THE TYPES OF COMPENSATION STRUCTURE AND DIFFERENTIALS IN ORGANISATION
Compiled and Written by FEresources (May 2017)
Compensation structures, also known as salary structures, set out the different levels of pay for jobs, or groups of jobs, by reference to;
1. Their relative internal value, as established by job evaluation
2. external relativities, via market rate surveys
3. where appropriate, negotiated rates for the job
A company's pay structure is the method of administering its pay philosophy. The two leading types of pay structures are the internal equity method, which uses a tightly constructed grid to ensure that each job is compensated according to the jobs above and below it in a hierarchy, and market pricing, where each job in an organization is tied to the prevailing market rate.
MAIN CHARACTERISTICS OF PAY STRUCTURES
- Indicate rates of pay for different jobs
- Provide scope for pay progression via performance, competence, contribution, skill or service
- Contain pay ranges for jobs grouped into grades, individual jobs or job families
ORGANIZATIONS NEED PAY STRUCTURES TO
- Establish a logically-designed framework within which equitable, fair and consistent reward policies can be implemented
- Determine levels of pay for jobs and people
- Basis for the effective management of relativities
- Help monitor and control the implementation of pay practices
- Communicate the pay opportunities available to employees.
There are two forms of compensation provided to employees; direct and indirect. Direct forms of compensation have a multitude of types or methods, from salaries to bonuses. Indirect compensation is primarily the various types of benefits and long term incentives. .
One of the forms of compensation is direct remuneration for services rendered by the employee. The term used for this is wages. It consists of four different groups of payment from the employer to the employee. They are salary, hourly, commission and bonus types of wages.
DIRECT FORMS OF COMPENSATION
This type of wage is customarily a set sum of remuneration over a defined period of time. The most traditional form is a Naira amount over a period of one year. The frequency of payment is another part of the compensation and is based on industry standards. Most businesses pay for services once a month.
Salaries are the most commonly used tool to pay professional or licensed employees. In general there is an expectation from the employer of a longer term commitment from the employee for providing a regular uninterrupted compensation stream via a salary.
This is a Naira amount per hour of service to the employer, more commonly used to compensate unskilled and skilled laborers in the workforce. This form of compensation comes with an implied understanding that during times of slow or minimal workloads, the employee may not be used to provide services. In effect, there is no guarantee of a regular cycle of pay.
When compensation is based on volume or some form of performance, this is known as commission based remuneration. Other terms used include piecework or piecemeal. Many industries used this type of remuneration to get a minimum standard of production in exchange for compensation. It is used to shift risk from the employer to the employee. There are two methods to calculate commission. One is based on volume of services and the other is based on sales.
Bonuses are used to increase performance from the employee. This is a variable type of remuneration and is more commonly found with salaried staff to incentivize them for a particular goal whether time or volume based. Other reasons used for bonuses are to increase or maintain retention of certain skills or the pool of skill-sets needed in the company. Sometimes bonuses are paid when a company meets certain financial standards or goals over an extended period of time.
Bonuses are not commonly used with hourly or commission based employees due to the nature of the type of compensation already established. However, in small businesses it is used as a tool to incentivize these two types of remuneration to meet certain goals. The other form of compensation is indirect in value. This includes benefits and equity based programs.
INDIRECT FORMS OF COMPENSATION
In general, these two types of indirect compensation provide value to an employee over a longer period of time.
This particular group is traditionally thought of in the form of insurances (health, dental, life, disability and vision) and retirement. Very few small businesses provide benefits to their employees due to the cost involved. When small businesses begin providing benefits, they customarily start out with retirement because of simplicity and low cost. As they grow, they add health insurance (mandated by law for employers with 50 or more employees) and continue to expand the benefit package as the number of employees increase and the risk of business performance decreases. Benefits allow for retention and recruitment.
Other benefits can include transportation, paid time off, vacation time, and customized incentives (lodging, meals, phones, etc.).
Equity Based Programs
Rarely found in the small business world for several reasons. These types of indirect compensation tie the employee to the company via ownership. Due to the complexity and the legal issues involved, very few small businesses use this tool. This is a sophisticated method to retain key employees and is discussed in another article.
The information below is a few pay structures of some organizations in Nigeria gathered from employees. In addition is the psychological reward the employee gets from this compensation structure.
1. HR Guide “ An experience Survey Consultant” 2015
2. David J. Hoare “in Human Resources Management” – Articles on Business Principles Operations, 01/21/2014
3. Article on Pay Structure by Erisa Ojimba, 2014 Salary.com
4. Cheryl Van Ornum 08/2011 “The 5 Key Objectives of Compensation Management”