Pros & Cons of Different Types of Employee Compensation

Employee Compensation and benefits can vary based on the type of structure that works best for your organization and project. Between hourly wages, salaried pay, and everything in between, understanding which to offer your employees can be difficult.

Here’s a breakdown of the pros and cons of the different kinds of compensation structures commonly used.

Pros & Cons of Employee Compensation Types

Hourly Wage

Pros: Paying by the hour remains the ideal method when a set number of hours is expected for project completion. This gives you flexibility because as a manager you can decide on how many hours you can pay for based on your budget.

Cons: The main disadvantage is that you will have to pay extra for overtime or for work on holidays. Costs are one and a half times the base hourly rate if you require your employees to work overtime and up to twice of that on a holiday.

Salary

Pros: One of the advantages of paying a salary is that you would not have to pay for overtime work. Employees will have to finish projects regardless of the time it requires within the budget that you have set aside for their salary. Your employees might also be happier, as they are not as likely to associate happiness with income. For example, those paid by the hour may experience a dip in satisfaction levels if they work fewer hours and thus earn less.

Cons: You will have to offer extra perks to make the salary and position more appealing, such as health insurance, benefits, and flexible working hours. This will require more planning as a manager, but may also result in your employees being happier overall.

Bonus

Pros: Paying a bonus incentivizes employees and teams to produce exceptional results. For example, if a team performs well as a whole, this raises the amount of the bonus that everyone will receive. Bonuses will also encourage employee loyalty, as this structure often has a large salary component and will appeal to those who are looking to build a career at the company.

Cons: It might be difficult to determine who should receive a bonus if team effort produced the results. Also, employees might take bonuses for granted and have expectations to receive one even if profits for the year do not warrant it.

Commission

Pros: Paying a commission tends to motivate salespeople to produce more sales for the company, especially if the commission rate is attractive. If the commission structure is well designed, it should work well without impacting your company profits. Individual effort is emphasized, requiring less supervision by sales management.

Cons: Conversely, a low commission rate would not be attractive to an employee. This may also affect company loyalty as an employee would be more likely to leave for a higher commission rate.

Ultimately, deciding which structure to go with will depend on the complexity of the work required, as well as how much time it will take for the work to be completed. Other factors should also be considered, such as employee satisfaction and the flexibility you require in managing your budget. If you strategically plan your pay structure, you can find the balance between maximizing profits and retaining happy employees.

To learn more about employee compensation try the KnowledgeCity courses: Compensation & Benefits! Get started today with a Free Demo. It will be well worth your time.