Employee Incentive Pay, Benefits, and Compensation Ethics

Methods for Determining Incentive Pay

There are a number of methods generally used by companies to link work output and expertise to employee remuneration. This section examines two methods that a company can use to build greater employee loyalty and retention through increased pay.

Reward management practices help a company determine how much to pay employees. The underlying principle is that the company develops a policy identifying what it considers the most valuable contributions and how to translate those contributions into financial remuneration. The advantage of this approach is that it can be applied to individuals, groups, and the organization as a whole (Schraeder & Becton, 2015).

Production Pay: A company can adopt a system of paying employees according to the amount of work they produce. This approach is well suited to departments such as sales and customer service, where work output is measurable and can be linked to incentive pay in addition to a base salary. The justification is that while employees are rewarded with more money, the company also benefits from a more motivated workforce (Schraeder & Becton, 2015).

Commissions: This is one of the most common forms of incentive pay, in which remuneration is linked to work output as a percentage of either base pay or the financial results associated with performance. Because output is easy to measure, there is little ambiguity about remuneration — pay is directly tied to a percentage figure. A company may also spread percentage points across departments to reflect the different types of work output produced in each area (Schraeder & Becton, 2015).

Legally Mandated Employee Benefits

Laws generally mandate certain benefits that companies must provide to permanent employees. The following benefits are required by law:

Social Security: Employers are required to pay Social Security taxes at the same rate as their employees. This contribution also includes the employer's share of Medicare payments. The combined rate is 7.65%, typically remitted through payroll taxes paid by the employer.

Unemployment Insurance: Requirements for this benefit vary from state to state and therefore depend on where the business is located. This mandatory benefit provides payments to unemployed workers so that they can meet basic needs until new employment is secured. This obligation is also fulfilled through a payroll tax (Rosenbloom, 2011).

Workers' Compensation: Employers are required to provide this benefit to workers who have been rendered disabled by occupational illness or injury. The rates and mandatory nature of this tax vary by state.

Family and Medical Leave: Under the Family and Medical Leave Act (FMLA), employers must provide eligible employees with up to 12 weeks of job-protected, unpaid leave during any 12-month period. Qualifying reasons include the birth and care of a child, the placement of a child for foster care or adoption, the need to care for an immediate family member with a serious health condition, or the employee's own serious health condition.

COBRA Benefits: This benefit applies to companies that had 20 or more employees on more than 50% of their typical business days in the preceding year. Under the Consolidated Omnibus Budget Reconciliation Act of 1985, employers must offer continuation of health coverage at group health insurance rates to former employees (Rosenbloom, 2011).