Question

What are some different ways a worker can be compensated? What do you believe to he the best way? Explain your reasoning.

Answer 1

Normally, 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.

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. Salaries are the 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 stream via a salary.

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.

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.

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 incentivize 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.

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 the 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 (mandated by law for employers with 50 or more employees) 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.