Compensation is a cash or non-cash payment made in exchange for services rendered. Compensation can include base pay, bonuses, commissions, merit pay, and tip income. It can also include ancillary or deferred payments, such as stock options, vacation pay, pension benefits, free parking, and medical insurance. Compensation levels are based on regional salary surveys; a periodic review of these surveys ensures that an employer sets compensation packages at competitive levels, in order to retain employees. Compensation is also based on performance, so that top-level performers can receive significantly greater pay than mid-range performers.
In a service business, compensation is typically the largest expense incurred by the employer. It is still a significant expense even in businesses that do not require a significant amount of employees.