While most employees think about their base salary when considering how much they earn, there are actually several different types of employee compensation. Not every employee receives every type, as it can vary depending on a different employment factors. Many employees also receive multiple kinds of compensation that create a compensation package. The following are the main types of employee compensation and how they are usually defined.
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This is the most basic type of employee pay. It is the base amount an employee is paid to perform the job described at the time of hiring and does not change unless granted a raise, or, in rarer cases, a pay cut. It is usually negotiated during the hiring process and included in employment contracts. There are usually two systems in which this pay is distributed. The first is an hourly rate, which is paid to employees per hour worked. Part-time employees are almost always paid an hourly rate, although full-time employees can be too. If employees work over 40 hours in a week they may be entitled to overtime pay, which will be covered in the next section. The second is salaried pay, where an employee is given a set amount no matter how many hours are actually worked.
Overtime pay is awarded when employees work more than 40 hours per week. It is usually exclusive to employees who work on an hourly basis. The regulations regarding overtime pay can be complex and situational. Employees not eligible for overtime are known as exempt. Salaried employees are usually exempt and not eligible for overtime pay, although that can, again, depend on the position per federal labor laws according to the U.S. Department of Labor. Most commonly, positions that are salaried, earn over a certain amount weekly and perform administrative duties are exempt.
Commissions are another major type of employee compensation that are more common in sales based professions than others. For example, salespeople, real estate agents, literary agents, and stockbrokers commonly work on commission. Some employees earn base pay in addition to commission fees, although some positions work solely on commission. This includes freelancers and self-employed people, as well as some employees who work in the occupations mentioned above. Commissions reward employees who are successful and do their jobs well, often leading to much higher salaries than could be expected otherwise. Employees who are a poor fit and do not demonstrate much success, however, are not paid as much, making this model something of a double-edged sword for workers.
Employee benefits are often not included in most measures of compensation but are a very important part of a compensation package. Most people, for example, get their health insurance through an employer, as well as other necessary benefits such as retirement accounts, dental insurance, sick days and more. Other benefits, such as childcare facilities, the ability to work from home, and time off can be highly attractive as well. Some companies even offer more generous benefits to their employees in order to make up for the fact that they can’t pay higher salaries. Benefits are a powerful tool employers have to attract the best talent and their importance should not be underestimated.
Employees are paid for their work in several different ways that often overlap with one another. Employee compensation is often more complicated than it appears at first glance and it is an important subject to understand for employers and employees alike.