Payroll

Bringing Home the Bacon: The Compensation Definition

April 25, 2019

The compensation definition differs between companies. Learn the different types of compensation and which employees they apply to.

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Earning a paycheck can be a great feeling.  Not only does it represent the fruits of our labor, but it also shows us the things we do daily are worth compensating. While there’s a gap between our salary (gross pay) and what we take home (net pay), there’s a lot more to the compensation definition than a simple gross-to-net transaction.  Compensation is any cash or non-cash payment an employer makes to an employee for work performed.

The Total Package

Before highlighting the different elements that makeup compensation, let’s take a look at something many don’t even realize exists:  the total compensation package. 

Let me hit pause for a minute because I’m imagining you thinking about your future significant other right now.  The person would be not only attractive, but also smart, fun, empathetic, and would help keep the kitchen clean.  The “total package,” in other words.  If that analogy doesn’t click, think about it in terms of your breakfast plate; you don’t want only bacon for breakfast. Well, some of us might, but we can all agree that’s not balanced. If you want a balanced meal, you’ll have a plate with bacon, eggs, fruit, and toast.

Now, think about your total compensation package in a similar light.  The total compensation isn’t just about your salary (the attractive piece), but also your 401k (smart), the company box seats at the hockey arena (fun), your health benefits (empathetic), and your annual 5% raise (keeping the kitchen clean). 

In other words, if you only looked at your salary (that attraction piece), you might feel like you could do better. However, when you consider all the other elements in your compensation package, what’s in front of you starts to look a lot more appetizing. A company’s compensation definition may differ from what you’re used to, so consider the whole package!

The Salary

Employees receive pay in different ways, depending on the essence of their job.  Employees who receive a salary are often those who can come and go from the office, work from home, and telecommute on a snow day.  Basically, salaried employees get paid whether or not they are in the office.

Even though an employee’s salary may be $50,000 per year, for example, that amount does not show up in a lump sum on the paycheck. It’s divided among the number of pay periods in the year.  So, on the check stub, the line item shows a number divided by 52 (weekly pay periods), 26 (bi-weekly pay periods), 24 (semi-monthly pay periods), or 12 (monthly pay-periods).

The Hourly Wage

On the flip side of the salaried employee, we have an hourly employee. This compensation definition is straightforward – employees earn wages based on the number of hours they work.  So, if an employee shows up to work at 8:00 a.m. and clocks out at 12:00 for lunch and doesn’t return, that employee will only be paid for 4 hours of the workday even if they were scheduled for more. 

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While salaried employees’ pay is simply a salary amount divided by the number of pay periods, hourly employee’s pay is the hourly rate multiplied by the number of hours worked. So, if an employee’s hourly rate is $10 per hour, and they worked 40 hours that week, then the gross compensation will be $400.

The Contractor Payment

Now, there will be certain situations where a worker is neither a salary nor an hourly employee.  These types of workers are contract workers, and they work for the company for a limited amount of time. The amount of time is based on a temporary project that needs to be completed. 

Contract workers might receive different types of compensation—hourly or by the project—but they usually won’t receive a salary.  A contractor is not an employee of a company, so the notion of the total compensation package stops there and rarely has additional perks.

The Overtime Wage

If an employee works over 40 hours per week, they are eligible to receive overtime pay.  The overtime wage is typically 1.5 times the employee’s normal hourly rate.  Salary employees are exempt from overtime wages.

The Tip

Gratuity, more commonly referred to as a tip, is an additional amount to the regular price of a service.  In service industry jobs, it’s common to receive tips. These types of positions include waiters, stylists, and housekeepers.  If an employee receives tips over $20, then the income is taxable.

The Bonus

On top of an employee’s regular compensation, he/she might receive a bonus as well. An outstanding performance or a good year for the company typically justify a bonus. Bonuses aren’t guaranteed, so an employee might receive a bonus one year but not another.

The Merit

When an employee receives compensation for going above and beyond, or if an employee outperforms his/her peers, this is a “merit” increase.

The 401k

Fringe benefits are often part of a company’s compensation definition as well. This is “payment” that employees receive outside the regular monetary compensation. In other words, employees may receive all kinds of pay that show up on a paycheck, but a fringe benefit isn’t always a liquid asset.

The 401k plan a company offers can come with another form of earnings—company contributions and/or company matching.  If a company contributes to a 401k on behalf of an employee, then it’s a form of compensation. For example, some companies contribute $1,000 at the start of each year that an employee works for that company. Some companies will also match the contributions an employee makes up to a certain percentage. So, if an employee contributes 2%, the company might match that dollar for dollar up to 5%). 

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The Benefits

Defining compensation can translate into benefits as well. Besides the 401k plan, contributions, and matching, another fringe benefit that doesn’t always appear to be monetary are the health benefits.  Companies often recognize that employees desire to have the security of health insurance and pre-tax flexible spending accounts for unforeseeable issues that may arise.  When companies pay for a portion of the healthcare premiums or contribute to an HSA (Health Savings Account), that contribution is essentially compensation.

The Stock Options

Even though a stock option (or ownership in a company) is not necessarily something that shows up on an employee’s paycheck, it’s a type of compensation that is considered to be a liquid asset—so it can easily be converted to cash. Offering stock options allows employees to buy into a company at a discounted or fixed rate. This compensation is more along the lines of future gains – similar to 401(k)!

Bringing Home the Bacon, Eggs, Fruit and the Toast

Now that you are familiar with the different compensation definitions, hopefully, this will open your eyes to the importance of the total compensation package.  It isn’t about any one type of compensation, rather, it is viewing the entire package to determine if the compensation meets your needs.  So when you are tempted by a nice salary, remember to consider everything else that is being offered to you.  After all, man cannot live on bacon alone. 

Heart puzzle with Bacon on one side and fruit, eggs, and toast on the other


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