Compensation

People talk about loving or hating their job, but do they ever mean that they love or hate how much compensation they receive for the job that they perform? Can someone pay you enough to take on jobs like Mike Rowe did on his television show, Dirty Jobs? How much an employee or manager is paid and the different ways that their compensation can be structured is an area in which HR managers find themselves competing with other employers. As the business environment become more complex, so do the forms of employee financial compensation. From a business standpoint, employee compensation can be thought of as the cost of acquiring human resources for running operations.

Salary

A salary is a form of compensation paid periodically by an employer to an employee, the amount and frequency of which may be specified in an employment contract. In general, employees paid a salary do not “punch a clock,” and they work however many hours are necessary to accomplish organizational goals and objectives. Most managers are paid a salary that is calculated in terms of annual, monthly, or weekly earnings instead of hourly pay. U.S. employment law distinguishes between exempt (salaried) and nonexempt (hourly) workers. Employers can require exempt employees to work long hours without paying overtime.

Today, the idea of a salary continues to evolve as part of a system of all the combined rewards that employers offer to employees. Salary is coming to be seen as part of a “total rewards” system, which includes bonuses, incentive pay, commissions, benefits, perks, and various other tools that help employers link rewards to an employee’s measured performance.

Stock Options

Something that has become increasingly common is to offer salaried employees options to purchase stock in the company. An employee stock option (ESO) is a call option on the common stock of a company, granted by the company to an employee as part of the employee’s compensation package. The objective is to give employees an incentive to stay with the company and behave in ways that will boost the company’s stock price. For example, you could be given the right to buy 5,000 shares in total at a price that is lower than the market price with the options vesting 20% over 5 years. This would mean that for every year you remained employed at the company, you would be able to buy 1,000 shares at a discounted price. The ESO becomes more valuable as the company’s stock climbs higher over time.

Wage Systems

Wage payment systems offer another means by which organizations compensate employees. Unlike salary, wage systems are based on either hours worked or some other measure of production. Some of the most common wage systems are the following:

• Time rate: Under this system, a worker is paid by the hour for time worked. Time worked beyond a set amount (generally 40 hours per week) is paid as “overtime” and at a higher base hourly wage, usual 1 1/2 times higher.
• Differential time rate: According to this method, different hourly rates are fixed for different shifts or different assignments. The most common differential time rate occurs in production facilities where workers who are assigned to a graveyard shift (e.g., 11:00 p.m.–7:00 a.m.) are paid a “shift differential” that can range from a few cents to many dollars per hour.
• Payment by piecework: The worker’s wages depend on their output and the rate of each unit of output; it is in fact independent of the time taken by the worker. In other words, for every “piece” a worker produces, he or she is paid a set amount. This type of pay has fallen out of favor with many businesses since it emphasizes quantity over quality. That said, today’s “gig economy” relies on a kind of payment by piecework. According to Uber, the company’s drivers are independent contractors, receiving payment for each trip.

Hybrid Wage Systems

Some employees’ positions are structured in a way that doesn’t fit with conventional salary or wage systems. In these cases, employers pay their employees by a “hybrid method.” Hybrid wage systems are most common in sales positions or management positions. The most common hybrid wage systems are the following:

• Straight Commission. Under a straight commission system, the employee receives no compensation from their employer unless they close a sale or transaction. Real-estate agents and car sales staff are two of the best known examples of professions in which straight commission is the standard form of compensation. One hundred percent of such employees’ compensation is dependent upon selling the customer a product, good, or service. This approach to compensation has fallen out of favor in many businesses because it can lead to salespeople to make high-pressure sales—putting undue pressure on customers to buy something so the salesperson can get paid.
• Salary plus commission. Similar to the straight commission, salary plus commission requires an employee to make a sale or “close a deal” in order to earn compensation. However, only a portion of the employee’s compensation comes from the commission. The employer pays the employee some level of compensation every pay period, regardless of their sales level. This reduces the necessity for high-pressure sales tactics, so long as the base salary is adequate. Wait staff at restaurants are essentially paid hourly wages plus commission (i.e. tips), but the hourly wage for such work can be as little as $2.10 per hour.
  
• Salary plus bonus. When an employee is paid a salary plus bonus, the bonus is not paid unless sales-volume or production goals are met or exceeded. For example, the manager of a real-estate firm may be paid a substantial salary but will earn a bonus only if the office he or she manages exceeds some pre-established sales figure for the month, quarter, or year. The advantage of a salary plus bonus is that it’s tied to the performance of a department or division, thereby motivating the entire team to work together to reach organizational goals or sales targets.