Compensation

This text looks at salary and bonuses, benefits, insurance, long-term incentive plans, and paid expenses. Some companies offer employee stock options believing that they incentivize employees with an ownership stake in the firm to boost the company's stock price (ordinarily a function of firm performance). Managers may use some of these tools when organizational systems govern salary.

Fringe Benefits

Fringe benefits are various indirect benefits, often of a more discretionary nature than standard benefits.


Learning Objectives

Explain fringe benefits


Key Takeaways

Key Points
  • The term was coined during World War II to describe the various indirect benefits which industry had devised to attract and retain labor when direct wage increases were prohibited.
  • Companies that offer such work-life perks aim to raise employee satisfaction and thus corporate loyalty.
  • Certain fringe benefits may be excluded from an employee's gross income and are thus not subject to federal income taxes. An example of this is flexible spending accounts, 401(k), and 403(b). Accident, health, and life insurance plans also act in this way.
Key Terms
  • tax shelter: A legal structure that reduces tax liability for a person or that person's assets.
  • 403 (b): A U.S. tax-advantaged retirement savings plan available for public education organizations, some non-profit employers, cooperative hospital service organizations, and self-employed ministers in the United States. It has tax treatment similar to a 401(k) plan.
  • 401(k): 401(k) are "defined contribution plans" with annual contributions limited (currently to $17,000). Contributions are "tax-deferred" in that they are deducted from paychecks before taxes and then taxed when a withdrawal is made from the 401(k) account. Depending on the employer's program, a portion of the employee's contribution may be matched by the employer.


The term "fringe benefits" was coined by the War Labor Board during World War II to describe the various indirect benefits which industry had devised to attract and retain labor when direct wage increases were prohibited. The term perks (also perqs) is often used colloquially to refer to those benefits of a more discretionary nature.

Perks are often given to employees who are doing notably well or have seniority. Common perks are hotel stays, free refreshments, leisure activities on work time, stationery, allowances for lunch, and take-home vehicles. When multiple choices exist, select employees may also be given first choice on such things as job assignments and vacation scheduling. They may also be given first chance at job promotions when vacancies exist.

 Company Car: One of the perks this lifeguard enjoys is the use of a company car.

Benefits may also include formal or informal employee discount programs that grant workers access to specialized offerings from local and regional vendors (e.g., movies and theme park tickets, wellness programs, discounted shopping, hotels and resorts, and so on). Companies who offer these types of work-life perks seek to raise employee satisfaction, corporate loyalty, and worker retention by providing valuable benefits that go beyond a base salary figure.

Some fringe benefits (for example, accident and health plans, and group-term life insurance coverage up to US $50,000) may be excluded from the employee's gross income and are therefore not subject to federal income tax in the United States. Some function as tax shelters (for example, flexible spending accounts, 401(k),and 403 (b)). Fringe benefits are also thought of as the costs of keeping employees other than salary. These benefit rates are typically calculated using fixed percentages that vary depending on the employee's classification and often change from year to year.