Employee Compensation

Related Terms: Employee Benefits; Employee Motivation; Employee Reward Systems

People work in order to earn money, but the structure of compensation is quite diversified. The two broadest categories are salaries and wages. Salaries tend to be paid every other week or monthly; wages are typically calculated by the hour but paid by the week. As a consequence of legislative language, salary-earning employees are sometimes referred to as "exempt" employees and hourly workers as "non-exempt"; in other words the first are exempt from the requirements of Fair Labor Standards Act (discussed below), the latter group are covered. Compensation may also take the form of commissions paid to sales people based entirely on some percent of the goods or services they sell; this type of compensation is often combined with a minimal salary to even out the ups and downs of commission earnings—but people on pure commission who fail to "earn back" their base salary rarely continue in the job long. Piece work, where pay is based on actual performance of some job measured by units produced, is a variant of this approach. People serving as wait-personnel in restaurants are typically compensated by a low wage inadequate to support them: they get the majority of their income from tips. In the so-called New Economy which began emerging in the 1990s, characterized by cutbacks and layoffs of salaried and professional employees, many individuals became self-employed of necessity but, often, continued working in actual "jobs," much as before. The compensation of such people is based on contract revenues, but they receive no fringe benefits and are required to pay their own payroll taxes.

Compensation has a legal status and, once engaged, people can use the courts to enforce the employment agreement. Employee benefits ("fringe benefits") have another status: they are provided at the employer's option and may be withdrawn at will. As such they are not strictly speaking compensation although, in practice, they are viewed as a part of the full compensation "package." The employer's payment of premiums for certain types of fringe benefits, such as health care coverage and insurance policies (disability, life insurance), are not viewed under tax law as part of the employee's taxable income. Others, such as the provision of an automobile or housing, are taxable and therefore fall under the definition of "compensation."

COMPENSATION AND TIME

For the non-exempt part of the workforce hours spent on the job are the measure of compensation to be paid. Time spent at work is regulated by the government, and laws govern pay scales over and above the specified work week, typically 40 hours. The vast majority of exempt workers are also required to work a fixed number of hours a week—but the hours may be flexible under "flextime" rules set by the employer. For exempt employees, pay for "overtime" is not controlled by law in most cases. In other words, the typical administrative/professional/executive employee is expected to work 40 hours—and as many more as the job may require, the extra hours compensated, if at all, by bonuses or time off. In the case of people working for commissions, time spent on the job is only incidentally related to compensation. Normally, of course, such people spend a lot of time working—but one can imagine the highly charismatic (and lucky) sales person who, in a couple of hours a month, can move a million dollars worth of real estate'¦.

COMPENSATION LAWS

The Fair Labor Standards Act of 1938 (FLSA) is in a sense the basic law controlling employment and compensation issues and, through amendments passed later, the management of benefits packages. FLSA sets minimum wage, overtime pay, equal pay for men and women, controls child labor, and establishes record keeping requirements. On the whole FLSA is aimed at protecting the non-exempt work force—which was the overwhelming majority of all workers at the time of the law's passage. Since that time the profile of the workforce has greatly change; amendments to FLSA have in part reflected these changes. As illustrated by state over-rides of FLSA's minimum wage requirements (see below), states also actively regulate compensation and other aspects of the workplace.

The chief amendment of FLSA was passage of the Equal Pay Act of 1963 (EPA). EPA prohibits unequal compensation of men and women in the same workplace doing similar jobs. EPA makes exceptions for seniority, allows the use of merit systems, and recognizes compensation systems based on performance. EPA requirements do not differentiate between exempt and nonexempt employees.

Other legislation related to employment compensation issues includes: 1) the Consumer Credit Protection Act of 1968 which deals with wage garnishments; 2) the Employee Retirement Income Security Act of 1974 (ERISA), which regulates pension programs; 3) the Old Age, Survivors, Disability and Health Insurance Program (OASDHI), which forms the basis for most benefits programs; and 4) legislation implementing unemployment insurance, equal employment, worker's compensation, Social Security, Medicare, and Medicaid programs and laws.

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