Pay comes in variety of programs to pay people as return of their services. This blog lay emphasis on "Total Compensation- monetary returns"
Total Compensation is received as Cash payout i.e. Base, Merit, Incentives, Cost of Living, Adjustments & Direct Benefits i.e. Pensions, medical Insurance, Program to help balance work and life demands.
Cash Compensation: Base
Base Compensation is the cash compensation Base. It could be Base Wage OR Base Salary. If you wish to know more about Wage OR Salary, please click the link below 👇
How Pay, Wage, Salary, Compensation differs?
Why to forget that there is a distinction which is often made in the United States between the wage and salary!
With salary referring to pay for employees who are exempt from regulations of the Fair Labor Standards Act (FLSA) and hence do not receive Overtime pay, which does not mean that the Organizations can flip their labels on their workforce to enjoy the laxities under FLSA.
Laws, Institutions and Society is equally watchful that the labels should not help any organization to evade themselves to abide by the regulations under FLSA.
Besides this, there are some exceptional organizations like IBM, Eaton, and Walmart, as they label their base pay as “salary". Since these organizations believe that they divide employees into separate categories of salaried and wage earners. As “salaried” workforce reinforce their organizational culture for the reason the employees are counted as part of the same team. For example, Managers and Professionals usually fit into the category of "Salaried workforce". Their pay is calculated at an annual Or monthly rate rather than hourly, because hours worked do not need to be recorded.
On the other hand Wage reflects the Value of the work Or skills and generally ignores differences attributable to individual employees which the employer pays for the work performed.
Hypothetically, assume that the base wage for the Workers to be somewhere between the range of $10 to $20 an hour. You must be having this question on your mind that "Why this defined pay range with a upper limit and lower limit?" Because the Worker will receive more or less wage within this range only based on his experience and/or performance. Now these workers, under the provisions of the Fair Labor Standards Act are also treated as "non exempts" in USA and are therefore covered by overtime and reporting standards, having stated that their pay is calculated as an "hourly wage".
Therefore, it is very much prevalent that employers based on different industries tend to set the pay systems where base wages acts a a function of the skill Or education qualification which an employee possesses, like engineers, school teachers, healthcare, Operators etc.
Cash Compensation:
Merit Increases, Merit Bonuses, Cost of Living Adjustment (COLAs)
Merit Increases are given as increments to base pay, based on performance. According to Survey, 90 percent of US firms use merit pay increases. In recent years, it indicate that on an average, an outstanding performer receives a 4.4 percent increase, an average performer a 2.8 percent increase, and a poor performer a 0.4 percent increase. Finally, companies increasingly use merit bonuses.
Merit bonuses are also increments based on a performance rating but, are paid in the form of a lump sum rather than becoming (a permanent) part of the base salary. "Merit bonuses now account for more of the pay performance relationship than do the traditional merit increases.”
According to the Survey, the average annual merit bonus in recent years has been about 5 percent for hourly employees, 6 percent for lower levels salaried employees, and 13 percent for higher level (but below officers/executives) salaried employees, all much larger than the more often discussed recent merit increase pools of around 3 percent .
A Cost-of-Living adjustment (COLA) to base wage are based on what other employers are paying for the same work OR changes in living costs OR changes in experience OR Changes in skill. Now employers are trying to control fixed costs and they believe that linking pay increases to individual and/ or company performances are one of the best provisions. COLAs were the common provisions of the past NOT today seeing the digital and virtual world!
Cash Compensation: Incentives
Incentives may be:
a) Short Term
b) Long term
Consequently, incentives and sometimes merit bonuses also are frequently referred to as Variable Pay.
Incentives tie pay increases to performance but it differs from merit adjustments.
How it differs?
A) Incentives do not increase the base wage and so must be re- earned each pay period.
B) Potential size of the incentive payment will generally be known beforehand. Whereas merit pay programs evaluate past performance of an individual and then decide on the size of the increase, what must happen in order to receive the incentive payment is called out very specifically ahead of time.
For example a Ford salesperson knows the commission of Land Cruiser versus a Bentley prior to making the Sale. The larger commission he or she will earn by selling the Land Cruiser is the incentive to sell a customer that car rather than the Bentley.
C) Incentive Program relies on an objective measure of sales performance whereas a Merit increase program typically relies on a subjective rating of performance.
Cash Compensation: Long Term Incentives
Let me put these questions across to illustrate the business strategy.
1. Why Intel, Google and Starbucks, offer stock options to all their employees?
2. Why Bristol Myers Squibb grants stock to selected “key contributors” who make outstanding contributions to the firm’s success?
3. Why the Stock options are often the largest component in an executive pay package?
4. Why some companies extend stock ownership beyond the ranks of the managers and the professionals?
Because of the underlying belief that the stock ownership of employees will make them focus on long term financial objective return on investment, market share, return on net assets etc. because these employees have a financial stake in the organization.
How Employers are smarter than the employees?
Employers tie this benefit with the employees' term of service OR with any sort of merit like annual performance bonus OR anything else which concerns the employer.
What is there in the stock ownership OR ESOP for the employees?
Employees see a benefit in the form of stock ownership Or options to buy stock at a fixed price because they see a monetary gain to the degree the stock price later goes up.
It was also observed in some scenarios where either the employees couldn't enjoy this long term incentive OR the company's stock price went into losses.
Indeed, "Take the risk OR lose the chance"
The reward is in the risk.
