different forms of compensation
There are two forms of compensation provided to employees; direct and indirect. Direct forms of compensation have a multitude of types or methods, from salaries to bonuses. Indirect compensation is primarily the various types of benefits and long term incentives.
One of the forms of compensation is direct remuneration for services rendered by the employee. The term used for this is wages. It consists of four different groups of payment from the employer to the employee. They are salary, hourly, commission and bonus types of wages.
Direct Forms of Compensation
- Salary This type of wage is customarily a set sum of remuneration over a defined period of time. The most traditional form is a dollar amount over a period of one year. The frequency of payment is another part of the compensation and is based on industry standards. Most businesses pay for services twice a month. Most commonly used tool to pay professional or licensed employees. In general there is an expectation from the employer of a longer term commitment from the employee for providing a regular uninterrupted compensation.
- Hourly This is a dollar amount per hour of service to the employer, more commonly used to compensate unskilled and skilled laborers in the workforce. This form of compensation comes with an implied understanding that during times of slow or minimal workloads, the employee may not be used to provide services. In effect, there is no guarantee of a regular cycle of pay.
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Commission
When compensation is based on
volume or some form of performance, this is known as commission based remuneration.
Other terms used include piecework or piecemeal. Many industries used
this type of remuneration to get a minimum standard of production in exchange
for compensation. It is used to shift risk from the employer to the
employee. There are two methods to calculate commission. One is
based on volume of services and the other is based on sales.
An example of an industry that uses volume remuneration extensively is the fishing industry. The men that work on the boats have a risk that the captain will not find fish. In exchange, the captain may hit upon some nice fishing grounds and bring in a large catch. Once the fish is offloaded, the processors use commission to compensate the production workers. These workers are paid by piecemeal, that is, how much final product they can generate from the catch. Typically their cuts of the meat are weighed and they are compensated based on that measurement for services rendered.
An example of an industry that uses sales based commissions is the auto retail dealerships. Here the salesman is enticed to get the buyer to purchase the vehicle so that he may receive compensation for his services. Other commission based industries include, brokers, real estate agents, door to door salesmen, internet website owners and some folks in the cleaning services.
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Bonuses
Bonuses are used to increase
performance from the employee. This is a variable type of remuneration
and is more commonly found with salaried staff to incentive them for a
particular goal whether time or volume based. Other reasons used for
bonuses are to increase or maintain retention of certain skills or the pool of skill sets needed in the company. Sometimes bonuses are paid when a
company meets certain financial standards or goals over an extended period of
time.
Bonuses are not commonly used with hourly or commission based employees due to the nature of the type of compensation already established. However, in small businesses it is used as a tool to incentive these two types of remuneration to meet certain goals.The other form of compensation is indirect in value. This includes benefits and equity based programs. In general, these two types of indirect compensation provide value to an employee over a longer period of time.
Indirect Forms of Compensation
- Benefits
This particular group is
traditionally thought of in the form of insurances (health, dental, life,
disability and vision) and retirement. Very few small businesses provide
benefits to their employees due to cost involved. When small businesses
begin providing benefits, they customarily start out with retirement because of
simplicity and low cost. As they grow, they add health insurance and
continue to expand the benefit package as the number of employees increase and
the risk of business performance decreases. Benefits allow for retention
and recruitment.
Other benefits can include transportation, paid time off, vacation time, and customized incentives (lodging, meals, phones, etc.). -
Equity Based Programs
Rarely found in the small business
world for several reasons. These types of indirect compensation tie the
employee to the company via ownership. Due to the complexity and the
legal issues involved, very few small businesses use this tool. This is a
sophisticated method to retain key employees and is discussed in another
article.
Compensation represents by far the most important and contentious element in the employment relationship, and is of equal interest to the employer, employee and government.
1. To the employer because it represents a significant part of his costs, is increasingly important to his employee’s performance and to competitiveness, and affects his ability to recruit and retain a labor force of quality.
2. To the employee because it is fundamental to his standard of living and is a measure of the value of his services or performance.
3. To the government because it affects aspects of macroeconomic stability such as employment, inflation, purchasing power and socioeconomic development in general.
While the basic wage or pay is the main component of compensation, fringe benefits and cash and non-cash benefits influence the level of wages or pay because the employer is concerned more about labor costs than wage rates parse. The tendency now is towards an increasing mix of pay element of executive compensation has substantially increased in recent years.