Understanding total Employee Compensation is important when deciding which job offer to accept during the interview process, going through a salary negotiation, or just looking forward to future career development. The information here is designed to simplify the different aspects of employee compensation packages. Beyond these definitions, please take the time to research salary in your chosen field by using our salary information forum, and salary calculator. And as always, we ask you to share our site with your friends and co-workers.
Base Pay: An employee's initial rate of compensation, excluding extra lump sum compensation or increases in the rate of pay. An employee's base pay can be expressed as a base hourly rate of pay or as an annual salary.7
Wage: Money that is paid or received for work or services, as by the hour, day, or week.
Overtime: Payment for additional work done outside of regular working hours, in the U.S. the legal mandated minimum rate is 1.5 times the employee hourly wage. Time off in lieu; compensatory time; or comp time can be given to the employee instead of overtime pay.
Salary (non-exempt): Non-exempt employees are paid a fixed compensation for regular work they perform, and are paid 1.5 times what their hourly wage breaks down to be for any over-time work they perform.
Salary (exempt): Some positions are exempt from overtime laws. These ‘Exempt’ employees are paid a fixed compensation even if they work outside of regular working hours.
Performance Bonus: A form of additional compensation paid to an employee or department as a reward for achieving specific goals or hitting predetermined targets. A performance bonus is compensation beyond normal wages and is typically awarded after a performance appraisal and analysis of projects completed by the employee over a specific period of time.7
Commission: Compensation for goods or services sold by an employee. Usually paid in the form of a percentage of the amount of sales by the employee.
Stock-Options: An employee stock option is a call option on the common stock of a company, issued as a form of non-cash compensation. Restrictions on the option (such as vesting and limited transferability) attempt to align the holder's interest with those of the business' shareholders. If the company's stock rises, holders of options generally experience a direct financial benefit. This gives employees an incentive to behave in ways that will boost the company's stock price. Employee stock options are mostly offered to management as part of their executive compensation package. They may also be offered to non-executive level staff, especially by businesses that are not yet profitable, insofar as they may have few other means of compensation. Alternatively, employee-type stock options can be offered to non-employees: suppliers, consultants, lawyers and promoters for services rendered. Employee stock options are similar to warrants, which are call options issued by a company with respect to its own stock.1
Stock Grants: A company can offer an employee a stock grant instead of paying the wages that the employee would normally receive. Stock grants are useful for a startup firm, which may not have the revenue to pay an employee the current market rate for labor. Executives may receive stock grants as compensation to provide an additional performance incentive. Many stock grants give the employee stock options, which provide the employee the right to purchase stock at a specific price.8
Phantom Stock: Phantom stock is a method for companies to give their management or employees a bonus if the company performs well financially. Phantom stock provides a cash or stock bonus based on the value of a stated number of shares, to be paid out at the end of a specified period of time. Phantom stock accounting is straightforward. These plans are treated in the same way as deferred cash compensation.1
Employee Stock Ownership Plan (ESOP): An ESOP is a type of employee benefit plan designed to invest primarily in employer stock. Stock acquired by the ESOP is allocated to accounts for individual employees based on relative pay or some more equal formula. Accounts vest over time, usually following one of two formulas: in the first, vesting starts at two years and completes at six; in the second, participants become 100% vested after four years. When employees leave the company, they receive their vested ESOP shares, which the company or the ESOP buys back at an appraised fair market value. ESOP participants must be allowed to vote their allocated shares at least on major issues, such as closing or selling the company, but are not required to be able to vote on other issues, such as choosing the board.1
Retirement/Pension Plans: Arrangement to provide people with an income when they are no longer earning a regular income from employment.1
401(k): A qualified retirement plan established by an employer (business) for its employees. Under a 401(k) plan, eligible employees may defer a portion of their wages/salary to their account under the plan. These deferred amounts are referred to as salary-deferral contributions, and can be made on a pre-tax and/or post-tax basis.4
403(b): Under a 403(b) plan, eligible employees may defer a portion of their wages/salary to their account under the plan. These deferred amounts are referred to as Salary-Deferral Contributions, and can be made on a pre-tax and/or post-tax basis.4
Defined Benefit Pension Plan: A traditional defined benefit (DB) plan is a plan in which the benefit on retirement is determined by a set formula, rather than depending on investment returns.1
Defined Contribution Plan: In a defined contribution plan, contributions are paid into an individual account for each member. The contributions are invested, for example in the stock market, and the returns on the investment (which may be positive or negative) are credited to the individual's account.1
SEP: A Simplified Employee Pension Plan is an individual retirement account for a self employed person or a small company with less than 25 employees.5
SIMPLE Plans: The Savings Incentive Match Plan for Employees is a retirement plan sponsored by employers. These programs are attractive for employers because they don't incur many of the administrative fees and paperwork of plans such as the 401(k).5
Cash Balance Plans: A cash balance plan is a type of defined benefit plan. Like all defined benefit plans, cash balance plans guarantee a benefit amount to covered employees on the basis of a known formula. The unique nature of a cash balance plan is that benefits are defined as a lump sum--the "cash balance" of a covered employee’s account--rather than as a periodic payment to be received during retirement.6
Retiree Health Benefits: Most post-retirement benefits include life insurance and medical plans. Although these benefits are mostly employer-paid, retired employees often share in the cost of these benefits through co-payments, payment of deductibles and making employee contributions to the plan when required.7
Profit sharing: A profit-sharing agreement in the United States is the agreement that establishes a pension plan maintained by the employer to share its profits with its employees. A profit-sharing agreement used to be supplemental to a type of pension called a defined contribution plan. For example, if an employee should become ill or incur economic hardship, then access to some or all of profit sharing account would prevent the employee from quitting. Today, most newer companies only have profit-sharing plans and don't have defined benefits plan.1
Employer Assisted Housing (EAH): Employer-assisted housing (EAH) is an employer-based benefit that helps employees move beyond the most common homeownership hurdles enabling them to purchase, or rent, a home, often within neighborhoods located near the workplace.2
Home Office Reimbursement: Company pays employee for work from home expenses such as phone and internet. In some cases a company will have the employee sign a ‘Telecommute Agreement’ about what expenses are covered and how they are to be used.
Expense Reimbursement: Many employers reimburse set up a plan to reimburse their employees for the cost of doing business.
Group Insurance: Coverage through an employer or other entity that covers all individuals in the group.
Medical/Health: Health Plan (such as from an HMO) or Health Insurance coverage for medicine, doctor and emergency room visits, hospital stays and some other medical expenses.
Dental: Insurance assisting in the expenses of prevention, treatment, and care of either dental disease or accidents to the teeth.
Vision: Insurance for vision and eye cover outpatient services of doctors and the general health of the eyes and specialized optometrists.
Prescriptions: Prescription drug plans cover outpatient prescription medication.
Behavior Health: Mental health and chemical dependency insurance traditionally has been full of limitations and exclusions but has been changing considerably in the past few years. Due to the Patient Protection and Affordable Care Act (PPACA) signed into law March 23, 2010 there may be more changes to come, please read your insurance coverage carefully.
COBRA: The Consolidated Omnibus Budget Reconciliation Act of 1985 (or COBRA) is a law passed by the U.S. Congress on a reconciliation basis and signed by President Reagan that, among other things, mandates an insurance program giving some employees the ability to continue health insurance coverage after leaving employment.1
Employee Wellness Plans: program offered by some employers as a combination of educational, organizational, and environmental activities designed to support behavior conducive to the health of employees in a business and their families. It consists of health fairs, health education, medical screenings, health coaching, weight management programs, staff member wellness newsletters, on-site fitness programs and/or facilities and educational programs designed to change employees' behavior in order to achieve better health and reduce the associated health risks.1
Employee Assistance Programs: Employee Assistance Programs (EAPs) are employee benefit programs offered by many employers, typically in conjunction with a health insurance plan. EAPs are intended to help employees deal with personal problems that might adversely impact their work performance, health, and well-being. EAPs generally include assessment, short-term counseling and referral services for employees and their household members.1
Group Term Life Insurance: A type of insurance coverage offered to a group of people. This coverage will provide a benefit to the beneficiaries if the covered individual dies during the defined covered period. As with other types of group benefits, group term life insurance is generally cheaper than comparable individual policy coverage. For this reason, group term life insurance is often a key component in employee benefit packages.7
Long Term Care Insurance: Long-term care insurance generally covers home care, assisted living, adult daycare, respite care, hospice care, nursing home and Alzheimer's facilities. If home care coverage is purchased, long-term care insurance can pay for home care, often from the first day it is needed. It will pay for a visiting or live-in caregiver, companion, housekeeper, therapist or private duty nurse up to 7 days a week, 24 hours a day (up to the policy benefit maximum).1
Accidental Death Insurance: Accidental death and AD&D policies very rarely pay a benefit; either the cause of death is not covered, or the coverage is not maintained after the accident until death occurs. Accidental death is a limited life insurance that is designed to cover the insured when they pass away due to an accident. Accidents include anything from an injury, but do not typically cover any deaths resulting from health problems or suicide. Because they only cover accidents, these policies are much less expensive than other life insurances.1
Disability Income Insurance: Disability Insurance, often called DI or disability income insurance, is a form of insurance that insures the beneficiary's earned income against the risk that disability will make working (and therefore earning) impossible. It includes paid sick leave, short-term disability benefits, and long-term disability benefits. Statistics show in the US a disabling accident occurs every second.1
Health and Dependent Care: Benefits provided by an employer to an employee for use in caring for dependents such as newborns or disabled persons.7
Flexible Spending Account (FSA): A flexible spending account (FSA), also known as a flexible spending arrangement, is one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer in the United States. An FSA allows an employee to set aside a portion of his or her earnings to pay for qualified expenses as established in the cafeteria plan, most commonly for medical expenses but often for dependent care or other expenses. Money deducted from an employee's pay into an FSA is not subject to payroll taxes, resulting in substantial payroll tax savings. One significant disadvantage to using an FSA is that funds not used by the end of the plan year are lost to the employer.1
Health Savings Account (HSA): HSAs are tax-free accounts where money is deposited either by an individual, an employer or both and withdrawn at any time to pay for qualified medical expenses. Unlike FSAs, HSAs allow individuals or employees to carry over unused funds from one year to the next, and to keep the account if they retire or change employers.3
Cafeteria Plans: Cafeteria plans, also known as flexible benefit or Section 125 plans, give employees the opportunity to customize their benefit package to meet their particular needs, individual choices are particularly valuable. A typical cafeteria plan allows employees to "redirect" part of their salary to purchase benefits from a "menu" of benefits. In most instances, these plans are funded by both the employees and by the employer. Cafeteria plans are specially authorized by Section 125 of the Internal Revenue Code.3
Tuition Reimbursement: Tuition reimbursement plans are more common to larger, established employers because it is a costly benefit program to provide to employees. Employers consider the program an investment in key assets (employees) and sometimes require contracted periods of work following the education.8
Group Legal Services: Pre-paid legal plans typically offer certain services for a fixed monthly charge. The general concept, is to offer affordable legal services for the general public. It does not replace the public defender system nor does it replace the use of lawyers and law firms. In some plans you are covered for specific services while there may be retainer fees or discounted rates for other services.1
Daycare/Dependent Care: Benefits provided by an employer to an employee for use in caring for dependents such as newborns or disabled persons.7
Domestic Partner Benefits: Some public- and private-sector U.S. employers provide health insurance or other spousal benefits to same-sex partners of employees, although the employee receiving benefits for his or her partner may have to pay income tax on the value of the benefit. Partner benefits are more common among large employers, colleges and universities than at small businesses. The qualifications for and benefits of domestic partnership status vary from employer to employer; some recognize only same-sex or different-sex couples, while others recognize both.1
Relocation Assistance: Money and other consideration that an employer gives to employees who move or are transferred at the company’s behest. Can include reimbursement for packing and moving, house-hunting trips, and temporary housing and storage.9
Paid Vacation: As the name implies, Paid Vacation is leisure time off from work when you still receive your normal pay as if you had been at work during that time period.
Unpaid Time Off: An employer can grant time off from work to an employee that is
unpaid, meaning the employee does not receive any play during that time period.
Sick Leave: Sick leave (or paid sick days or sick pay) is time off from work that workers can use during periods of temporary sickness to stay home and address their health and safety needs without losing pay or their jobs. Some workplaces offer paid sick time as a matter of workplace policy, and in some jurisdictions it is codified into law. States around the USA are considering legislation that would provide workers access to paid sick days.1
Personal Time Off (PTO): Paid time off (PTO) is a feature in some employee agreements that provides a "resource" of hours that an employee can draw from to take time off from work, without having to specify a reason. Generally PTO hours cover everything from planned vacations to sick days. Unlike more traditional leave plans, companies with PTO plans do not separate time off from work between "vacation days" and "sick days". For healthy employees, PTO can be an attractive benefit because, in general, they are offered more vacation time under a PTO plan than they would be under a plan that differentiates sick leave and vacation. The corollary to this is that employees tend to be out more frequently, which can be seen as a drawback for the employers. Another negative is that an employee who becomes ill, not having any dedicated sick time, might be forced to choose between either working while sick (usually at a lower rate of productivity, and often causing other employees to get sick), or cancelling a planned vacation (which may incur financial losses). On the other hand, an advantage is that a worker will be honest in scheduling time off in advance, allowing the company to plan around the absence, rather than "calling in sick" at the last minute.1
Parental Leave: Parental leave is an employee benefit that provides paid or unpaid time off work to care for a child or make arrangements for the child's welfare. Often, the term parental leave includes maternity, paternity, and adoption leave. Often the minimum benefits are stipulated by law.1
Bereavement Leave: Short-term paid time off for an employee after the death of an immediate family member.
Other Fringe Benefits: A variety of other ‘perks’ are provided to employees by some companies. These benefits may include but are not limited to; transportation assistance (free or reduced rates for public transportation), car allowances, company car provided for business use, mileage reimbursement for miles driven for business, paid or reduced fee memberships (association dues, gym memberships, Costco/Sams Club), and group purchasing discounts (employees of certain companies receive ‘corporate rates’ or ‘corporate discounts’ with certain 3rd party retail stores or service providers).
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