Page 654 - Business Principles and Management

Chapter 24 • Rewarding and Developing Employees

24.1 Compensation Planning

Goals Terms
• Describe several types of • compensation • commission plan
compensation systems and the • wage • piece-rate plan
reasons each is used. • salary • combination plan
• Discuss important factors that • compensation plan • bonus
affect pay levels in a business.
• time plan • minimum wage law

Compensation Plans

One of the important reasons people work is to earn money. But money is just
one valuable benefit that employees receive for their labor. Other benefits in-
clude such things as paid vacations, company-sponsored health insurance, and
employee assistance programs. The pay and other benefits employees receive in
exchange for their labor are called compensation.
The method used to determine pay can be an important factor in attracting
employees to the company, motivating them to give their best efforts, and retain-
ing good employees. Therefore, the compensation system must pay employees
fairly, in a way that encourages them to work for the company while using the
company’s resources efficiently.
Many factors affect the amount of pay an employee receives. These include
the skill required for the job, the work conditions, the amount of education and
experience the person has, the supply and demand for that type of worker, and
economic conditions.
A wage is pay based on an hourly rate. Salary is pay based on a time frame
other than hourly, such as weekly or monthly. Salaries are most often paid to ex-
ecutives, supervisors, professionals, and others who do not have a fixed number
of hours to work each week. Companies develop compensation plans to deter-
mine how employees will be paid. A compensation plan is a system of policies
and procedures for calculating the wages and salaries in an organization.
Because businesses vary a great deal in terms of what they produce and the
qualifications of their employees, many different methods are used to determine
how employees are paid. Under some plans, employees with the same qualifica-
tions and experience are paid the same no matter what job they do or whether
one is more productive than another. Other systems determine pay levels by the
type of work, the amount produced, or the quality of the work. Commonly used
compensation plans are time plans, performance plans, and combination plans.

TIME PLANS

The most common payment method is a time plan, which pays a certain amount
for a specified period of time worked. Wages are a time-based plan. For example,
an employee might earn $8.50 per hour. A salary is also based on time worked.
For example, a company may pay an employee a salary of $2,800 per month,

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