Compensation

What is Compensation?

Compensation is a broader term that relates to employee payments in the form of salary, commission, benefits, etc. 

Compensation can be hourly or monthly pay, including overtime, health benefits, festival bonus, stocks, retirement, and other non-monetary incentives like training, team-building activities, extra leaves, counseling, seminars, etc. 

Types of Compensation

To be specific, there are two basic compensation types. 

• Direct compensation
• Indirect compensation 

Both these types of compensation fulfill the employees’ needs while keeping them content with their employers. Different companies may differently implement direct and indirect compensation policies depending on the size and nature of their businesses. 

The direct compensation may include:

• Fixed Salary or Base Pay: Although varied, the most basic practice lies with the annual amount of payment which is equally divided by weeks and paid monthly or bi-weekly.  
• Hourly Pay: The hourly pay system applies to both skilled and unskilled professionals. However, the hourly dollar rate for the employees may differ based on an employee’s experience, skill, market condition, full-time job, part-time job, etc. 
• Commission: Commission is also known as piecemeal or piecework, which is paid based on monthly sales volume or expected performance. Commission may be paid as the main compensation or, sometimes, on top of the basic salary. 
• Bonuses/Profit Sharing: Typically, bonuses are paid on top of the regular compensation amount as a percentage of the monthly or yearly revenue.
• Overtime: Overtime is a pay that compensates the employees and workers for additional work hours above their regular schedules. The overtime law varies depending on the state law. 
• Tips: A tip is a personal compensation for a service rendered, typically at restaurants, salons, workshops, etc. However, the employers of those businesses should regulate the tips given by the customers while reimbursing them among the employees if received through cards. 

The indirect compensation includes:

• Insurance and Health Benefits: The employer is supposed to provide health, optical, dental, and disability insurance for employees and workers. Many companies also include life insurance depending on the hierarchical levels of employees. Typically, businesses don’t buy these costly benefits for their employees unless the number of employees is fifty or above since it then becomes their legal obligation. 
• Miscellaneous Benefits: Benefits that may fall under this category are conveyance or transportation facilities, subsidized meals, vacations, paid leaves, etc. 
• SSN Retirement Benefits: Every US worker and employee with SSN (Social Security Number) is eligible to receive retirement benefits depending on their annual earnings. 
• Incentives Or Gifts: Incentives may not be money but the facility of using a company vehicle, cell phone, accommodation, etc., which the employee may enjoy in exchange for longstanding services. 
• EBP (Equity-Based Programs): Here, the employer compensates certain employee(s) through a percentage of ownership instead of basic pay or hourly pay. 

4 Main Factors in Determining Compensation

1. Minimum Wage

Although minimum wage varies from state to state, some comply with the federal minimum wage, which is regulated by the Fair Labor Standards Act (FLSA). 

According to the update in 2009, the minimum hourly wage for a worker should be $7.25. That’s the federal law; many states have higher minimum wage requirements.  

2. Overtime 

The Fair Labor Standards Act delineates the overtime pay rate for workers and employees in the states. The hourly employees and workers who’ve worked more than forty weekly hours must be paid one-and-half times their regular rates. 

3. EEO (Equal Employment Opportunity)

As per federal law, there mustn’t be any discrimination while compensating the employees and workers. The criteria of discrimination are: 

• race 
• cast 
• color 
• age 
• gender 
• religion 
• sexual orientation 
• genetic information 
• pregnancy 
• disability 

This is to note that the compensation rates and types also fall under the discrimination criteria. 

4. Taxes

Employers must file and pay state and federal taxes for their employees. The process is to withhold the taxable amount from the stipulated salary or wage while paying it to the government on time. 

Integral Components of Compensation

The significant components of compensation are:

• JD (Job Description): The job description defines and explains the job nature & responsibilities, requirements, location, condition, environment, etc., of a particular position within the company.  
• JE (Job Evaluation): Job evaluation is conducted through ranking, classification, point method, and factor comparison to determine the correct compensation rate for the employees. 
• JA (Job Analysis): Job analysis is used s for analyzing the potential, skills, and experience of an incumbent to develop their job description. 
• PS (Pay Structures): The pay structure is developed to compensate the employees and workers based on expectations, qualifications, probationary period, hourly or basic pay, etc. 
• Policies and Regulations: The company policies and regulations are established by the employers to instruct, encourage, and monitor the performance of the employees and workers to attain company objectives.  
• Salary Surveys: The salary survey collects market data on concurrent salary structures in different businesses and industries. These types of surveys typically include inflation indicators, average salaries, salary budgets, cost of living indicators, etc.   

What is Nonemployee Compensation? 

If a self-employed person is paid by the company based on an independent contractor agreement, including service fees, commissions, incentives, etc., it's called nonemployee compensation.

Here, the employer won’t withhold the taxable amount from the payment for the services rendered. The nonemployees themselves will have to pay the tax. 

However, if you had to pay the nonemployee above $600 in any given year, you must report it on Form 1099-MISC to the IRS (Internal Revenue Service).