Compensation

This text looks at salary and bonuses, benefits, insurance, long-term incentive plans, and paid expenses. Some companies offer employee stock options believing that they incentivize employees with an ownership stake in the firm to boost the company's stock price (ordinarily a function of firm performance). Managers may use some of these tools when organizational systems govern salary.

Pay Systems

Organizations can remunerate labor according to different criteria, including hours worked, output produced, or a combination of the two.


Learning Objectives

Identify the different wage payment systems used by organizations by which they remunerate labor


Key Takeaways

Key Points
  • Under a time rate system, the worker is paid by hour, day, week or month. Under a high wage plan, the worker is paid highly in exchange for a high level of performance.
  • Under a piecework system, the worker is paid according to output. A straight piecework system is completely independent of time taken, whereas a differential piecework system rewards more efficient workers.
  • A combination of time and piecework systems also exist, such as the Gantt Task and Bonus System, and Emerson's Efficiency System (see examples).
  • Under a lockstep compensation system, salaries are based purely on seniority within an organization. This system is easy to administer, but can reduce incentives for employees to perform.
Key Terms
  • contingent worker: a provisional group of employees who work for an organization on a non-permanent basis
  • wage: An amount of money paid to a worker for a specified quantity of work, usually expressed on an hourly basis.
  • remuneration: a payment for work done; wages, salary, emolument


Wage payment systems are the different methods adopted by organizations by which they remunerate labor There exists several systems of employee wage payment and incentives, which can be classified as following:

Time Rate System: Under this system, the worker is paid by the hour, day, week, or month.

High Wage Plan: Under this plan, a worker is paid a wage rate that is substantially higher than the rate prevailing in the area or in the industry. In return, he is expected to maintain a very high level of performance, both quantitative and qualitative.

Measured Day Work: According to this method, the hourly rate of the time worker consists of two parts viz, fixed and variable. The fixed element is based on the nature of the job (i.e., the rate for this part is fixed on the basis of job requirements). The variable portion varies for each worker depending upon his merit rating and the cost-of-living index.

Differential Time Rate: According to this method, different hourly rates are fixed for different levels of efficiency.

Payment by Results Piece Work Straight Piecework System: The wages of the worker depends upon his output and rate of each unit of output; it is in fact independent of the time taken by him.

Piecework system: A family in New York City making dolls' clothes by piecework in 1912. Each family member earns money based on how many pieces they produce.



Differential Piece Work System: This system provides for higher rewards to more efficient workers. For different levels of output below and above the standard, different piece rates are applicable.

Taylor Differential Piece Work System Merrick Differential Piece Rate System Combination of Time and Piece Work Gantt Task and Bonus System: The system consists of paying a worker on a time basis if he does not attain the standard and on piece basis (high rate) if he does.

Emerson's Efficiency System: Under this system, minimum time wages are guaranteed. Beyond a certain efficiency level, bonus in addition to minimum day wages is given.

Renumeration systems are procedures for determining an employee's salary.

For example, lockstep compensation is a system of remuneration in which the employees' salaries are based purely on their seniority within the organization. In the legal profession, where this system is most commonly found, all law school graduates hired by a law firm who graduated in the same year, receive the same base pay, regardless of the background, experience, or ability of each. During the late-2000s financial crisis, some law firms began replacing the lockstep system with "merit-based" systems. The lockstep system of compensation has the benefit of being easy to administer, reducing internal competition within firms, and maintaining a single company philosophy. At the same time, however, it has been criticized for being inefficient and reducing incentives for employees to improve performance.