The differences between wages, salary, commission, and bonuses
There are a few different methods that employers use to pay their employees, and while they may have similarities, they each also have their own implications for your business and its employees. On top of that, there may be a blended model at play, in which you offer two types of compensation at once, such as a wage and bonuses. How you pay your employees will impact your finances and your reporting requirements. Read on to learn the differences between the main ways of earning money in the workplace.
Most entry-level positions offer an hourly wage in exchange for work. An hourly wage might be $10. So if the employee works 8 hours that day, they would be compensated $80 for that day. There are minimums set by law which vary depending on where the business operates. Typically, the minimum wage is directly related to the cost of living in that area. Generally, there are a set number of hours that can be worked in a week, and working beyond that maximum entitles the employee to a higher rate of pay. There may be premiums associated with working undesirable shifts, or an even higher rate of pay that employees are entitled to for working on holidays. Because of the number of hours worked, the specific days worked, and overtime, the amount an employee will potentially earn each year can vary widely when paid with hourly wages.
A salary is the standard compensation for management and upper-level positions. It is an agreed-upon annual total, where a certain number of hours worked per week is expected – typically 35 to 40. There will be other requirements outlined, such as how many days per week are expected. Depending on the schedule, the total salary is divided into equal payments for each pay period. Often, a salary is agreed to as an annual figure, with each payment equally divided by the number of payments. If you pay an employee a salary of $60,000 a year once a month over 12 months, you would pay $5,000 each payment, not accounting for any deductions.
How a company manages its payment schedule will vary from company to company. Any other pay, such as overtime worked, commissions earned, or bonuses, are separate from salary. Many companies don’t offer overtime pay for extra hours worked, but they may offer commissions or bonuses for performance.
This is a form of compensation that is based on performance. The amount an employee receives can vary drastically, depending on how well they perform in a pay period. Commission is typically a calculated percentage of the value of goods or services sold. It is meant as an incentive to drive employees to make sales. For example, you may offer to pay $1,000 as a commission for each car sold. An employee who sells 10 cars in the pay period would receive $10,000 commission.
All earnings made by commission are counted as taxable income. Some salaried or hourly positions offer a commission on top of regular earnings. However, some positions, especially those in sales, can be based solely upon commission. This means that if the employee doesn’t sell anything, they don’t get paid.
A bonus is a compensation type that is not guaranteed. It is usually tied to some kind of company goal, usually driven by sales or performance. A bonus might be awarded on an individual basis, or for a team or other work group. The idea behind a bonus is to create an incentive to meet a specific goal. It is rewarded when the goal has been reached, or evaluated at specific times. Bonuses are offered on top of a wage, salary, or commission.
Because of the unofficial structure, bonuses are loved by some and loathed by others. It can be motivating to receive a bonus, as it’s completely separate from what an employee already earns. However, it can also leave employees feeling disgruntled if they feel they weren’t supported well enough to reach the goal and therefore missed out on the bonus. If the goals are unrealistic, employees may also struggle with motivation even if they are offered a bonus.
Whatever payment structure your company follows, make sure you are consistent and fair as an employer, and follow all applicable laws. Contact us to learn more about different forms of compensation and what they mean for your bottom line.