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.
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.
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.
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.