees look for different types of benefits. Employers should regularly review their employee benefits to see if they meet today's needs. Employee benefits are more complex than salary structures, so benefits are harder for employees to understand and appreciate. Employers must communicate effectively for benefits to motivate employees.

Social contributions, pensions and retirement savings plans help employees prepare for retirement. Insurance plans help protect employees against unexpected costs such as hospital bills. Some benefits, like Social Security, are required by law. Other regulations establish requirements that benefits must meet to obtain the most favorable tax treatment. Although many benefits are not required by law, they have become so common that today's employees expect them. A large employer without benefits would be very unusual and would struggle to compete in the job market.

The benefits impose significant costs. On average, of every dollar spent on compensation, more than 30 cents is spent on benefits. An organization managing its labor costs must pay particular attention to the cost of its employee benefits. Why are organizations paying an increasing share of compensation in the form of benefits? It would be simpler to pay all benefits in cash and let employees take out their own insurance and contribute to their own savings plans. This arrangement would also give employees greater control over what their pay earns them.

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