5 Types of Employee Compensation

Five Ways Employers Compensate Their Employees

  • Base Pay
  • Overtime Pay
  • Sales Commission
  • Tips
  • Bonus Pay

When a person is looking for jobs, they might wonder about the types of employee compensation they receive. Different occupations and different types of employers can result in a range of compensation options for workers. Understanding the available types of compensation and how they work gives a candidate or employee more information so that they can make sound decisions about their future and their finances.

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1. Base Pay

The base pay is the basic compensation that an employee will receive. It might be hourly or salaried. A salaried employee refers to the idea that their base pay is the same regardless of how many hours they work. They are not eligible for overtime pay, and they may work more than 40 hours per week.

2. Overtime Pay

When a person has an hourly rate of payment, their standard work week is typically 40 hours. The United States Department of Labor defines the situations in which employees are eligible for overtime pay. The rate of overtime pay is 1.5 times the person’s hourly wage. For example, the first 40 hours worked by a janitor may be paid at $20 per hour. If the janitor works five additional hours during that week, those five hours are paid at 1.5 times $20, which is $30 per hour for each of those five hours.

3. Sales Commission

Sales jobs often include base pay and sales commission. The commission is a certain percentage or dollar amount per sale. For example, a person who sells cars may receive a specific percent commission on all sales. A person who makes cold-calls and sells security systems to homeowners may receive a flat-rate commission on each security system they sell. In some lines of work, the commission rate may be tiered. The higher the dollar amount that a person sells, they may be able to earn a higher percent of those sales for their commission.

4. Tips

In some occupations, employees routinely receive tips. However, tips are not guaranteed in any way. The tips do not come from the employer. They come from the individual for whom the worker provides a service. In the United States, people who work as restaurant servers, hair stylists, barbers, hotel housekeepers, bellhops, babysitters or similar service providers often receive tips. For example, it is customary to tip at a rate of 15 percent for acceptable service to the restaurant server. For excellent service or for a large party, it is customary to tip 20 percent of the bill.

5 Types of Employee Compensation

5. Bonus Pay

According to HR Guide, another type of employee compensation that a person might receive is bonus pay. In most cases, there is no guarantee of bonus pay. The bonus pay might be associated with an individual’s performance or productivity. It may also be associated with the company’s profitability over a specific period of time. In some cases, bonuses are associated with meeting specific goals. Bonus pay may also include profit sharing, merit pay, stock options, or recognition pay.

When a person receives a job offer, the offer usually includes details about the types and amount of compensation. Having this information is critical for making a decision to accept or decline the offer, and being familiar with each type of compensation allows a person to feel more confident about which job offer to accept. Knowing about these five types of employee compensation is also important for people who want to work in finance, human resources, business or management.