Competitive pay and good salary plans are important for getting and keeping the best employees worldwide. Well-structured compensation plans not only help in drawing competent candidates but also enhance employee engagement and productivity within the organization. The first step in making a plan that will appeal to workers and meet their many needs is to learn about the different types of pay that are out there. This piece will discuss ten common types of pay, including direct and indirect pay. In addition, we will show you how to make a compelling compensation plan that can work well for your company’s foreign workforce.
Direct Compensation Plans (4 Types)
The first category we’ll look at is direct compensation plans, which involve giving money directly to workers. We will talk about the different kinds of direct pay and explain what they mean and how they can be used.
1. Base Pay
Base pay is the foundational wage or salary that a worker gets for their work. Likewise, it can be set up as either an hourly wage or a fixed yearly salary:
- Hourly Wages: For every hour they work, employees are paid a set amount. Most full-time paid workers put in 40 hours a week. If they go above and beyond this, they may be eligible for overtime pay, which is an extra hourly rate. Employers must use accurate time-tracking tools and follow the rules about minimum wage. Similarly, they should also be careful of overtime payments that apply.
- Salaries: A salary is a fixed amount paid to an employee regardless of the number of hours worked. Salary jobs are usually only available full-time, and they’re usually held by higher-level workers like managers and executives. There are times when certain labor rules allow salaried workers to get overtime pay, but this is not usually the case.
It’s very important to pick the right base pay plan as your compensation plan. It should be mentioned that competitive base pay is a big motivator. For instance, it is estimated that 96% of people who are looking for new jobs do so mainly to get better base pay.
2. Sales Commission
Sales commission is a popular way to pay people who work in sales because it directly links their pay to how well they do their job. The goal of this type of pay is to encourage workers to meet or beat sales goals and targets. There are two main types of commission structures:
- Base Salary Plus Commission: Employees get a base pay plus extra money based on how well they do in sales. This system keeps finances stable and encourages people to do their best.
- Commission Only: Workers only get paid based on how well they do in sales. This can be very motivating for people who thrive in performance-driven environments, though it comes with greater income variability.
The right commission structure varies on the type of sales job and how much employee performance affects the business. For promoting high productivity and rewarding excellent sales accomplishments, commission-based compensation plans are crucial.
3. Bonuses
Bonuses are extra payments that are made to workers on top of their regular pay. A lot of compensation plans use them to encourage and reward employees who do a good job. Depending on the goals of your company and the needs of your workers, you can give them different kinds of bonuses.
- Signing Bonuses:
They are one-time gifts that companies give to new employees to get them to join. They are especially good at getting highly sought-after people to apply, and they can help make up for any financial problems they might have if they have to change jobs.
- Performance Bonuses:
These are given to people, teams, or even whole departments based on how well they meet certain goals. These bonuses are a direct way to link pay to success, which will motivate workers to meet or beat their goals.
- Referral Bonuses:
These bonuses are given to workers who bring new customers, clients, or job applicants. By giving workers rewards for referring new customers, businesses can build a culture where employees are eager to help the company grow and be successful.
- Retention Bonuses:
They are given to employees as a motivation to stay with the company during times of change or economic uncertainty. During mergers, acquisitions, or big reorganizations, retention bonuses can be very helpful.
- Holiday Bonuses:
It is a way to thank workers for their hard work throughout the year. Holiday bonuses must be included in the company’s compensation plans in some countries, like Mexico, where they are required by law.
Bonuses are given in form of cash, gifts, gift cards, company stock, or stock options. This gives employers a lot of options for how to recognize and thank employees for their hard work.
4. Tips
In the service industry, tips are a part of monetary compensation. They can be broken down into two groups:
- Optional Tips: They are amounts that customers choose to give based on how happy they are with the service they get. Service workers who get tips are more likely to give great service if they want to get bigger tips.
- Mandated Tips: also referred to as service charges or gratuities, are predetermined amounts that are included in a customer’s bill. Mandated tips provide a regular level of additional pay for service workers, unlike voluntary tips.
The importance of tipping differs across different countries and cultures worldwide. For example, in the United States, tips might comprise a significant portion of a service worker’s earnings. In contrast, in nations such as France, gratuity is less prevalent and not obligatory, unless the service provided is excellent.
Indirect Compensation Plans (5 Types)
While direct compensation involves the exchange of money, indirect compensation offers employees non-monetary benefits that may or may not have monetary value.
Below are some examples of indirect compensation:
5. Employee Benefits
Employee perks include a variety of non-wage compensations offered to employees that can considerably improve job satisfaction and loyalty. Examples of employee benefits are:
- Paid time off
- Parental leave
- Health insurance
- Pension or retirement contribution matching
- Tuition assistance or reimbursement
- Life insurance
- Pensions
- Tax-advantaged retirement benefits
- Transportation subsidies
- Company housing
- Company cars
- Wellness programs
- Training and development programs
- Disability insurance
- Workers’ compensation insurance
- Social Security
- Relocation subsidies
- Meal subsidies
Employers can choose to provide some of these perks, while others are legally compulsory. The list of statutory benefits might differ greatly from one country or region to the next.
6. Equity
Employees are granted partial ownership of their company through equity. Equity packages are frequently held for personnel in high-level leadership positions, as they can boost their commitment and engagement with the company.
Companies with limited cash reserves, such as startups, are likewise more likely to provide equity packages as compensation for lower-than-market base salary.
7. Stock Options
Stock options allow employees to purchase a specified number of shares of their company’s stock at a predetermined price.
Before exercising stock options, employees may be required to work for their employer for a set period. This vesting term may encourage employees to stay with their organization longer.
8. Flexible Work Arrangements
Hybrid and remote work schedules have become a popular employee benefit in recent years. That’s because these schedules provide employees with greater flexibility and autonomy, as well as a better work-life balance. Here are some figures demonstrating the high desire for flexible work arrangements:
- 97% of employees like to work remotely on occasion.60% of people would leave their existing jobs to work remotely.
- Companies using remote employees have a 25% lower employee turnover.
- Remote workers report 20% higher job satisfaction than in-office employees.
- 23% of employees would forego vacation time to work a mixed schedule.
- 15% of employees would take a pay cut to transition to a hybrid schedule.
Allowing your workers to work from home some or all of the time can improve job satisfaction and retention.
9. Home Office Equipment
If you use a remote work model, you may wish to provide your staff with phones, laptops, and other office equipment. Providing this equipment ensures they have the tools they need to complete their task when away from the office.
10. Contractor Compensation
The last type of compensation plan we’ll look at is contractor compensation. This category is primarily for independent contractors. Because these laborers are not legally employees, their pay structure is slightly different. Most importantly, contractors can define their own fees and work schedules. They can charge by the hour, milestone, or completed job.
Furthermore, contractors are not legally entitled to the same benefits as full-time workers. Employers may offer to subsidize specific company expenses to lure top contractors to work for them.
Conclusion
Organizations that want to hire and keep the best employees need to know about the different types of compensation plans. Each type of pay has its perks. Direct pay includes things like base pay, commissions, bonuses, and tips. Indirect pay includes things like employee benefits, equity, stock options, flexible work schedules, and home office equipment. These pay methods can be changed to better meet the needs of both employees and contractors, leading to productivity, and job satisfaction. For personalized opinions on compensation plans valid to your business; reach out to us at EOR Services.