Examples of Employee Compensation Plans Hourly Wage Annual Salary Retirement Savings Raises, Bonuses and Incentives Group Health Benefits

Employee Compensation The term “compensation” refers to the combination of wages, salaries and benefits an employee receives in exchange for work. Compensation may include hourly wages or an annual salary, plus bonus payments, incentives and benefits, such as group health care coverage, short-term disability insurance and contributions to a retirement savings account. A total compensation package can have several components. An “employee compensation plan” collectively refers to all the components in addition to the manner in which the compensation is paid and for what purpose employees receive case bonuses, salary increases and incentives.

Hourly Wage Employees classified as non-exempt receive what employers usually call wages, which are calculated on an hourly basis and require overtime payment for work in excess of 40 hours per week. ---------------------------------------------------------------------------------------------- Overtime is one and a half times the hourly rate. Employees who have a collective bargaining agreement with management -- often called a labor union contract -- have wages set by contract terms for a certain period. For example, a sample labor union contract may require employers to pay master plumbers, licensed plumbers and apprentice plumbers hourly wages of $19.75, $17.95 and $15.50, respectively, pursuant to the terms of a collective bargaining agreement.

Annual Salary Although there are salaried employees who are classified as non-exempt and, therefore, entitled to overtime pay, the term “salary” generally refers to an annual salary the employee receives or a method of employee compensation that does not require overtime pay. For instance, the reference to a “salaried employee” is generally used to describe a worker who does not receive overtime pay. ----------------------------------------------------------------------------------------------------- An example of an employee compensation plan for salary levels is one based on a salary scale that considers education, years of professional experience, credentials and qualifications such as job competency and functional expertise. Salary levels such as the wage tables published annually by the U.S. Office of Personnel Management contain annual wages, as well as increases based on step and grade promotions for federal government employees paid according the General Services and Senior Executive Service wage scales.

Retirement Savings A sample compensation scenario gives employees the opportunity to participate in the employer-sponsored 401k plan. Employees designate pre-tax contributions to be deducted from each paycheck. For employees who contribute 5 percent of their gross salary or wages, the company matches 50 percent of the employee’s contribution. In other words, the employer’s matching contributions equal 2.5 percent of the employee’s gross salary. Vesting refers to the amount of time before which the employer’s contribution is fully available to the employee. Vesting periods range anywhere from one to five years. A five-year vesting period means that for the first year after the employer makes its contribution to the employee’s 401k plan, 20 percent of the money actually belongs to the employee. In the second year, 40 percent belongs to the employee, and in subsequent years, 60, 80 and 100 percent of the employer’s contributions become vested and available to the employee. If the employee leaves his job before completing five years, he forfeits the appropriate portion of the non-vested employer’s contributions.

Raises, Bonuses and Incentives The employer's performance management system is usually what drives a compensation plan's salary increases. Employees receive annual raises based on performance ranking and ratings. For example, an outstanding performance appraisal could result in a 5 percent salary increase. ----------------------------------------------------------------------------------------------------- Sample employee bonus and incentive plans include cash incentives based on a percentage of the employee's gross salary or an employee's share based on a discretionary pool of funds designated for distribution to employees whose performance contributed to business success. Many executive bonuses and incentives are tied to improvement of the bottom line or even increases in the value of shares for publicly held companies.

Group Health Benefits A total compensation plan may include group health-care benefits. Many employers pay a sizeable portion of the total monthly premium, leaving a portion of the premium to be deducted from the employee’s pay. Premiums for employer-sponsored health care plans are deducted from pre- tax income, which are gross earnings. Group health coverage may include supplemental coverage for dental and vision care as well. Some employers pay the total cost for short-term disability insurance and offer coverage for long-term disability insurance as part of an employee’s total compensation.