- The different forms of compensation include salary, sales commission, tips, stock options, bonuses, incentive pay, benefits, and non-monetary
- Compensation is calculated based on previous experience, level of education, and the level of the position itself
- Direct and indirect are two forms of classifying compensation
Compensation is a topic that all employees should know if looking for work. In contrast, if you are a business owner or work in HR, then compensation is something you are required to know. This is how the workforce operates. Employees offer their skills to businesses for money and vice versa. It is also something that becomes a topic of conversation when applying for any job.
Yet, what many individuals fail to realize, is that there are many forms of compensation. So, today we are going to go over them, so you can have a better understanding. Knowing the differences will also help you be confident when speaking with employers.
What is Compensation?
Before we get into the differences in compensation, let’s outline what it is. That way, everyone is on the same page when understanding.
Compensation is also the payment an employee gets from an employer for services. You can also think of it as money that someone receives from their job. Yet, compensation also means money when someone loses something, damages something, or gets hurt. For example, “workers’ compensation” is offered to employees who are hurt while working.
What Are the Different Types of Compensation?
Now that we know what compensation is let’s look at the different types there are.
An employee’s compensation is usually a combination of salary and hourly pay. A salary means that an employee will be paid the same amount each month, regardless if they worked 40 hours one week or 80 hours another. With this type of compensation package, an employer can offer compensation without worrying about how long an employee works.
Salary is one of the most common forms of compensation that is offered to employees for their work. This can be broken down into:
- Hourly wages
- Weekly wages
- Monthly wages
- Yearly wages
Salary is paid bi-weekly or at the end of the month, depending on the business.
An hourly pay compensation package means that employees will be paid according to the number of hours they work each week, regardless if it is 20 or 40 hours a week. With this type of compensation package, employers must keep good records and ensure that no one works over the maximum amount allowed by law in order not to break any labour laws.
Sales commissions are an amount that is paid to an employee who sells a product or service. For example, a car salesperson will get a percent of the final price of a car they sell. Or an employee may get a percent on the software they sell to other businesses.
Tips are another form of commission that employers receive. Yet, this is generally reserved for people in the service industry, including:
- Hotel employees
- Taxi or Uber drivers
Tips can be a percentage of a bill’s total amount or whatever a person feels is appropriate.
Stock options are a form of equity compensation. Equity compensation means that an employee is being paid based on how much their company has made since they started working there, instead of what they have done throughout each week/month. With stock options, an employee will be given compensation in the form of additional stocks or shares that they can purchase from a company. This type of compensation is only available for companies that have been around long enough to issue stock options and it usually becomes more profitable as time goes on. Stock options are shares of a company available for employees to buy for a price. This price is usually predetermined. This can be motivating for employees and create a strong company culture.
Bonus pay is an extra amount of payment given to an employee on top of their salary. Businesses may offer bonuses to compensation packages as an incentive for employees or potential new hires. Some examples are holiday pay or profit-sharing. A bonus is usually based on how well a business has performed during a specific time frame. For example, a company might give all of its employees one week’s worth of compensation because it did better than expected during the month or year leading up to that bonus payment. If an employee leaves before they receive their full compensation package for work done in that timeframe, then whatever is left over will be saved by the company in case the person returns.
Incentive compensation is paid to employees based on their performance. This means that it will be a function of the employee’s output and how well they have done compared to what was expected before their employment started. For example, if an employer has agreed with an employee that he or she would receive incentive compensation for meeting certain sales targets, then the compensation will be paid out if those targets are met.
An employer may provide employees with compensation packages that include health insurance, retirement plans and other types of benefits beyond compensation such as vacation time or sick leave. These also vary by company but many companies offer their employees a combination of benefits in order to attract talent to their business. Examples include:
- Dental care
- Health care
- Paid leave
- Maternity leave
- Paid holidays
While many jobs offer benefits to employees, the amount of compensation will vary.
The last type is non-monetary. This compensation package refers to anything an employer gives their employees that is not money or something with monetary value, such as a laptop computer or company cell phone. Many companies offer non-monetary compensation in order to attract talent from other businesses and they can be just as valuable for the employee receiving them as compensation for work done. Examples of non-monetary compensation include:
- Free meals
- Extra days off from work
- Flexible work hours
- Offering to allow an employee to mentor another
- More responsibility
Again, these forms of compensation are for employees who go above and beyond in their roles.
How Is Compensation Calculated?
One of the main factors in compensation is the previous experience that one brings to a job. If someone has been working for five years and they are applying for a new position, there is a good chance they will be paid higher than someone who just graduated college. It’s not necessarily because people with more work experience are better workers, but it shows that they are more established in the workforce. Determining an employee’s compensation can be demanding. Yet, common factors businesses will look for to help them calculate it is:
- Level of education
- Previous experience
- The level of the position
- The location of the job
- The cost of living in that area
- The availability of candidates
- The size of the business
- The reputation of the business
- The performance of the employee
Direct vs. Indirect Compensation
Another way to categorize compensation is to separate them into two groups. While both groups are monetary in nature, here are the differences between the two:
Direct compensation is money for employees in the form of:
- Hourly wages and salary
Indirect compensation is financial benefits in the form of:
- Stock values
- Health insurance
- Retirement plans
- Company car, phone, events
Hourly Wage vs. Salary
While hourly wage and salary are both forms of payment, employees may like one better than the other. For example, employees who are on salary are more likely to get other forms of compensation such as:
- Stock options
- Incentive pay
On the other hand, people on hourly are more likely to receive:
- Sales commissions
All employees deserve compensation for their skills. While there are different types, it is an award to employees who excel at work.
Professional Leadership Institute (PLI) is an educational website providing professionals from all types of businesses with practical education in entrepreneurial leadership. To keep evolving your leadership toolkit, additional PLI resources below will be helpful: