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Compensation: Definition, Example and Related Terms

What is Compensation ?

Compensation is a term that refers to the payment that one party gives to another in exchange for services rendered or work done. This payment can come in many forms, including money, benefits, shares in a company, or other types of rewards.

In a business context, compensation is often used to incentivize employees or contractors to perform at their best. It is a critical part of any commercial contract, as it sets out what an individual or company will receive in return for their efforts. Compensation can be straightforward, such as an hourly wage, or it can be complex, such as a package that includes base pay, bonuses, stock options, and other benefits.

It is important to understand the different forms of compensation, as well as how they can be used to motivate and reward performance. A good compensation package can help to attract and retain top talent, while a poorly structured package can lead to dissatisfaction and turnover.


  • Scenario Description
    A company enters into a contract with a software developer to create a new application. The contract specifies that the developer will be paid a fixed fee for the project, plus a bonus if the application is delivered ahead of schedule. In this example, the fixed fee is the base compensation that the developer will receive for their work. The bonus is an additional form of compensation that is designed to incentivize the developer to complete the work quickly.
    A salesperson is hired by a company to sell its products. The salesperson's compensation package includes a base salary, a commission on every sale they make, and a yearly bonus if they exceed their sales targets. In this example, the base salary, commission, and bonus are all forms of compensation. The commission and bonus are designed to motivate the salesperson to sell as much product as possible.