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Rewards can be a type of compensation.

What Is Compensation?

Compensation is the total cash and non-cash payment offered by an employer to an employee in return for the services rendered to the company. Apart from salary and wages, compensation also includes:

  • Sales commission,
  • Overtime pay,
  • Bonuses,
  • Profit sharing,
  • Recognition checks and rewards,
  • Non-cash benefits, such as company-paid accommodations, certain stock options, a company-financed car and other non-cash taxable items.

The value of compensation received by an employee depends on a number of factors such as the availability of relevant skills, the employer’s desire to retain the employee, the profitability of the company, and salaries for comparable jobs in the marketplace.

Compensation regulations

Compensation is governed by a number of local, state, and federal tax and employment laws. These regulations and policies affect various aspects of compensation, such as the general benefits plans and the amount of payment received by an employee.

When it comes to compensation legislation, the FLSA (Fair Labor Standards Act) tops the list. The Act dictates five key compensation laws that govern child labor, equal pay, minimum wage, overtime pay, and recordkeeping requirements. These rules are particularly relevant to non-exempt employees. Familiarity with FLSA is essential for all small business owners.

Disparities in compensation based on sex are prohibited by the Equal Pay Act of 1963, an amendment to the FLSA. However, the Act does not forbid pay based on performance, merit, and seniority. The Act is applicable regardless of the non-exempt or exempt status.

Other laws affecting compensation in other ways include the OASDI (Old Age, Survivors, Disability and Health Insurance) program, on which most benefits plans are based; Medicare; Social Security; the CCPA (Consumer Credit Protection Act of 1968) dealing with wage garnishment, worker’s comp; equal employment; unemployment insurance; and ERISA (Employee Retirement Income Security Act of 1974).

Traditional compensation

Compensation is traditionally offered in the form of salaries and wages at fixed payment levels, with standard increases due to the cost of living, merit, and promotion.

Benefits are an important component of overall compensation. While benefits are often non-cash, they have a monetary value. Health insurance, accident insurance, sick leave, vacation pay, and pension plans are a few examples of such benefits.

For more information on various aspects of compensation, please refer to the Bureau of Labor Statistics (BLS) website.

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