compensation is being paid for services during the course of employment.

There is direct
compensation (or monetary compensation) and indirect compensation (or non-monetary
compensation) in the form of benefits provided to the employee.

Direct compensation is monetary payment for services rendered by an employee. This can be
either a salary or hourly wages. A salary is a set amount of money paid to an employee for services
performed. Employees on a salary are exempt and can expect to earn the same amount of money
each pay period. A wage is an hourly rate of pay given to an employee for services performed. Non-
exempt employees receive wages and can expect to earn an hourly wage for each and every hour
they perform. Commissions are mainly used for salespeople. They receive a percentage of what
they sell as a commission, often in addition to a base salary.

Other forms of compensation include incentives and stock options. Incentives are rewards generally
given to employees when company goals are met - like sales quotas or performance goals. These
rewards can be a company party or extra money. Stock options, which are a benefit given to
employees, carry the right to buy and sell shares of stock in the company.

Indirect compensation is non-monetary, or intangible, compensation in the form of benefits or

perks given to an employee in conjunction with direct compensation. This is compensation that has
no cash value but benefits an employee. Health and life insurance, Social Security, retirement plans,
flexible scheduling, and even discounts for products and services are just some of the non-monetary
benefits many employees receive.

An organization can offer applicants and employees three general forms of compensation to induce
them to work. Direct financial compensation includes direct payment of money to employees,
such as salaries, wages, commissions and bonuses. Indirect financial compensation is non-cash
benefits, such as medical insurance, retirements and employee services. Non-financial
compensation doesn't involve financial value, but makes an employee's job enjoyable and
satisfying. Finally, when developing a compensation strategy, care must be given to maintain both
external competitiveness and internal equity.

Salary is an amount of pay regularly given to a person for a task completed. Salary has different
characteristics: it is an employer's responsibility towards their employees; it can never be a free and
direct contribution to a task accomplished. Unlike a regular and consistent salary based on
schedules, hourly pay refers to the amount of money given per each hour of offering service. Hourly
pay is convenient for seasonal workers and provides ease of shifting from one job to another. A
wage is a set amount of money paid to a worker for each hour or set work period. However, wage
workers have no job security and may easily lose their jobs in the event of a company facing
financial crisis. Employers do not withhold payroll taxes for independent contractors and self-
employed workers. Examples of salary include a monthly salary of $3500 for a high school teacher
or a yearly salary of $174,000 for a senatorial member of Congress in the United States.

A compensation system is a framework used by organizations to decide the worth of people's work
and other considerations such as promotions or salary increments. It consists of pay grades, job
family, administration, and pay ranges. The three main types of compensation systems are direct
financial compensation, indirect financial compensation (otherwise known as a non-cash
benefit), and non-financial compensation, which entails satisfactory actions without monetary
value. A commission is a way of direct payment, determined by the percentage of all revenues
generated to a company through sales. Pay-for-performance is a system where workers are paid a
basic salary and entitled to additional money if they meet set performance standards. The main
difference between commissions and pay-for-performance is that commissions are based on the
revenues a worker generates for the company through sales.

Compensation equity is employee perception of overall fairness of the compensation received in

exchange for the work provided. It consists of both external and internal equity. External equity is
the perception that similarly situated employees outside an organization are paid about the same as
employees inside the organization. Internal equity focuses on the relative work and pay of
employees within the organization. Employee equity takes into account the uniqueness of each
employee in determining individual compensation.

Designing a compensation system that is equitable is important for the success of an organization.
External inequity may result in losing good employees to employers who are paying more for the
same work. It's illegal to discriminate in compensation based solely upon gender. Moreover,
compensation inequity can cause a decrease in productivity and organizational morale.

Employee benefits are a type of compensation that employers provide to employees as part of their
employment agreement. Many employee benefits offer indirect financial compensation, which is
different from methods of direct financial compensation such as a salary. There are two main types
of employee benefits: mandatory and voluntary. Mandatory benefits are required by law. These
types of benefits can include Social Security, Medicare, and unemployment insurance. Some of the
costs of these benefits can be shared by employees and employers. For example, The Social
Security system is paid for through a payroll tax that employers pay half of. Voluntary benefits are
not required by law but are offered at the discretion of employers. These benefits include life
insurance, dental insurance, and a 401(k) plan.

There are two general orientations when deciding which employee benefits to offer and how to
structure them. These orientations are consumer-oriented benefits and organization-oriented
benefits. Consumer-oriented benefits are designed to meet the needs of employees as individuals.
These types of benefits often require employees to pay at least a portion of the costs, such as dental
insurance. Organization-oriented benefits are designed to meet the organization's needs as a
whole. These types of benefits are usually structured to allow employers to contribute a certain
amount of money towards the cost of the benefit, and employees then receive the benefit at no
additional cost. An example of an organization-oriented benefit would be a retirement plan that
requires employees to work for a certain number of years before becoming eligible to receive
benefits. It is important for companies to carefully consider their employees and overall
organizational needs when deciding which employee benefits to offer.

An incentive compensation plan involves compensation that is based upon an employee achieving
certain performance standards. Merit pay is an increase in an employee's base pay based on the
employee's improved performance. Piece rates involve being paid for each unit an employee
produces, while commissions are payments based on a percentage of total revenue brought in by
an employee. Bonuses are one-time payments that reward an employee for meeting some
performance standard or goal. Skills-based compensation involves increasing an employee's pay
based upon an increase in an employee's skill and expertise that is valuable to the employer.

Companies can employ different compensation strategies to help align the company's interests with
those of employees. Some strategies include stock options, profit sharing and gain-sharing plans. A
grant of stock options gives employees the right to purchase company stock at a predetermined
price in the future. If the company does well, the employee will be able to purchase the stock below
market rate. A profit-sharing plan allows employees to share in an increase in profits, while a gain-
sharing plan allows employees to share in the savings realized through increases in efficiency.