Compensation includes topics in regard to wage and/or salary programs and structures, for example, salary ranges for job descriptions, merit-based programs, bonus-based programs, commission-based programs, etc. (Also see the Related Info (including Benefits).)
Compensation is payment to an employee in return for their contribution to the organization, that is, for doing their job. The most common forms of compensation are wages, salaries and tips.
Compensation is usually provided as base pay and/or variable pay. Base pay is based on the role in the organization and the market for the expertise required to conduct that role. Variable pay is based on the performance of the person in that role, for example, for how well that person achieved his or her goals for the year. Incentive plans, for example, bonus plans, are a form of variable pay. (Some people might consider bonuses as a benefit, rather than a form of compensation.) Some programs include a base pay and a variable pay.
Organizations usually associate compensation/pay ranges with job descriptions in the organization. The ranges include the minimum and the maximum amount of money that can be earned per year in that role.
Employees have certain monies withheld from their payroll checks, usually including federal income tax, state income tax, FICA (social security) contributions, and employee contributions to the costs of certain benefits (often medical insurance and retirement).
Exempt and Non-Exempt
Jobs in organizations have two classifications, exempt and non-exempt.
Professional, management and other types of skilled jobs are classified as exempt. Exempt jobs get a salary, that is, a fixed amount of money per time interval, usually a fixed amount per month. It's not uncommon for exempt positions to receive higher compensation and benefits than non-exempt jobs, although non-exempt jobs often can make more money than exempt jobs simply by working more hours.
Unskilled or entry-level jobs are usually classified as non-exempt. Non-exempt jobs usually get a wage, or an amount of money per hour. Non-exempt jobs also get paid over-time, that is, extra pay for hours worked over 40 hours a week or on certain days of the week or on holidays.
Each job must have the same pay range for anyone performing that job, that is, one person can't have a higher maximum pay than someone else doing that same job.
Employee Benefits
Employee benefits typically refers to retirement plans, health life insurance, life insurance, disability insurance, vacation, employee stock ownership plans, etc. Benefits are increasingly expensive for businesses to provide to employees, so the range and options of benefits are changing rapidly to include, for example, flexible benefit plans.
Benefits are forms of value, other than payment, that are provided to the employee in return for their contribution to the organization, that is, for doing their job. Some benefits, such as unemployment and worker's compensation, are federally required. (Worker's compensation is really a worker's right, rather than a benefit.)
Prominent examples of benefits are insurance (medical, life, dental, disability, unemployment and worker's compensation), vacation pay, holiday pay, and maternity leave, contribution to retirement (pension pay), profit sharing, stock options, and bonuses. (Some people would consider profit sharing, stock options and bonuses as forms of compensation.)
You might think of benefits as being tangible or intangible. The benefits listed previously are tangible benefits. Intangible benefits are less direct, for example, appreciation from a boss, likelihood for promotion, nice office, etc. People sometimes talk of fringe benefits, usually referring to tangible benefits, but sometimes meaning both kinds of benefits.
You might also think of benefits as company-paid and employee-paid. While the company usually pays for most types of benefits (holiday pay, vacation pay, etc.), some benefits, such as medical insurance, are often paid, at least in part, by employees because of the high costs of medical insurance.
The basic components of employee compensation and benefits:
Employee compensation and benefits are divided into four basic categories:
Equity-based compensation
Equity based compensation is an employer compensation plan using the employer’s shares as employee compensation. The most common form is stock options, yet employers use additional vehicles such as restricted stock, restricted stock units (RSU), employee stock purchase plan (ESPP), and stock appreciation rights (SAR).
External equity
External equity refers to the similarity of the practices of other organization of the same sector. If perceived like this, it can be said that the program is considered competitive or externally equitable. Usually, these comparisons are done in external labor markets where the wages vary. There are various factors that contribute to create these differences, for example, geographical location, education and work experience.
Internal equity
Internal equity is employees' perception of their duties, compensation, and work conditions as compared with those of other employees in similar positions in the same organization. As this comparison is always made within the company, problems with internal equity can result in conflict among employees, mistrust, low morale, anger and even the adoption of legal actions. Workers can make the evaluation of internal equity regarding two main points. On the one hand, procedural justice is the person’s perceived fairness of the process (assigned tasks) and procedures used to make decisions about him/her. On the other hand, distributive justice refers to the perceived fairness in the distribution of outcomes (salaries). The classic objectives of equity based compensation plans are retention, attraction of new hires and aligning employees’ and shareholders’ interests with the long-term success of the company.
Bonus plans benefits
The concept saying bonus plans can improve employee performance is based on the work of Frederic Skinner, perhaps the most influential psychologist of the 20th century. Using the concept of Operant Conditioning, Skinner claimed that an organism (animal, human being) is shaping his/her voluntary behavior based on its extrinsic environmental consequences – i.e. reinforcement or punishment.
Compensation is payment to an employee in return for their contribution to the organization, that is, for doing their job. The most common forms of compensation are wages, salaries and tips.
Compensation is usually provided as base pay and/or variable pay. Base pay is based on the role in the organization and the market for the expertise required to conduct that role. Variable pay is based on the performance of the person in that role, for example, for how well that person achieved his or her goals for the year. Incentive plans, for example, bonus plans, are a form of variable pay. (Some people might consider bonuses as a benefit, rather than a form of compensation.) Some programs include a base pay and a variable pay.
Organizations usually associate compensation/pay ranges with job descriptions in the organization. The ranges include the minimum and the maximum amount of money that can be earned per year in that role.
Employees have certain monies withheld from their payroll checks, usually including federal income tax, state income tax, FICA (social security) contributions, and employee contributions to the costs of certain benefits (often medical insurance and retirement).
Exempt and Non-Exempt
Jobs in organizations have two classifications, exempt and non-exempt.
Professional, management and other types of skilled jobs are classified as exempt. Exempt jobs get a salary, that is, a fixed amount of money per time interval, usually a fixed amount per month. It's not uncommon for exempt positions to receive higher compensation and benefits than non-exempt jobs, although non-exempt jobs often can make more money than exempt jobs simply by working more hours.
Unskilled or entry-level jobs are usually classified as non-exempt. Non-exempt jobs usually get a wage, or an amount of money per hour. Non-exempt jobs also get paid over-time, that is, extra pay for hours worked over 40 hours a week or on certain days of the week or on holidays.
Each job must have the same pay range for anyone performing that job, that is, one person can't have a higher maximum pay than someone else doing that same job.
Employee Benefits
Employee benefits typically refers to retirement plans, health life insurance, life insurance, disability insurance, vacation, employee stock ownership plans, etc. Benefits are increasingly expensive for businesses to provide to employees, so the range and options of benefits are changing rapidly to include, for example, flexible benefit plans.
Benefits are forms of value, other than payment, that are provided to the employee in return for their contribution to the organization, that is, for doing their job. Some benefits, such as unemployment and worker's compensation, are federally required. (Worker's compensation is really a worker's right, rather than a benefit.)
Prominent examples of benefits are insurance (medical, life, dental, disability, unemployment and worker's compensation), vacation pay, holiday pay, and maternity leave, contribution to retirement (pension pay), profit sharing, stock options, and bonuses. (Some people would consider profit sharing, stock options and bonuses as forms of compensation.)
You might think of benefits as being tangible or intangible. The benefits listed previously are tangible benefits. Intangible benefits are less direct, for example, appreciation from a boss, likelihood for promotion, nice office, etc. People sometimes talk of fringe benefits, usually referring to tangible benefits, but sometimes meaning both kinds of benefits.
You might also think of benefits as company-paid and employee-paid. While the company usually pays for most types of benefits (holiday pay, vacation pay, etc.), some benefits, such as medical insurance, are often paid, at least in part, by employees because of the high costs of medical insurance.
The basic components of employee compensation and benefits:
Employee compensation and benefits are divided into four basic categories:
- Guaranteed pay – a fixed monetary (cash) reward paid by an employer to an employee. The most common form of guaranteed pay is base salary.
- Variable pay – a non-fixed monetary (cash) reward paid by an employer to an employee that is contingent on discretion, performance, or results achieved. The most common forms of variable pay are bonuses and incentives.
- Benefits – programs an employer uses to supplement employees’ compensation, such as paid time off, medical insurance, company car, and more.
- Equity-based compensation – stock or pseudo stock programs an employer uses to provide actual or perceived ownership in the company which ties an employee's compensation to the long-term success of the company. The most common examples are stock options.
Equity-based compensation
Equity based compensation is an employer compensation plan using the employer’s shares as employee compensation. The most common form is stock options, yet employers use additional vehicles such as restricted stock, restricted stock units (RSU), employee stock purchase plan (ESPP), and stock appreciation rights (SAR).
External equity
External equity refers to the similarity of the practices of other organization of the same sector. If perceived like this, it can be said that the program is considered competitive or externally equitable. Usually, these comparisons are done in external labor markets where the wages vary. There are various factors that contribute to create these differences, for example, geographical location, education and work experience.
Internal equity
Internal equity is employees' perception of their duties, compensation, and work conditions as compared with those of other employees in similar positions in the same organization. As this comparison is always made within the company, problems with internal equity can result in conflict among employees, mistrust, low morale, anger and even the adoption of legal actions. Workers can make the evaluation of internal equity regarding two main points. On the one hand, procedural justice is the person’s perceived fairness of the process (assigned tasks) and procedures used to make decisions about him/her. On the other hand, distributive justice refers to the perceived fairness in the distribution of outcomes (salaries). The classic objectives of equity based compensation plans are retention, attraction of new hires and aligning employees’ and shareholders’ interests with the long-term success of the company.
Bonus plans benefits
- Adjust labor cost to financial results – the basic idea is to create a bonus plan where the company is paying more bonuses in ‘good times’ and less (or no) bonuses in ‘bad times’. By having bonus plan budget adjusted according to financial results, the company’s labor cost is automatically reduced when the company isn’t doing so well, while good company performance drives higher bonuses to employees.
- Drive employee performance – the basic idea is that if an employee knows that his/her bonus depend on the occurrence of a specific event (or paid according to performance, or if a certain goal is achieved), then the employee will do whatever he/she can to secure this event (or improve their performance, or achieve the desired goal). In other words, the bonus is creating an incentive to improve business performance (as defined through the bonus plan).
- Employee retention – retention is not a primary objective of bonus plans, yet bonuses are thought to bring value with employee retention as well, for three reasons: a) a well designed bonus plan is paying more money to better performers; a competitor offering a competing job-offer to these top performers is likely to face a higher hurdle, given that these employees are already paid higher due to the bonus plan. b) if the bonus is paid annually, employee is less inclined to leave the company before bonus payout; often the reason for leaving (e.g. dispute with the manager, competing job offer) 'goes away' by the time the bonus is paid. the bonus plan 'buy' more time for the company to retain the employee. c) employees paid more are more satisfied with their job (all other things being equal) thus less inclined to leave their employer.
The concept saying bonus plans can improve employee performance is based on the work of Frederic Skinner, perhaps the most influential psychologist of the 20th century. Using the concept of Operant Conditioning, Skinner claimed that an organism (animal, human being) is shaping his/her voluntary behavior based on its extrinsic environmental consequences – i.e. reinforcement or punishment.
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