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Compensation of employees (CE) is a statistical term used in national accounts, balance of payments statistics and sometimes in corporate accounts as well. It refers basically to the total gross (pre-tax) wages paid by employers to employees for work done in an accounting period, such as a quarter or a year.
However, in reality, the aggregate includes more than just gross wages, at least in national accounts and balance of payments statistics. The reason is that in these accounts, CE is defined as "the total remuneration, in cash or in kind, payable by an enterprise to an employee in return for work done by the latter during the accounting period". It represents effectively a total labour cost to an employer, paid from the gross revenues or the capital of an enterprise.
Compensation of employees is accounted for on an accrual basis; i.e., it is measured by the value of the remuneration in cash or in kind which an employee becomes entitled to receive from an employer in respect of work done, during the relevant accounting period – whether paid in advance, simultaneously, or in arrears of the work itself. This contrasts with other inputs to production, which are to be valued at the point when they are actually used.
For statistical purposes, the relationship of employer to employee exists, when there is an agreement, formal or informal, between an enterprise and a person, normally entered into voluntarily by both parties, whereby the person works for the enterprise, in return for remuneration in cash or in kind. The remuneration is normally based on either the time spent at work, or some other objective indicator of the amount of work done.
For social accounting purposes, CE is considered a component of the value of net output or value added (as factor income). The aim is not to measure income actually received by workers, but the value which labour contributes to net output along with other factors of production. The underlying idea is that the value of net output equals the factor incomes that generate it. For this reason, some types of remuneration received by employees are either included or excluded, because they are regarded as either related or unrelated to production or to the value of new output.
In different countries, what is actually included and excluded in CE may differ somewhat. The reason is that the way in which workers are compensated for their labour may be somewhat different in different types of economies. For example, in some countries workers get substantial payments "in kind", in others they don't. Systems of social insurance also differ between countries, and some countries have little social insurance. One has to keep this in mind when comparing CE magnitudes for different countries.
A compensation system has to be aligned to the mission, vision, business strategy and organizational structure of a company to design the compensation plan in an efficient way to can achieve the goals. Businesses within the same organization will have different competitive conditions, acquire different business strategies, and design compensation strategies. A general compensation plan consists of three components: a base compensation, rewarding incentives, and indirect compensation in form of benefits.