Employee compensation is the amount of money paid for the work they do for their employer. It consists of two components: wages and salaries paid to a worker excluding all taxes that an employer withholds automatically and social contributions paid by employers such as benefits, Social Security payments, and insurance coverage (OECD).
The most widespread types of payments are wages, salaries, and tips. Wages are paid on an hourly basis, salaries mostly represent a fixed amount received monthly, and tips show the gratitude from customers. For instance, more than 90% of the USA population is working for wages or salaries. Moreover, other types of payments exist, namely: commissions for the intermediary agents; benefits such as insurances, vacations, retirement plans, taxes; profit for individuals running their own business; stock commission; overtime pay usually paid for more than 40 hours spent working during a week. As separate types of compensation, base (or fixed) and variable payments should be mentioned. Fixed compensation is usually based on a firm`s position on the market and the jobs required to keep it. Variable pay, on the other hand, is based on a worker`s skills, knowledge, and experience (McNamara).
Incentives are related to variable pay. They include different kinds of bonuses and benefits for worker`s performance. For instance, the so-called 13th salary, or the commission of agents, depends upon sales. There are other kinds of incentives such as a club membership, a share in profits, housing or vacation allowances, leaves, insurance. They belong to the category of indirect benefits.
Compensation may also be monetary and non-monetary (McNamara). Monetary compensation is the amount of money a worker gets in cash (or by a paycheck) or the one that will be transferred to money in the future such as a retirement or a housing plan, or shares of stock. Non-monetary compensation is represented through psychological motivation of an employee: interesting and creative tasks, challenging goals, degree for a research, recognition, and outstanding skills development.
Furthermore, salaries may be classified as open and secret. In a firm using a secret pay option, it is prohibited for employees to indicate the amount they receive. However, personally, I consider the open pay system more motivating, especially with the incentives part. As performance of workers affects their variable pay, the differences between the employees performing the same functions and taking the same place in the company vary in such way that the one getting paid less would increase his or her performance to receive a higher payment.
Generally, jobs in organizations can be exempt and non-exempt (McNamara). Exempt positions are classified as the ones requiring more skills, as the managerial positions, or any other kinds of professional skills (accountant, engineer, marketing agent, etc.). People hired at those positions usually get a salary. Non-exempt jobs are unskilled ones. Unskilled personnel usually receive a wage and overtime payment if applicable.
I consider such current situation fair due to the fact that skilled staff puts initial efforts into obtaining a degree in order to get a prestigious position. Therefore, they are supposed to receive a higher payment. Furthermore, their job requirements are usually based on their performance: a marketing manager is not going to be paid more if his or her projects don`t bring profit, and a manager or an owner of a business won`t derive a profit at all if their management tools are ineffective. Moreover, I consider non-monetary compensations and incentives an important part of not just a salary, but of an entire working process. I believe that challenging assignments warm up employee’s interest and keep him or her active; therefore, labor productivity increases and profits improve, which is good for a business as a whole. Various incentives benefit employees as well. However, it is expensive for companies to provide each worker with a dental insurance, for example. In the present US economy, only the military or other civil or social public figures are provided with such kind of insurance. I consider it fair though that people who are engaged in extra jobs or perform on a really high level or the ones who appear to be the only professionals in their field get higher incentives or allowances. However, in some cases, employees hired on a wage basis may be able to earn more than the ones working for fixed salaries. It happens as a result of overtime payments or incomes from second and further jobs. I believe the economy of the state also needs unskilled labor force as the degree-holding professionals would not agree to earn low wages considering the efforts they put and the money they spent to get that valuable knowledge.
Generally, a successful compensation system is designed based on nine main criteria. These are the following: equity, below and above market payments, the abovementioned base and variable compensation, open and secret pay, monetary and non-monetary benefits, pay decisions, performance, membership, egalitarianism, and elitism.
Equity, in international practice, is defined by the list of job specifications that indicate what skills and background a potential employee must be able to apply. External equity is defined based on a research of the outside market; if companies require the same list of skills, they use the same approach. To identify whether firms pay appropriate amounts of money, they use a salary trend index. Taking this index into consideration, a firm defines if its payments are below or above market salaries. Salaries lower than the market ones are characterized as unstable ones because good professionals won`t stay long in the position they could be paid more in the other company. Therefore, such conditions lead to high labor turnover rates. On the contrary, above-market salaries can attract competitive staff. Elitism implies a policy for salary differentiation on different levels of an organization: managers get paid less than financial directors, though they are paid more than waiters, for example. On the other hand, under egalitarianism, workers receive a relatively equal compensation. Under a centralized system, staff receives a salary from one point, usually from the Human Resources department. However, I find a decentralized system more appropriate as payments received by workers from their direct managers facilitate this process, especially in huge companies. Company’s individual pay decisions involve all aforementioned components combined and transferred to create a single policy.