Understanding Compensation

Employees are an important company asset and payroll is typically a company’s largest expense. Compensation therefore plays a vital role in the success of any organisation. Companies aim to determine and maintain pay level guidelines that attract, retain and motivate employees.

Compensation programs within large and mid-sized companies are usually well defined and structured - every position has a Job Grade (job level) with a defined salary range and benefits package. Compensation programs within smaller companies tend to be more informal or even, non-existent.

Compensation packages vary by company and job level.

Entry-level positions often offer a base salary only. Mid-level to management level positions typically offer a base salary and a performance-based bonus such as a short-term incentive and/or long-term incentive. Executive-level positions offer the most lucrative compensation packages that often include base salary, both a short-term and long-term incentive, and other perks.

• Base Salary

A fixed compensation paid on a regular basis in exchange for an employee performing routine job functions, often expressed in an annual sum i.e., annual base salary.

• Short-term Incentives

Rewards to an employee for achieving certain goals over a short period, such as a year or less. Short-term incentives typically entail a cash reward paid out on an annual basis. Rewards can include a cash bonus or commissions (for revenue-generating positions such as sales). These incentives are measured based on an employee’s own performance, a department’s performance and/or the company’s performance.

• Long-term Incentives

Rewards to an employee based on company performance over a longer period of time, typically two to five years. These incentives can be paid in various ways such as cash bonuses, stock options, restricted stock, ownership or shares within a private company. These incentives are typically measured based on an employee’s long-term contribution to the long-term success of the department and/or company and are usually paid out to mid-level management and executive-level positions.

In addition to the cash compensation components of an offer package, companies, especially large and mid-size companies, may offer non-cash components as well. The most common are health care benefits, pension plans, and holiday, vacation and sick pay. Some employers offer other benefits such as a car allowance, gym membership, professional membership reimbursement, child care assistance, and numerous other benefits and perks designed to attract, motivate and retain talent.