Compensation and Benefits

Compensation and benefits are key elements of human resources (HR) management, focusing on the various ways employees are rewarded for their work. Together, they form the total remuneration package offered to employees, influencing job satisfaction, employee retention, and the ability to attract top talent.

How much an employee or manager is paid and how their compensation can be structured is an area in which HR managers find themselves competing with other employers. As the business environment becomes more complex, so do the forms of employee financial compensation. From a business standpoint, employee compensation refers to the direct financial rewards paid to employees for their labour.

Though paychecks and benefits packages aren’t the only reasons why people work, they do matter. Competitive pay and benefits also help organizations attract and retain qualified employees. Companies that pay their employees more than their competitors generally have lower turnover. Consider, for example, The Container Store, which regularly appears on Fortune magazine’s list of “The 100 Best Companies to Work For.” ^[1] The U.S. retail chain staffs its stores with fewer employees than its competitors but pays them more—in some cases, three times the industry average for retail workers. This strategy allows the company to attract extremely talented workers who, moreover, aren’t likely to leave the company. Low turnover is particularly valuable in the retail industry because it depends on service-oriented personnel to generate repeat business. In addition to salary and wages, compensation packages often include other financial incentives, such as bonuses and profit-sharing plans, as well as benefits, such as medical insurance, vacation time, sick leave, and retirement accounts.

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.

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.

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, usually 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 his or her output and the rate of each unit of output; it is 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 depends 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 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” to earn compensation. However, only a portion of the employee’s compensation comes from the commission. The employer pays the employee some level of wages every pay period, regardless of his or her sales level. This reduces the necessity for high-pressure sales tactics, so long as the base salary is an adequate wage. Wait staff are essentially paid salary plus commission (they receive an hourly wage plus tips).
  .
• Salary plus bonus – When an employee is paid a salary plus a 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.

Incentive Programs

In addition to regular paychecks, many people receive financial rewards based on performance, whether their own, their employer’s, or both. Other incentive programs designed to reward employees for good performance include bonus plans and stock options.

• Bonus Plans – Bonus plans have become quite common, and the range of employees eligible for bonuses has widened in recent years. In the past, bonus plans were usually reserved for managers above a certain level. Today, companies have realized the value of extending plans to include employees at virtually every level. The magnitude of bonuses still favors those at the top.
  .
  Cisco Systems Canada’s year-end bonuses—annual income given in addition to salary—are based on individual and company-wide performance. If the company has a profitable year, and if you contribute to that success, you’ll get a bonus. They refer to it as “rewarding people for their performance, not their seniority”. ^[2]
  .
• Profit-Sharing Plan – An employee’s profit share is paid annually as a percentage of the employee’s earnings and is based on the company’s net profit. Profits in the most recent years have averaged about 10%. Interestingly, because this profit share is part of an employee’s retirement savings, it is put into a deferred profit-sharing account.
  .
  Mountain Equipment Co-op (MEC) has a profit-sharing program that distributes a portion of the company’s profits to its employees. The program is based on a formula that takes into account each employee’s salary and the company’s financial performance. Employees receive their profit-sharing payments in the form of cash or additional contributions to their retirement savings plan.
  .
  MEC’s profit-sharing program is designed to align the interests of the company and its employees. By sharing profits with its employees, MEC aims to incentivize them to work harder and contribute to the company’s success. It also helps to create a sense of ownership and loyalty among employees, who feel that they are part of a shared enterprise.
  .
• Stock-Option Plan – A stock option plan is a type of employee compensation plan that gives employees the right to purchase company stock at a predetermined price for a set period. Stock option plans are typically used as a way to incentivize and retain employees, especially in companies where the stock is publicly traded.
  .
  WestJet’s compensation plan also gives employees the right to participate in their Employee Share Purchase Plan. This enables employees to purchase WestJet shares amounting to up to 20 percent of their gross salary and the company will match their contributions.  This is used as an incentive to attract and retain good people.

Benefits

Compensation includes more than just salary, and benefits are a key legal, motivational, and organizational consideration when it comes to employee relations. Benefits comprise indirect rewards and perks provided to employees in addition to their base salary or wages.  Standard benefits address a range of employee needs, and they can be a key reason for employees to seek out employers who offer them. Human resource professionals must familiarize themselves with the various benefit options that are out there. The following lists the most common types of benefits:

• Relocation assistance – Often enough, hiring someone means moving the new employee to a different location. The talent an employer needs may come from another city or country, and attracting the right person may entail assisting with visas, housing, flights, and a range of other moving costs.
  .
• Medical, prescription, vision, and dental plans – Particularly in countries with poor social benefits (such as the U.S.), medical insurance is a necessity for employers hiring full-time workers (sometimes it’s even legally required). In countries with strong social welfare systems (such as Canada), these benefits are provided by the government.
  .
• Dependent care – Many employees obtain health insurance coverage through their employer not only for themselves but for their spouse and/or children, too.
  .
• Retirement benefit plans (pension, RRSP contribution) – Larger employers usually offer employees various retirement-related benefits such as long-term investments, pensions, and other savings for retirement. The primary draw for most of these benefits is the tax benefit (the ability to set aside pretax income for retirement savings).
  .
• Group-term life and long-term care insurance plans – Life insurance and long-term care are benefits paid by employers to insure individuals against various types of risks and disasters. Employees with life insurance or long-term care insurance will see their dependents (and themselves, in the case of long-term care) financially supported if a serious ailment or tragedy occurs.
  .
• Legal assistance plans – Not quite as standard as the rest of the benefits above, legal assistance plans can be established for jobs in which personal liability is high. Legal assistance is expensive, and such plans draw on organizational resources to cover the employee under circumstances when legal aid is needed.
  .
• Child care benefits – Supporting employees’ families is critical to retaining great talent. Especially in families with two working parents, employer-covered child care is a key benefit that provides cost savings to the employee while enabling the employee to focus on work (which benefits the employer).
  .
• Transportation benefits – Another common benefit is paid transportation. Particularly in countries/regions where public transportation is the norm, it’s quite common for the employer to pay for all work-related transportation.
  .
• Paid time off (PTO) in the form of vacation and sick pay – All organizations must provide paid time off, vacation, and sick pay under certain circumstances. Many countries have stringent legislation governing minimum requirements for paid time off and vacation leave to ensure that employees have a healthy work-life balance.

While there are other, less common benefits that employers can offer, the list above describes the standard benefits that employees can expect to encounter.