One way small businesses recruit talented and motivated employees is to offer comprehensive compensation and benefits packages that provide employees with competitive pay for their work and additional perks for the workers and their families. While compensation includes any guaranteed and performance-based pay the company offers for daily work, benefits add extra value for employees in the form of monetary or nonmonetary perks says Missouri State University. Legally, small businesses have to provide employees with certain benefits that cover unemployment and disability from work-related incidents. However, offering a variety of optional benefits can also help attract and keep talented workers, keep employees committed to business goals, improve employee morale and make the company stand out from competitors.


Employee compensation is the money companies pay for employees' work – including any additional tips, bonuses and commissions – and benefits include extra perks such as health insurance, reimbursement for tuition, retirement plans and paid time off.

Compensation and Benefits Overview

An employee's compensation and benefits consist of both the money they earn for performing their regular work as well as additional monetary and nonmonetary benefits beyond their due earnings. The definition of compensation includes the employee's guaranteed salary or hourly pay, any incentive pay for overtime and holidays, bonuses earned and commissions and tips for sales and service. A worker's compensation also varies based on job title, level of education required, experience and level of responsibility. Benefits are what employees receive beyond their standard compensation. Examples include both tangible benefits such as coverage for various insurance and retirement plan options and intangible perks like flexible work options and wellness programs.

Mandatory Employee Benefits

Depending on their location and number of employees, small businesses must offer their employees specific benefits for disability insurance, workers' compensation and unpaid leave and job protection for family and medical issues according to the U.S. Small Business Association. Both employers and workers in states such as California, Hawaii and Rhode Island pay taxes toward disability insurance covering part of an employee's wages if they are physically unable to work. All businesses must offer each employee unemployment insurance and workers' compensation for work-related incidents regardless of their work hours, while small businesses with at least 50 employees have to give eligible workers an annual unpaid leave of 12 weeks to comply with the Family Medical Leave Act. Also, small business employers have to help contribute to employees' retirement by paying for half their Medicare and Social Security taxes.

One of the most common nonmandatory benefits that small businesses offer is paid time off for holidays, illness and vacations. This paid time off usually is based on the employee's work status, tenure and hours worked. Employers often also give employees access to retirement plans such as 401(k) plans and various Individual Retirement Account (IRA) options. Small businesses can choose a percentage to match employees' contributions to 401(k) plans up to an annual capped amount according to the U.S. Department of Labor. Furthermore, employees can receive some tax benefits for contributing to an IRA account through their employer.

Health and Wellness Benefits

While not required, small business employers often offer health insurance plans, and small businesses with at least 50 workers face a tax penalty for not doing so under the Affordable Care Act. Supplementary insurance plans for vision and dental insurance along with health-savings plans help employees reduce their costs for preventative care and treatments. Life insurance plans can provide some security to employees' families in the event of their death. Other wellness benefits employees may receive include gym memberships, company wellness programs and recreational activities to get workers active.

Other Benefits Employers Can Offer

Small businesses can include additional compensation and benefits to help employees develop their skills and feel empowered in their work. For example, employees may get access to training programs or mentorship to learn from more experienced professionals and prepare themselves for promotions. Companies can also offer flexible working options like telecommuting and flexible work schedules or even provide onsite childcare to assist workers with families. Lumen Learning says that other benefits can include providing free lunches, taking employees out for social events and providing workers an allowance to purchase equipment they want, such as a new computer or tablet.