Compensation and benefits (C&B) is a subdiscipline of human resources that is focused on policy making for employee compensation and benefits. As part of any employment agreement, employees are compensated for services rendered in a predetermined and equitable fashion.
Compensation and Benefit Types
Employee compensation and benefits can be divided into four general categories:
Cash reward
The ability to reward employees with cash and other incentives is a source of organizational power.
- Guaranteed pay—Monetary compensation paid by an employer to an employee based on employee/employer agreements. The most common form of guaranteed pay is the basic salary.
- Variable pay—Monetary compensation paid by an employer to an employee on a discretionary basis. It is often contingent on performance or results achieved. The most common forms are bonuses and sales incentives.
- Benefits—Programs an employer uses to supplement employees' compensation, such as paid time off, medical insurance, and a company car.
- Equity-based compensation—A plan that uses the company's shares as compensation. The most common example is stock options.
Guaranteed Pay
The basic element of guaranteed pay is the base salary, paid based on an hourly, daily, weekly, biweekly, or monthly rate. The base salary is typically used by employees for ongoing consumption.
Many countries dictate the minimum base salary by stipulating a minimum wage. Individual skills and the level of experience of employees give rise to differentiation in income levels within the job-based pay structure. In addition to base salary, there are other pay elements that are paid based solely on employee/employer relations.
Variable Pay
Variable pay is contingent on discretion, employee performance, or results achieved. There are different types of variable-pay plans, such as bonus schemes, sales incentives (commission), and overtime pay.
For example, a variable-pay plan might be that a salesperson receives 50% of every dollar they bring in up to a certain amount of revenue. Beyond this amount, they then bump up to a higher percentage for every dollar they bring. Typically, this type of plan is based on an annual period of time requiring a "resetting" each year back to the starting point of 50%. Sometimes this type of plan is administered so that the sales person never resets and never falls down to a lower level.
Benefits
There is a wide variety of employee benefits, such as paid time off, different types of insurance (life insurance, medical/dental insurance, and work disability insurance), pension plans, and a company car. A benefit plan is designed to address a specific need and is often not offered in the form of cash. Many countries dictate different minimum benefits, such as minimum paid time off, employer's pension contribution, and sick pay.
Equity-Based Compensation
Equity-based compensation is a compensation plan that uses the employer's shares as employee compensation. The most common form is stock options. Employers use additional vehicles such as restricted stock, restricted-stock units, employee stock-purchase plan, and stock-appreciation rights. The classic objectives of equity-based compensation plans are retention, attraction of new hires, and aligning employees' and shareholders' interests. Simply put, ownership of the company drives better performance through personal value creation.
Affecting Factors
Many internal and external factors affect C&B, including:
- Business objectives
- Labor unions
- Internal equity (the idea of compensating employees in similar jobs, and for similar performance, in a similar way)
- Organizational culture and organizational structure
- State of the economy
- The relevant labor market and/or industry
- Labor and tax laws