Compensation and benefits 101: a glossary of terms

Acronyms, jargon, business buzzwords – they’re inescapable.

Every industry and every function has them, and compensation and benefit is no exception to that rule – what’s the difference between base and variable compensation? How are pay equity and pay transparency related? What does vesting really mean?

Language should never be a barrier to doing your job effectively, so we’ve put together this glossary of terms commonly used in the world of compensation and benefits as a reference point for those moments of confusion.

Across-the-board increase

Also known as general increase. An increase in employee compensation which is standardised across an entire organisation e.g. all employees receive a 1% salary increase regardless of performance. They are often tied to inflation or increases in the cost of living.

Annual turnover rate

Employee turnover rate measures the number of employees who leave an organisation within a specific time period – usually an annual figure.

It’s calculated by taking the number of employees who left the company in a given year and dividing this by the average number of employees the company had in that year (number of employees at the start of the year plus the number of employees at the end of the year, divided by two). The resulting figure is then multiplied by 100 to get a percentage.

Base pay

Also known as base salary, basic pay, basic salary. The regular salary an employee receives before any additions e.g. bonuses, shift differential pay, overtime or reductions e.g. pension contribution, health insurance, cycle scheme are made.

Bonus

A payment to an employee which goes above and beyond their normal salary, typically given when employees hit defined goals to incentivise performance (performance bonus), to reward exceptional performance (recognition bonus) or to incentivise remaining with the company (retention bonus). Bonuses may be given out on an adhoc, one-off basis or there may be an annual bonus cycle in operation.

C-level

Also known as c-suite. Refers to any executive-level employees within a company. The ‘c’ stands for ‘chief’ as in job titles such as Chief Executive Officer (CEO), Chief Financial Officer (CFO), Chief Marketing Officer (CMO) and so on.

Cliff

A period of time which must pass before an employee’s equity (stock options) starts vesting. Typically there is a one year cliff on equity, so for employees this is normally the one year anniversary of them starting their role.

Compa ratio

The compa ratio (also referred to as market ratio) is calculated by taking an employee’s current salary and dividing it by the target rate (typically the midpoint of the salary band for that role). It’s useful in assessing salary band progression, to highlight where employees sit within their salary band and identify if you are under or over paying employees against their salary band.

If the resulting ratio is 1.0, the salary is exactly at the midpoint of the range. Anything less than 1.0 means the salary is below the salary midpoint, and above 1.0 means it is above.

Compensation

Any payment given by employers to employees during their time of employment, in return for their time and work.

It primarily refers to an employee’s base wage and salary, with the term ‘compensation and benefits’ commonly used to refer to salary plus any additional perks e.g. bonuses, commission, equity, pension, healthcare also included in an employee’s compensation package.

Compensation benchmarking

Also known as salary benchmarking. The process of evaluating a company’s compensation in comparison to compensation across the wider industry.

It typically involves comparing internal job descriptions, salary, and benefits with external data from similar companies. The aim is to determine how fair and competitive a company’s compensation is when compared to competitors and the wider market.

Traditionally, compensation benchmarking datasets have been bought from consultants like Radford or Mercer – but this data is often difficult to interpret, unreliable, and outdated. Today, salary benchmarking tools like Ravio exist to make the compensation benchmarking process simple, accurate, and real-time.

Compensation philosophy

Also known as a pay philosophy or compensation policy. A formalised statement documenting a company’s principles in relation to compensation and benefits, typically linking to the company’s overall vision, values, and goals. It should include the company’s high level approach to elements of compensation such as salary bands, variable compensation, pay transparency, salary reviews, global pay, and more.

Compensation package

Also known as pay package. The overall value a company offers an employee for their work, including salary as well as any variable compensation (bonuses, incentives etc) and benefits (health insurance, pensions, cycle to work scheme etc).

Compensation review

Also known as salary review. A regular evaluation process to determine whether employee compensation should be adjusted. It typically includes reviewing if individual salaries and benefits fairly and accurately represent the value and performance of employees’ work, as well as an overall look at where company compensation lies amongst competitors and the wider market. It may also include goals to address and improve pay transparency and pay equity. Compensations reviews typically occur annually.

Compensation framework

Also known as compensation strategy. A company’s implementation plan and approach to compensation and benefits.

The compensation strategy should use the compensation philosophy as its starting point, but go into detail on how this philosophy is actually put into place. This typically includes:

• Job framework
• Level framework
• Location framework
• Salary bands

Cost of living adjustment (COLA)

An increase to employee compensation or benefits based on changes in the costs of goods and services, reflecting that these changes will make a big difference to the monthly outgoings of employees.

Dilution

When a company creates or issues additional new shares it results in a reduction of value for existing shares and percentage ownership of the company the share represents, because there are more shares in existence – so each represents a smaller piece of the whole.

Direct compensation

Any compensation given to employees by a company which holds ‘direct’ monetary value, including base salary, bonuses, commission, overtime. This is as opposed to indirect compensation, which refers to other non-monetary compensation with ‘indirect’ value such as health insurance, pension contributions, learning and development funds.

Diversity, Equity, and Inclusion (DEI)

Diversity, equity and inclusion (DEI) in the workplace context refers to the policies and practises a company puts in place to ensure fair and equal representation, participation, and compensation of all people – regardless of race, ethnicity, gender, sexual orientation, age, disabilities, religion, marital status, nation origin etc.

Employee stock pool

Also known as employee option pool. A number of company shares which are reserved and set aside to be given to existing and new employees as equity compensation.

Equity compensation

Also known as share-based compensation.

Equity is a type of non-cash compensation wherein employees are given an ownership stake in the company through shares in the business. It can be offered alongside base salary and variable pay in a total compensation package, and is common in startups as a way to keep payroll costs lower whilst incentivising long-term employee loyalty.

Equity compensation can be granted at the start of employment as a new hire equity grant, and can also be used as a performance raise to recognise and reward existing employees, through equity refresh grants. 

EU Pay Transparency Directive

A set of rules aiming to combat pay discrimination and to help to close the gender pay gap in companies based in Europe. The Directive was officially adopted by the European Parliament in March 2023, and will be fully rolled out by June 2026.

Read more: Everything you need to know about the EU Pay Transparency Directive

Executive compensation

Also known as executive pay. Remuneration packages designed for C-level leaders within a company.

Fringe benefits

Benefits refers to any additional compensation offered by an employer to employees, which go beyond their salary. Benefits are sometimes split into ‘core’ and ‘fringe’ benefits.

Core benefits are standard expected benefits, often legally required, such as a minimum number of paid holiday days or a workplace pension plan. Fringe benefits are other, more bespoke benefits that are offered such as additional days off for wellness or mental health, flexible working arrangements, or a cycle to work scheme.

Full Time Equivalent (FTE)

A unit to measure employee working hours, particularly used in workforce planning as a way to standardise measures of working hours across full-time and part-time employees. 1.0 FTE is the number of hours a full-time employee is expected to work, often 40 hours per week. 0.6 FTE (for example) would represent an employee who works 3 days per week, 24 hours per week.

Gender pay gap

A measure of equality in pay, demonstrating the difference between average earnings for men and women. It is usually expressed as the percentage men earn in excess of women in a particular company, role, or industry e.g. 6% gender pay gap.

Read more: Gender pay gap calculations: median vs mean, adjusted vs unadjusted

Geographic pay differential

Also known as location-based pay. Changes in employee compensation across different geographic locations – additional or reduced compensation to account for higher or lower cost of living in a given place.

Global salary converter

Also known as global wage converter or calculator. A way to compare how typical salaries differ across different countries worldwide to ensure fair compensation for a global workforce. Salary converters are typically based on calculations of the cost of living in different cities and countries.

Headcount planning

A process to help companies ensure that they have the right people and roles in place to deliver on their strategic goals and vision, and allocate budget and resources accordingly to address any gaps. It is typically carried out annually.

HR dashboard

A management tool for HR teams, enabling them to summarise and visualise key metrics and KPIs in one place, to track progress and identify trends or areas for improvement.

Human resources information system (HRIS)

Software used as a central source for collecting, storing, organising, and managing employee information and data. Examples of common HRIS systems include BambooHR, Deel, Rippling, HiBob, and Persenio.

Hybrid working

A type of flexible working where employees split their time between the office and remote working from home. Companies typically define their hybrid working schedule e.g. requiring employees to work in the office 2 days per week.

Incentive plan

A type of compensation structure where rewards are used to motivate and incentivise employees to achieve specific goals, going above and beyond the base compensation and benefits received. This is commonly used with sales teams who often gain incentives or commission for signing new customers.

Indirect compensation

Any non-monetary compensation given to employees by a company which holds ‘indirect’ value such as health insurance, pension contributions, learning and development funds. This is as opposed to compensation with ‘direct’ monetary value, including base salary, bonuses, commission, overtime.

Individual contributor

Employees who contribute to company functions but do not have management duties and responsibilities.

Job levels

Also known as job grade or job classification. A way of defining the expectation for different job roles within an organisation, including the responsibilities and level of authority within the hierarchy of the company – see also levelling framework.

Job family

A group of job roles which are similar in terms of work, skills, level of responsibility. It can be a useful way to organise roles in a way that allows interrogation on pay equity, salary banding, career progression, and more.

Job mapping

A process undertaken to establish the job roles which are essential to the running of a company. This includes existing roles as well as open roles to be filled, and future roles which will be required e.g. to meet financial objectives or add resourcing to a specific team. Some companies will also undertake skills mapping (also known as competency mapping).

Levelling framework

The approach a company takes to defining the job levels within their organisation and ensure consistency across teams and individuals in terms of responsibilities, workload, job titles, compensation, benefits, training budgets, career progression, and more.

Living wage

An hourly rate of pay calculated based on the cost of living in a given location. It’s typically a higher rate than the minimum wage for that location, which is often not enough earnings for people to live fairly on and often has related age limits.

In the UK in 2023, for instance, the minimum wage is £5.28 per hour but this can only be given to 16-17 year olds, whereas the National Living Wage is £10.42 per hour and is required for all employees over 23.

Manager

Employees with responsibility for overseeing functions and/or managing teams of people – as opposed to individual contributors.

Market adjustment

Changes in compensation made based on changes in the market to ensure compensation remains fair and competitive even if the labour market externally changes e.g. during a time of inflation.

Market midpoint salary

The median salary paid for a given job role and grade – half of the market pays less than this, half pays more. It represents an average market value for that job position, which is a useful starting point for ensuring fair and competitive compensation.

Merit cycle

A compensation system wherein employee performance is used to determine increases in compensation. The merit cycle typically runs alongside the performance review process on an annual basis, with high-performing employees rewarded with an increase in base salary or a one-off performance bonus – often known as a merit raise or increase.

Merit matrix

A framework for making decisions during the merit cycle about salary raises based on employee performance. It’s a table format which uses two main factors to evaluate employee raises: their performance rating and their existing position within their salary band. Generally speaking, those who have a very high performance rating and are low in their salary band will be rewarded with higher merit raises, whereas those who have a low performance rating and are already in the top of their salary band will receive low (or no) merit raises.

Merit pool

An amount of company budget which has been set aside and dedicated to providing employees with merit raises during the merit cycle.

Offer letter

A written document outlining key terms for a prospective new employee, including the compensation and benefits package that the employer is offering. It is often the final stage in a recruitment process.

On-demand pay

A process for paying employees immediately after work is completed e.g after a shift or project is completed, instead of waiting for the monthly payroll cycle. Some companies allow employees to request on-demand pay in cases of monetary stress, and others may implement on-demand pay as a standard procedure.

On-target earnings

The total monetary compensation received by an employee who has a base salary but also a variable compensation component based on performance, such as commission for sales teams. This is the maximum amount this employee can earn if they are ‘on target’ for their performance and are therefore receiving their maximum commission.

Overtime pay

Additional earnings received when an employee works over and above their normal working hours. Overtime pay is not legally required, but some employers choose to implement it, especially in roles where working over hours may happen more regularly e.g. retail or hospitality.

Pay adjustment

A pay adjustment is any adhoc or irregular change to an employee’s monthly pay due to factors such as lengthy sick leave, a bonus or results-based extra payment, start or end of contract. It doesn’t include ongoing salary changes e.g. annual salary increases or promotions.

Pay adjustment budget

An amount of money set aside by a company to account for any pay adjustments which need to be made.

Pay equity

A core concept that equal work deserves equal pay, regardless of any differences in employee race, gender, age, national origin, sexuality etc. In practice for HR teams, pay equity means ensuring that all employees are paid fairly and that any salary disparities e.g. gender pay gap across the organisation are removed.

Pay progression

Also known as salary progression. The process of an employee gaining increased compensation as their time in a role increases and they develop their skills and experience.

Paid time off (PTO)

Also known as paid leave, holiday entitlement. The designated time away from work for which employees still receive their normal compensation. Usually counted in days e.g in the UK employees who work 5 days a week must receive at least 28 paid holiday days per year (including bank holidays).

Pay transparency

The practice of openly sharing information regarding compensation within a company. Pay transparency is important for ensuring pay equity within an organisation, highlighting and making public any disparities across employee salaries.

See also: EU Pay Transparency Directive.

Percentiles

A statistical figure used by compensation professionals as a way to rank salaries against the wider market, defining a salary relative to the distribution of salaries other companies pay for the same role. For instance, a 50th percentile salary means that 50% of companies pay the same or less for that role.

Many companies use percentiles to inform recruitment and salary offers e.g. a company may opt to set their salaries at the 90th percentile to ensure they attract the best candidates (meaning only 10% of companies offer higher salaries for that role).

Reasonable adjustments

Changes to a working environment or working arrangements made to ensure that disabled employees can perform their job without difficulties or barriers. Reasonable adjustments are often legally required e.g. the UK Equality Act 2010 views failing to make reasonable adjustments as a form of disability discrimination.

Sabbatical

A period of time which employees are allowed away from work, either paid or unpaid, with the guarantee that their job will remain theirs. Typically, sabbaticals are offered as an employee benefit for employees who remain at a company for a certain amount of time e.g. after 5 years of service employees may be able to take a 3 month sabbatical.

Salary bands

Also known as pay bands or salary ranges. A defined pay range which is aligned to a set of job positions within a company, typically varying depending on the level of the role and the function it sits within. It’s a way of setting target pay ranges for all employees, with a minimum and maximum amount the company is willing to pay someone in a particular role.

Salary freeze

Also known as a pay freeze. A decision made by a company to suspend any salary increases for a certain period of time, typically due to financial constraints within the business.

Shift differential pay

A method of offering employees increased compensation for working less desirable shifts, typically those outside of normal working hours e.g. late night or bank holidays.

Target percentile

Most companies use a target percentile as part of their compensation strategy, for instance offering salaries at the 75th percentile (the median/middle of the market salary for that job role) to attract the top talent on the market.

Time off in lieu (TOIL)

When an employee is offered time off work to ‘replace’ any overtime hours they may have worked – typically instead of offering overtime pay.

Total compensation

Also known as total compensation package or total reward package. An overall measure of all forms of compensation an employee is given by an employer for their work, including base salary, any bonuses or variable pay, and benefits.

Total Cost of Workforce (TCOW)

A compensation metric used as a measure of overall company spend on employees – salaries, variable compensation, benefits, recruiting, equipment, facilities, training. This overview of personnel spend is especially useful for budgeting and forecasting.

Variable compensation

Also known as variable pay. Compensation given to employees based on their performance, as a cash incentive. It’s variable because it isn’t a set amount, but rather changes depending on how well an employee does against their targets. It’s common within sales teams, who often have a base salary and a structure which gives bonuses or commission based on meeting targets.

Vesting

The process of gaining 100% ownership of an asset over time. It is commonly used in relation to equity and share-based compensation: shares will be given to employees when they join a company with a defined ‘vesting period’ (typically four years with a one year cliff), after which the employee will fully own those shares.

It’s a way to incentivise employees to stay with a company for a longer period of time, as typically the right to those shares is waived if the employee leaves before the vesting period is complete.

Worker council

In Germany, a works council (Betriebsrat) is a group of employees elected to represent the rights of the company’s whole workforce in conversations with leaders and board members.

The Works Constitution Act makes it a requirement for all companies with five or more employees to allow the creation of a works council, and they ensure that employers observe employment law and collective agreements, and to raise the views of employees regarding workplace improvements.

This typically includes factors which are vital to a compensation and benefits approach, like:

• Company working hours, break times, overtime policy
• Holiday days
• Compensation structures – including pay discrimination.

So if you hire in Germany, they're important to be aware of as they can have a large influence.