What are the different types of employee compensation?

There are different types of employee compensation that, to a large extent, determine the workforce's well-being and commitment to the company. These two aspects are fundamental for the health and growth of any business, so creating a robust internal compensation plan that satisfies everyone is vital. 

Importance of a strong pay policy

A pay policy, or remuneration policy, is designed to distribute an organisation salary budget fairly. More importantly, it should take each employee's merits and performance into account. So it's a set of rules for allocating salaries, award pay raises and bonuses.

This requires a policy that takes the following factors into account:

•   Business costs.
•   Motivation.
•   Goals achieved.
•   Commitment.
•   Personal objectives.

Education, age and experience are also important. Still, these shouldn't be the only criteria, as many companies have been doing to date. By creating a more comprehensive evaluation system focussed on rewarding individual productivity and work quality, we'll be able to keep the company's best talent satisfied and committed. 

This is why having a remuneration policy are so important. In fact, this is regarded as one of the factors that most influences satisfaction levels in your workforce. And well-being is closely linked to motivation, productivity or creativity. Fulfilling this objective means we’ll have teams that get involved in problem-solving, that work as a team, and with a positive attitude – all of which are crucial for any organisation. Establishing a proper salary band is also important to achieve all this.

Types of employee compensation

There are three ways employees generally get paid in the UK and Europe. Most pay policies would typically include all three in some way and use them to offer the best working conditions for their professionals. 

Fixed base salary

The first type of remuneration is a fixed base salary, which relates to the minimum amount a company offers an employee, and which is stated in their contract. This usually depends on the role an employee occupies within the organisation as well as market salaries. A fixed salary is not linked to objectives or variables in any way.

One of the main advantages of this retribution system is the peace of mind it gives employees, as they know exactly how much they will earn every month. And as we mentioned before, their well-being also benefits the organisation. On a negative note, however, it sometimes leads to a certain "complacency", where the employee loses interest in continuing to create value for the company because their income is guaranteed. 

Variable pay

With this type of remuneration, the amount an employee receives depends on their performance and reaching predetermined objectives. So, in contrast to a fixed salary, it varies according to the employee's performance and not the role they perform.

The objective of variable pay is to motivate employees to do their best and, usually, close deals and increase sales. It's a win-win situation for the employee and the company. However, this kind of system can create stress or competition among teammates.

The most important thing for this to work properly is to set up a transparent, fair and coherent pay system with which employees feel comfortable. And above all, you must set achievable goals; otherwise, it could lead to demotivation. For example, increase sales by 2% on last year could be a realistic goal.

Variable remuneration can take different forms such as bonuses, commissions, shares in the company, or any other mutually agreed method. We've already learned this in our article on how to pay commissions to employees.

On the other hand, you can also add salary supplements to an employee's pay. These could include, for example, extra payment for time served, for night shifts or profit-sharing. 

Flexible benefits or benefits in kind

The third kind of remuneration is known as flexible benefit or benefits in kind. The difference between this and the other two is that they are non-monetary payments, such as products or services offered by the company.

This includes things like holidays, flexitime, training, company car, medical insurance, food or childcare vouchers, pension plans, public transport cards, to name a few.

Employees sometimes place more value on these benefits than the salary itself. It's important to emphasise that in the UK, this kind of payment cannot be the only form of remuneration, and they must be combined with a fixed or variable salary. Employers must at least pay their employees the national minimum wage.

Read everything you need to know about flexible benefits in our latest blog post.

What’s the best type of employee compensation?

By now, you'll appreciate that each type of employee compensation has its advantages and disadvantages. For this reason, the best remuneration policy is the one that adapts to both the company and the employee's needs.

There is no single formula that works for all businesses. Even so, any remuneration policy must fulfil certain requirements:

• Simplicity: it must be easy for employees to understand and calculate
• Transparency: clearly explain how the system works and how earnings are calculated.
• Achievable: goals must be realistic and, while requiring some effort, they should be attainable.
• Fair: should be no differences between some employees and others.

Above all, be sure to analyse the cost per hire for the company before agreeing on these different types of employee compensation with the finance department. 

By adapting your remuneration system to the company’s needs and complying with these factors, you’ll be able to achieve a good organisational balance.