Methods of Compensation

Methods of Compensation

The operating companies need to develop a compensation package for their employees depending on the size and type of business, employers may choose to compensate their employees in a number of different ways.
Below is given the different methods of compensation:Image result for Method of Compensation in hrm images

1. Wages and Salaries

Although we use the terms wages and salaries interchangeably, in payroll accounting, the two terms have different definitions Wages refers to the earnings of employees whose pay is calculated on an hourly basis.
Salary refers to the earnings of employees whose pay is calculated on a weekly, bi-weekly, semi-monthly, or monthly basis.


Sales commission plans vary greatly from company to company but are generally based on the dollar amount of sales made during a payroll period. Commission income is considered the same as wages or salaries for withholding and reporting purposes. Commissions are usually computed on a certain percentage or commission rate.
Some commissioned employees may not be exempt from the minimum wage requirement. The employer must determine the regular, hourly rate for each non-exempt salesperson during the week and make sure this rate is at least equal to the current minimum wage.

3.Piece-Rate Plan

Workers paid on a piece-rate plan receive a certain amount for each item produced. Gross earnings equal the rate per item multiplied by the number of items produced during the payroll period

4.Combination Plan

Many businesses pay sales people both a salary and a commission. Such a combination plan provides some regular income and offers an incentive for superior sales.


Draws are often given to salespeople who work only for commission. A draw is an advance given to a salesperson that will be collected when future sales transactions are closed. Draws will be subtracted from a salesperson’s commissions after any applicable taxes and deductions have been withheld. The draw is subject to all payroll withholding taxes.