{"id":934,"date":"2019-08-21T19:15:40","date_gmt":"2019-08-21T19:15:40","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-humanresourcesmgmt\/?post_type=chapter&#038;p=934"},"modified":"2024-04-25T01:32:18","modified_gmt":"2024-04-25T01:32:18","slug":"types-of-compensation","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-humanresourcesmgmt\/chapter\/types-of-compensation\/","title":{"raw":"Types of Compensation","rendered":"Types of Compensation"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Discuss types of compensation<\/li>\r\n \t<li>Discuss factors affecting compensation<\/li>\r\n<\/ul>\r\n<\/div>\r\nCompensation is generally broken down into two primary types: direct and indirect. Direct compensation consists of monetary payments based on time worked or results achieved, including both base and incentive pay. Indirect compensation includes costs incurred for benefits, including vacations, health insurance, retirement plans, federally required protections (e.g., disability and unemployment insurance), and other employee benefits.\r\n\r\nA third type of compensation is intangible. Intangible compensation includes non-financial rewards such as mentoring, awards or badging, recognition, and factors that impact quality of work or work\/life balance such as greater autonomy, a flexible work schedule, or the ability to work remotely.\r\n<table style=\"border-collapse: collapse; width: 100%;\" border=\"1\">\r\n<thead>\r\n<caption>Common Examples of the Types of Compensation[footnote]\"<a href=\"https:\/\/www.go2hr.ca\/retention-engagement\/managing-reward-why-line-managers-are-the-vital-link\" target=\"_blank\" rel=\"noopener\">Managing Reward: Why Line Managers are the Vital Link<\/a>.\" go2HR. Accessed August 22, 2019.[\/footnote]<\/caption>\r\n<thead>\r\n<tr>\r\n<th scope=\"col\">Direct Compensation<\/th>\r\n<th scope=\"col\">Indirect Compensation<\/th>\r\n<th scope=\"col\">Intangible Compensation<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>Base salary\/ hourly wage<\/td>\r\n<td>Retirement Plan<\/td>\r\n<td>Quality of work\/life balance<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cash bonuses<\/td>\r\n<td>Health Insurance<\/td>\r\n<td>Company values\/inspiration<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Annual incentives<\/td>\r\n<td>Cars<\/td>\r\n<td>Future growth opportunity<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\nhttps:\/\/assess.lumenlearning.com\/practice\/5a15f5b5-a4e7-4d78-8cdb-67270294385c\r\n\r\n<\/div>\r\n<img class=\"alignright wp-image-1045\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/4056\/2019\/08\/23201153\/american-3748708_960_720-300x200.jpg\" alt=\"Three people in sitting at a table in a business meeting.\" width=\"400\" height=\"266\" \/>Compensation is determined by the interplay of internal and external market and regulatory factors, as summarized below.\r\n<h2>Worker Productivity<\/h2>\r\nTheoretically, wages should increase when worker productivity increases. This is an economic calculation based on the market structure, costs of production, and market price and quantity.\r\n<h2>Supply and Demand for Labor<\/h2>\r\nTheoretically, wages should increase when the demand for labor exceeds supply or, as is the case currently, unemployment is at a historical low. There may also be geographic variances in wages based on the local\/regional availability of and competition for labor.\r\n<h2>Legislation<\/h2>\r\nAs discussed in <a href=\"..\/chapter\/fair-labor-standards-act\/\" target=\"_blank\" rel=\"noopener\">Fair Labor Standards Act<\/a>, laws such as the FSLA\u2014including state and local variations\u2014set a minimum standard for compensation.\r\n<h2>Labor Unions<\/h2>\r\nWages are one of a union\u2019s mandatory collective bargaining issues. As we\u2019ll discuss in <a href=\"..\/chapter\/why-it-matters-union-management-relations\/\" target=\"_blank\" rel=\"noopener\">Module 13: Union\u2013Management Relations<\/a>, employers who are subject to collective bargaining agreements tend to have higher wage and benefit costs than similar employers without union representation.\r\n<h2>Cost of Living<\/h2>\r\nAn increase in inflation results in a corresponding loss of purchasing power. Theoretically, wages should increase when the cost of living increases so workers are able to maintain their standard of living. There is also a geographic element to this factor. We see this in the variation in minimum wages set in cities and localities where the cost of living is relatively high.\r\n<h2>Industry Ability to Pay<\/h2>\r\nThere is a significant gap in what a technology company like Facebook can pay and what a non-profit, small business or start-up can afford to pay. The compensation differential may be offset by the sense of purpose or the opportunity to build a small business.\r\n<h2>Compensation Policy<\/h2>\r\nAn employer\u2019s position relative to the competition or market will affect the wages it offers. Generally, employers will take one of three positions: lead, lag or match. If an employer\u2019s policy is to lead the market, they will pay relatively higher wages than the competition. The rationale is that they will be able to attract a higher caliber of employees and see an offset in increased productivity and reduced training and turnover costs. Similarly, the face value employee cost savings of a \u201clag\u201d practice may be offset by higher recruiting, training and turnover costs. A match policy is simply to set compensation at the market rate.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\nhttps:\/\/assess.lumenlearning.com\/practice\/8be3a58e-dc32-4f5f-aa67-a24f83e3da63\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Discuss types of compensation<\/li>\n<li>Discuss factors affecting compensation<\/li>\n<\/ul>\n<\/div>\n<p>Compensation is generally broken down into two primary types: direct and indirect. Direct compensation consists of monetary payments based on time worked or results achieved, including both base and incentive pay. Indirect compensation includes costs incurred for benefits, including vacations, health insurance, retirement plans, federally required protections (e.g., disability and unemployment insurance), and other employee benefits.<\/p>\n<p>A third type of compensation is intangible. Intangible compensation includes non-financial rewards such as mentoring, awards or badging, recognition, and factors that impact quality of work or work\/life balance such as greater autonomy, a flexible work schedule, or the ability to work remotely.<\/p>\n<table style=\"border-collapse: collapse; width: 100%;\">\n<thead>\n<\/thead>\n<caption>Common Examples of the Types of Compensation<a class=\"footnote\" title=\"&quot;Managing Reward: Why Line Managers are the Vital Link.&quot; go2HR. Accessed August 22, 2019.\" id=\"return-footnote-934-1\" href=\"#footnote-934-1\" aria-label=\"Footnote 1\"><sup class=\"footnote\">[1]<\/sup><\/a><\/caption>\n<thead>\n<tr>\n<th scope=\"col\">Direct Compensation<\/th>\n<th scope=\"col\">Indirect Compensation<\/th>\n<th scope=\"col\">Intangible Compensation<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Base salary\/ hourly wage<\/td>\n<td>Retirement Plan<\/td>\n<td>Quality of work\/life balance<\/td>\n<\/tr>\n<tr>\n<td>Cash bonuses<\/td>\n<td>Health Insurance<\/td>\n<td>Company values\/inspiration<\/td>\n<\/tr>\n<tr>\n<td>Annual incentives<\/td>\n<td>Cars<\/td>\n<td>Future growth opportunity<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p>\t<iframe id=\"assessment_practice_5a15f5b5-a4e7-4d78-8cdb-67270294385c\" class=\"resizable\" src=\"https:\/\/assess.lumenlearning.com\/practice\/5a15f5b5-a4e7-4d78-8cdb-67270294385c?iframe_resize_id=assessment_practice_id_5a15f5b5-a4e7-4d78-8cdb-67270294385c\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:300px;\"><br \/>\n\t<\/iframe><\/p>\n<\/div>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignright wp-image-1045\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/4056\/2019\/08\/23201153\/american-3748708_960_720-300x200.jpg\" alt=\"Three people in sitting at a table in a business meeting.\" width=\"400\" height=\"266\" \/>Compensation is determined by the interplay of internal and external market and regulatory factors, as summarized below.<\/p>\n<h2>Worker Productivity<\/h2>\n<p>Theoretically, wages should increase when worker productivity increases. This is an economic calculation based on the market structure, costs of production, and market price and quantity.<\/p>\n<h2>Supply and Demand for Labor<\/h2>\n<p>Theoretically, wages should increase when the demand for labor exceeds supply or, as is the case currently, unemployment is at a historical low. There may also be geographic variances in wages based on the local\/regional availability of and competition for labor.<\/p>\n<h2>Legislation<\/h2>\n<p>As discussed in <a href=\"..\/chapter\/fair-labor-standards-act\/\" target=\"_blank\" rel=\"noopener\">Fair Labor Standards Act<\/a>, laws such as the FSLA\u2014including state and local variations\u2014set a minimum standard for compensation.<\/p>\n<h2>Labor Unions<\/h2>\n<p>Wages are one of a union\u2019s mandatory collective bargaining issues. As we\u2019ll discuss in <a href=\"..\/chapter\/why-it-matters-union-management-relations\/\" target=\"_blank\" rel=\"noopener\">Module 13: Union\u2013Management Relations<\/a>, employers who are subject to collective bargaining agreements tend to have higher wage and benefit costs than similar employers without union representation.<\/p>\n<h2>Cost of Living<\/h2>\n<p>An increase in inflation results in a corresponding loss of purchasing power. Theoretically, wages should increase when the cost of living increases so workers are able to maintain their standard of living. There is also a geographic element to this factor. We see this in the variation in minimum wages set in cities and localities where the cost of living is relatively high.<\/p>\n<h2>Industry Ability to Pay<\/h2>\n<p>There is a significant gap in what a technology company like Facebook can pay and what a non-profit, small business or start-up can afford to pay. The compensation differential may be offset by the sense of purpose or the opportunity to build a small business.<\/p>\n<h2>Compensation Policy<\/h2>\n<p>An employer\u2019s position relative to the competition or market will affect the wages it offers. Generally, employers will take one of three positions: lead, lag or match. If an employer\u2019s policy is to lead the market, they will pay relatively higher wages than the competition. The rationale is that they will be able to attract a higher caliber of employees and see an offset in increased productivity and reduced training and turnover costs. Similarly, the face value employee cost savings of a \u201clag\u201d practice may be offset by higher recruiting, training and turnover costs. A match policy is simply to set compensation at the market rate.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p>\t<iframe id=\"assessment_practice_8be3a58e-dc32-4f5f-aa67-a24f83e3da63\" class=\"resizable\" src=\"https:\/\/assess.lumenlearning.com\/practice\/8be3a58e-dc32-4f5f-aa67-a24f83e3da63?iframe_resize_id=assessment_practice_id_8be3a58e-dc32-4f5f-aa67-a24f83e3da63\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:300px;\"><br \/>\n\t<\/iframe>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-934\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Types of Compensation. <strong>Authored by<\/strong>: Nina Burokas. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li><strong>Authored by<\/strong>: rawpixel. <strong>Provided by<\/strong>: Pixabay. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/pixabay.com\/photos\/american-analyzing-brainstorming-3748708\/\">https:\/\/pixabay.com\/photos\/american-analyzing-brainstorming-3748708\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/about\/cc0\">CC0: No Rights Reserved<\/a><\/em>. <strong>License Terms<\/strong>: Pixabay License<\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section><hr class=\"before-footnotes clear\" \/><div class=\"footnotes\"><ol><li id=\"footnote-934-1\">\"<a href=\"https:\/\/www.go2hr.ca\/retention-engagement\/managing-reward-why-line-managers-are-the-vital-link\" target=\"_blank\" rel=\"noopener\">Managing Reward: Why Line Managers are the Vital Link<\/a>.\" go2HR. Accessed August 22, 2019. <a href=\"#return-footnote-934-1\" class=\"return-footnote\" aria-label=\"Return to footnote 1\">&crarr;<\/a><\/li><\/ol><\/div>","protected":false},"author":17,"menu_order":9,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Types of Compensation\",\"author\":\"Nina Burokas\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"\",\"author\":\"rawpixel\",\"organization\":\"Pixabay\",\"url\":\"https:\/\/pixabay.com\/photos\/american-analyzing-brainstorming-3748708\/\",\"project\":\"\",\"license\":\"cc0\",\"license_terms\":\"Pixabay License\"}]","CANDELA_OUTCOMES_GUID":"af397113-5a28-40a1-af10-4d26ef3ac6bf, 0ad108ff-9a62-40d3-938f-14a103d6989b, 79e0fcf3-db48-4dd4-9e15-bb2c9c6b3535","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-934","chapter","type-chapter","status-publish","hentry"],"part":926,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/wm-humanresourcesmgmt\/wp-json\/pressbooks\/v2\/chapters\/934","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/wm-humanresourcesmgmt\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/wm-humanresourcesmgmt\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-humanresourcesmgmt\/wp-json\/wp\/v2\/users\/17"}],"version-history":[{"count":16,"href":"https:\/\/courses.lumenlearning.com\/wm-humanresourcesmgmt\/wp-json\/pressbooks\/v2\/chapters\/934\/revisions"}],"predecessor-version":[{"id":3366,"href":"https:\/\/courses.lumenlearning.com\/wm-humanresourcesmgmt\/wp-json\/pressbooks\/v2\/chapters\/934\/revisions\/3366"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/wm-humanresourcesmgmt\/wp-json\/pressbooks\/v2\/parts\/926"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/wm-humanresourcesmgmt\/wp-json\/pressbooks\/v2\/chapters\/934\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/wm-humanresourcesmgmt\/wp-json\/wp\/v2\/media?parent=934"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-humanresourcesmgmt\/wp-json\/pressbooks\/v2\/chapter-type?post=934"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-humanresourcesmgmt\/wp-json\/wp\/v2\/contributor?post=934"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-humanresourcesmgmt\/wp-json\/wp\/v2\/license?post=934"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}