The Different Forms of Compensation

Direct Forms of Compensation

Salary

This type of wage is customarily a set sum of remuneration over a

defined period of time. The most traditional form is a dollar amount
over a period of one year. The frequency of payment is another part
of the compensation and is based on industry standards. Most
businesses pay for services twice a month.

Most commonly used tool to pay professional or licensed

employees. In general there is an expectation from the employer of
a longer term commitment from the employee for providing a
regular uninterrupted compensation.

Hourly

This is a dollar amount per hour of service to the employer, more

commonly used to compensate unskilled and skilled laborers in the
workforce. This form of compensation comes with an implied
understanding that during times of slow or minimal workloads, the
employee may not be used to provide services. In effect, there is no
guarantee of a regular cycle of pay.

Commission

When compensation is based on volume or some form of

performance, this is known as commission based remuneration.
Other terms used include piecework or piecemeal. Many industries
used this type of remuneration to get a minimum standard of
production in exchange for compensation. It is used to shift risk
from the employer to the employee. There are two methods to
calculate commission. One is based on volume of services and the
other is based on sales.

An example of an industry that uses volume remuneration

extensively is the fishing industry. The men that work on the boats
have a risk that the captain will not find fish. In exchange, the
captain may hit upon some nice fishing grounds and bring in a large
catch. Once the fish is offloaded, the processors use commission to
compensate the production workers. These workers are paid by
piecemeal, that is, how much final product they can generate from
the catch. Typically their cuts of the meat are weighed and they are
compensated based on that measurement for services rendered.

An example of an industry that uses sales based commissions is the

auto retail dealerships. Here the salesman is enticed to get the
buyer to purchase the vehicle so that he may receive compensation
for his services. Other commission based industries include,
brokers, real estate agents, door to door salesmen, internet website
owners and some folks in the cleaning services.

Bonuses

Bonuses are used to increase performance from the employee. This

is a variable type of remuneration and is more commonly found with
salaried staff to incentivize them for a particular goal whether time
or volume based. Other reasons used for bonuses are to increase or
maintain retention of certain skills or the pool of skillsets needed in
the company. Sometimes bonuses are paid when a company meets
certain financial standards or goals over an extended period of time.

Bonuses are not commonly used with hourly or commission based

employees due to the nature of the type of compensation already
established. However, in small businesses it is used as a tool to
incentivize these two types of remuneration to meet certain
goals.The other form of compensation is indirect in value. This
includes benefits and equity based programs. In general, these two
types of indirect compensation provide value to an employee over a
longer period of time.

For a more detailed and informative analysis and comparison of direct

compensation, I have written an article describing these and their
respective IRS compliance requirements. In addition I explain the
connection to Exempt and Non-Exempt status and connection with
the owners profit. Read: Four Types of Direct Compensation for a
more in-depth understanding of direct compensation.

Indirect Forms of Compensation

Benefits
This particular group is traditionally thought of in the form of
insurances (health, dental, life, disability and vision) and retirement.
Very few small businesses provide benefits to their employees due
to cost involved. When small businesses begin providing benefits,
they customarily start out with retirement because of simplicity and
low cost. As they grow, they add health insurance and continue to
expand the benefit package as the number of employees increase
and the risk of business performance decreases. Benefits allow for
retention and recruitment.
Other benefits can include transportation, paid time off, vacation
time, and customized incentives (lodging, meals, phones, etc.).
Equity Based Programs
Rarely found in the small business world for several reasons. These
types of indirect compensation tie the employee to the company via
ownership. Due to the complexity and the legal issues involved,
very few small businesses use this tool. This is a sophisticated
method to retain key employees and is discussed in another article.
This article introduced the reader to the terms of compensation.
There are two forms of compensation, direct and indirect. Each form
of compensation has types of remuneration (pay). As a small
business owner, you need to understand the basic forms of
compensation and the types used to pay employees. Knowledge
is Power.
If you have any comments or questions, e-mail me at dave (insert the
usual at symbol) businessecon.org. I would love to hear from you.
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Other articles related to compensation and may interest the reader
include the following:
Introduction to Human Resources Management the human
resources manager is critical to the overall success of the company.
The manager must match resources (human) to the position within
the company. They need to understand the work environment and
the overall needs of the company to help successfully generate
profit. This article introduces the reader to this essential function of
business.
Gain an Understanding of the Work Environment following
up on the above article is this one. The human resources manager
must understand how to evaluate the work environment to ensure
the best person for the respective functions of operations.
Develop a Position Profile now that the human resources
manager understands their job and the work environment, he/she
must begin to develop descriptions and other aspects of the
respective positions in the company.

Conclusion

Results of this study have confirmed that employee compensation is important

predictor of employee job engagement. This finding of this study is according to the
study of researchers [7;15]. This indicates that compensation can cause 46.6 %
change in employee job engagement. Banking sector of Pakistan for must formulate
the steady policies about employee compensation for maintaining the current level
of this variable. More researches will be done on other sectors like Government
institutions, Engineering Sector, service sector and Hotel Industry etc. for
generalizing the results. Other independent variables like organizational politics,
organizational environment, work life conflicts may be includes in future researches.

MISCELLANEOUS ISSUES

Child support. Compensation awards under Ind. Code 22-3-3-8 are subject to child support income
withholding under Ind. Code 31-2-10 and other remedies available for the enforcement of a child
support order. The maximum amount that may be withheld under this subsection is one-half () of the
compensation award. See Ind. Code 22-3-2-7.
Vacation days, personal days, sick days, retirement. The Workers Compensation Act does not require
that employees continue to accrue vacation, personal, or sick days during a period of total or partial
disability. The employer is not permitted to require an employee to use these days instead of receiving
workers compensation. Provisions for vacation, personal, and sick days cannot be used to reduce the
employees Average Weekly Wage.

Employee benefit plans paid by employer. The Worker's Compensation Act does not contain a specific
requirement that employers continue to pay for employee benefit plans (such as health insurance) while
an employee is not working and receiving Temporary Total Disability. Nor does the Act authorize the
employer to discontinue such plans. If such fringe benefits are discontinued, the employer may be
required to take into account amounts it pays for benefits on behalf of employees in calculating the
employees average weekly wage, if the benefits are paid pursuant to a wage contract in lieu of wages.

1. Human resource management department is very active in this organization.

Interpretation -

: The above table and graph represents that 65% employees are agree with that the HR

department of this organization is active, 10% employees have no comments about it and

remaining 25% employees are not satisfied with the activity of HR. The HR department of

Singer Bangladesh Ltd. is active but still it needs to make some improvement in HR activities.
2. The top management communication system with the subordinates is not

satisfactory.
Interpretation:

45% of the total respondents are not satisfied with the communication system of Singer, 35% are

satisfied and 20% have no comments about it. These data represent has the Singer has a

communication gap between the managers and employees. The communication system at singer

is not effective.
3. The Management allows you to make decisions.
Interpretation:
55% of the total respondents said that they are allowed by the management to make

decision, 10% are not sure and remaining 35% are not involved in making decisions.

4. Singer has a strong job evaluation system.

Interpretation:

Among the total respondents 55% respondents are not satisfied and 45% respondents are

satisfied with the job evaluation system of singer. It represents the job evaluation system of

Singer Bangladesh Ltd. is not strong.

5. Result of job evaluation has a great impact on job progress or job retention.
Explanation: Among 20 respondents 50% respondents states that the job evaluation has a

great impact on job progress, 15% respondents does not make any comments and 35%

respondents are not agree with that job evaluation has a great impact on job progress. So it

can be say that the job evaluation system at Singer Bangladesh Ltd should be improve.

6. The current compensation system of singer is satisfactory.

Explanation: 40% respondents are satisfied, 55% respondents are not satisfied and 5%

respondents do not make any comments about the Compensation system of Singer. So, the

Compensation system of Singer is not satisfactory.

7. Employees have a positive reaction about the compensation system of Singer.
Interpretation:
 30% respondents believe that the Employees have a positive reaction about the compensation

system of Singer, 55% respondents believe that employees have a negative reaction about the

compensation system of Singer and 15% respondents do not make any comments. The above

data represent that the employees of singer are not satisfied with the existing compensation

system.

8. The compensation objective of Singer is to motivate the employees?

Interpretation:

Among the total respondents 30% are agree with the above statement, 30% are disagree and

strongly disagree and 40% are do not know about it.

9. The Singer should change and add something new in its compensation system.
Interpretation:

Among the total number of respondents 85% think that the singer should change the

compensation system. Only 5% respondents think that it should not be changed and 10%

do no make any comments about it.