When talking compensation, one has to think of both direct and indirect compensation.

Direct compensation includes employee wages and salaries, incentives, bonuses, and commissions. Essentially, direct compensation is the money an employee receives in return for their effort and skills.

Indirect compensation includes benefits supplied by the employer, and non-financial compensation including: employee recognition programs such as “employee of the month”, offering jobs that employees find personally rewarding and fulfilling, organizational support, a desirable work environment, and flexible working hours. These are the areas that many would not initially consider part of a compensation program but are highly valued by employees and as such are still very important to consider.

If an employee does not enjoy their work environment, has no support, and does not find their job rewarding, it would be very difficult to keep them with your company based on financial compensation (direct compensation) alone.

Total compensation is used by many employers to describe not only salary and wages, but also all the plans, programs, benefits and opportunities that become available to employees as a result of employment. It includes:

-  Cash compensation – salary and wages
-  Health and wellness plans and initiatives – benefit plans
-  Retirement savings – pension plans
-  Other work-life benefits – i.e. tuition costs, onsite daycare etc.

Direct compensation includes employee wages and salaries, incentives, bonuses, and commissions. Essentially, direct compensation is the money an employee receives in return for their effort and skills.

Indirect compensation includes benefits supplied by the employer, and non-financial compensation including: employee recognition programs such as “employee of the month”, offering jobs that employees find personally rewarding and fulfilling, organizational support, a desirable work environment, and flexible working hours. These are the areas that many would not initially consider part of a compensation program but are highly valued by employees and as such are still very important to consider.

If an employee does not enjoy their work environment, has no support, and does not find their job rewarding, it would be very difficult to keep them with your company based on financial compensation (direct compensation) alone.

Strategic compensation serves a dual purpose:

• Employees are compensated in ways that enhance motivation and their own growth.
• The compensation plan aligns the efforts of the employee with the objectives and culture of the organization.

By having a strategic compensation plan, the employee goals are synonymous with those of the company, which in the end helps the company ultimately achieve their own goals resulting in a successful organization.

Some common goals of strategic compensation include the following:

• To reward employee's past performance
• To remain competitive in the labour market
• To maintain salary equity among employees
• To mesh employee's future performance with organizational goals
• To attract new employees
• To reduce unnecessary turnover

In order to achieve these goals, policies must be established to guide management in making compensation decisions. Compensation policies may include the following examples:

• The rate of pay within the organization and whether it will be above, below, or at the community rate.
• The pay level at which employees may be recruited and the differential between new and more senior employees
• The intervals at which pay raises are to be granted and the extent to which seniority will influence these raises.

Pay-for-performance is compensation strategy in which compensation is directly tied to the efforts and performance of the employee. It has been found that employees are more productive when they can see a clear link between their performance and their pay. When a pay-for-performance program is installed, employee output (productivity) can go up by 15 to 35 percent.

Pay-for-performance refers to a wide range of compensation options, including:

• Merit based pay
• Bonuses
• Salary commissions
• Team/ group incentives
• Gainsharing programs

Designing an effective pay-for-performance program is not easy seeing as many different considerations must be taken into account. Some of these considerations include:

• How you will measure productivity - this may be straightforward on an assembly line, but more difficult and more subjective for employees who work in a service environment
• Dollars allocated for compensation increases
• Which employees are eligible?
• Method of payout
• When will payments be made?

Pay equity is an employee's perception that the compensation they receive for their work is equal to the value of the work performed. It is commonly agreed that an employee's perception of pay equity (or pay inequity) can have a significant effect on motivation as well as productivity. There are three main categories that an employee can fall into when talking about pay equity:

• Doing more and receiving less – resulting in inequity where the employee feels they are being underpaid.
• Doing the same and receiving the same – resulting in equity and the employee feels they are being paid fairly.
• Doing less and receiving more – resulting in inequity where the employee feels they are being overpaid.

The greater the perceived difference between one employees input and their resulting output compared to another's, the greater that employee is motivated to reduce the inequity – by being less productive.

There are two main types of equity that one must consider:

• Internal equity occurs when employees believe that the wage rates for their jobs approximate the jobs value to the organization.
• External equity occurs when the organization is paying wages that are equal to what other employers are paying for the same type of work.

Payday:
An employee must be paid on a regular, recurring payday and must be given a statement showing their wages and deductions for that pay period.

Statutory Benefits:
These benefits are mandatory for an employer to provide in Canada and come off pay. They include:

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Government pension plans

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Public medical plans

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Employment insurance

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Workers' compensation

Employment Insurance (EI), Canada Pension Plan (CPP) and Income Tax
All employers are to collect Employment Insurance Premiums, Canada Pension Plan Contributions and Personal Income Tax on behalf of the federal government. As well as collecting fees from employees for EI and CPP, employers are also responsible for contributions to these.

Workplace Safety & Insurance Act (Workers' Compensation)
Employers must pay into the insurance fund of the Workplace Safety and Insurance Board (WSIB) through assessments on their payrolls (specific to workplace and industry).

Minimum Wage
An employee must be paid at least $8.00 an hour.

Exceptions include students, liquor servers, homeworkers, and hunting and fishing guides.

Overtime Pay
An employee must be paid overtime pay after they have worked 44 hours in a week, not including meal breaks, whether break is paid or not. The overtime rate must be at least 1 and a half times the regular rate of pay (1.5 x pay rate).

Alternatively, an employee and employer can agree in writing that the employee will receive paid time off work rather than overtime pay, known as “time off in lieu”. The employee must be given 1.5 hours of paid time off for every 1 hour of overtime worked and must be taken within 3 months of the week the overtime was worked (unless employee agrees in writing to take it within 12 months).

Unless a contract of employment/collective agreement states otherwise, an employee does not earn overtime pay on a daily basis by working more than a set number of hours a day. Overtime is only calculated on a weekly basis or a longer period of agreed time.

Pay systems should always take into consideration the context of internal factors, such as organizational strategies, and external factors, such as the labour market, when determining their compensation levels.

Internal Factors:

• Compensation strategy of organization.
• Worth of a job – this can be based on the subjective opinions of people who are familiar with the job, or more accurately, this can be determined via job evaluation.
• Employer's ability to pay.

External Factors: :

• Conditions of the labour market – for example, if unemployment is high, employees may be willing to accept lower wages, or if unemployment is low, a high wage would be expected/ required.
• Area wage rates – ensuring that you are paying your employees a rate that is in line with rates being paid by other employers for comparable jobs in the area.
• Cost of living – as cost of living increases, and employees wage needs to increase also.
• Collective Bargaining (where applicable).

Because of inflation, compensation rates need to be adjusted upwards periodically to ensure employees standard of living remains similar as prices go up – also known as purchasing power.

A tool that employers can use to help them make these changes is the CPI. CPI stands for Consumer Price Index and is the measure of the average change in prices over time in a fixed market. This index is based on the prices of essentials, such as food, clothing, shelter, fuels and transportation, and health care. Statistics Canada collects price information on a monthly basis and calculates the CPI for Canada as a whole, as well as various Canadian cities. As the CPI increases, an employees wage should increase proportionately. For example, in union contracts you can find what's known as an escalator clause. This clause provides employees within the union with a quarterly cost-of-living adjustment (COLA) in wages based on the CPI – i.e. 1 cent per hour for every 0.3-0.4 point change in the CPI.

A job evaluation is the systematic process of determining the relative worth of a job to an organization and helps to establish which jobs should be paid more than others within that organization. This information can be very useful when determining the wage rates for your company.

Due to their simplicity and ease of use, there are two types of job evaluation systems that are most commonly used:

Job Ranking System:

• the simplest and oldest of job evaluation systems
• jobs within the organization are simply rated on the basis of the relative worth of that job to the organization
• this can be done by a single individual who has knowledge of all jobs within the organization, or by a committee composed of management and employee representatives who have a collective knowledge of all the jobs within the organization
• this method achieves the relative importance of the different jobs in the organization, but not the differences in the degree of importance, which can help determine how much more one job should be paid relative to another.

Job Classification System:

• Jobs are classified and grouped according to a series of predetermined wage grades. The higher the grade the job falls into, the more responsibility, skill, knowledge and ability is required for the job.
• Managers evaluate different jobs within the organization using the corresponding job descriptions and “slot” the job into the appropriate corresponding pay grade.

The above two methods are both qualitative methods of doing a job evaluation, and as such are not as accurate as two other existing job evaluation systems: the factor comparison system, and the point system. These methods of evaluation, although more accurate, are quite costly and time consuming to undertake.

Competency-based pay is pay based on an employee's skill level, the variety of skills they possess, and the job knowledge of the individual. Competency-based pay is also known as skill-based pay or knowledge-based pay. This type of pay plan encourages employees to earn higher wages by learning and performing a wider variety of skills. Simply put, organizations who use this type of compensation strategy will give an employee an increase in their pay for every skill or knowledge that has been mastered and demonstrated according to a pre-determined standard.

Benefits:

• Encourages greater productivity
• Increases employee learning
• Encourages employees to acquire training when new or updated skills are required by the employer
• Increases employee commitment
• Improved staffing flexibility due employees having a greater breadth of skill
• Reduced absenteeism and turnover

Difficulties:

• Limit the amount of compensation employees can earn – they will eventually reach a “cap” when all skills required by the employer are learned.
• After achieving the top wage, employees may no longer be motivated to stay in that job.