9.8: Compensation and Benefits

In addition to salary and wages, compensation packages often include other financial incentives, such as bonuses and profit-sharing plans, as well as benefits, such as medical insurance, vacation time, sick leave, and retirement accounts. Offering attractive salaries, bonuses, and comprehensive benefits packages, including health insurance, retirement plans, and paid time off, helps ensure that employees feel valued and financially secure, making them more likely to stay with the company.

Wages and Salaries

The largest and most important component of a compensation package is the payment of wages or salary. Salaried employees are paid the same amount each time they receive a paycheck, while wages can fluctuate depending on how many hours an employee works. The benefits of salaried employment include access to employee benefits like health insurance, greater job security, steady pay, higher income, and better chances for career advancement, while disadvantages include less flexibility and the potential for longer working hours. Wage-based employment has advantages, including greater job flexibility and fewer working hours, and disadvantages, including a lack of employment benefits, less job security, fluctuating pay, lower income, and fewer opportunities for career advancement.^[1]

Piecework and Commissions

Sometimes it makes more sense to pay workers according to the quantity of products that they produce or sell. Piecework pays employees based on how much work they complete. Commission is typically a percentage paid on sales or deals closed. It’s commonly used in sales and real estate jobs.

Incentive Programs

In addition to regular paychecks, many people receive financial rewards based on performance, whether their own, their employer’s, or both. Other incentive programs designed to reward employees for good performance include bonus plans and stock options.

Bonus Plans

If the company has a profitable year, and if you contributed to that success, you’ll get a bonus.

Cisco Systems Canada’s year-end bonuses—annual income given in addition to salary—are based on individual and company-wide performance. If the company has a profitable year, and if you contributed to that success, you’ll get a bonus. They refer to it as “rewarding people for their performance, not their seniority”.^[2]

Bonus plans have become quite common, and the range of employees eligible for bonuses has widened in recent years. In the past, bonus plans were usually reserved for managers above a certain level. Today, companies have realized the value of extending plans to include employees at virtually every level. The magnitude of bonuses still favours those at the top.

Profit-Sharing Plans

An employee’s profit share is paid annually as a percentage of the employee’s earnings and is based on the company’s net profit.

Nature’s Path Foods and Canadian Tire both have profit-sharing arrangements with employees. Today, many Canadian companies offer some type of profit-sharing program. Canadian Tire’s plan has long been part of its operating principles, having been around since the late 1960s. Here’s how it works. An employee’s profit share is paid annually as a percentage of the employee’s earnings and is based on the company’s net profit. Profits in the most recent years have averaged about 10%. Interestingly, because this profit share is part of an employee’s retirement savings, it is put into a deferred profit-sharing account.^[3]

Stock-Option Plans

WestJet’s compensation plan also gives employees the right to participate in the Employee Share Purchase Plan. This enables employees to purchase WestJet shares amounting to up to 20 per cent of their gross salary, and the company will match their contributions. This is used as an incentive to attract and retain good people.

U.S.-based Starbucks, by contrast, isn’t nearly as selective in awarding stock options. At Starbucks, all employees can earn “Bean Stock”—the Starbucks employee stock-option plan. Both full- and part-time employees get Starbucks shares based on their earnings and their time with the company. If the company does well and its stock goes up, employees make a profit. CEO Howard Schultz believes that Bean Stock pays off because employees are rewarded when the company does well, and they have a stronger incentive to add value to the company (and drive up its stock price). Starbucks has a video explaining its employee stock option program on this webpage.^[4]

Benefits

Another major component of an employee’s compensation package is benefits—compensation other than salaries, hourly wages, or financial incentives. Types of benefits include the following:

• Legally required benefits (Employment Insurance, Canada Pension Plan, Workplace Safety and Insurance Boards)
• Paid time off (vacations, holidays, sick leave)
• Insurance (health benefits, life insurance, disability insurance)
• Retirement benefits

Because Canadian health and dental plans vary, it’s difficult to know the average cost. According to MaRS, the average annual premium works out to about 15% of payroll for smaller businesses or up to 30% of payroll for large companies. ^[5]

Many workers receive benefits in addition to those required by law, including vision care, semi-private hospital stays and out-of-country medical coverage. Some companies also provide benefits to permanent part-time employees who work a minimum number of hours per week.

When designing the benefits program, employers can use strategies to limit or contain costs in the longer term. These may include:^[6]

• Sharing the cost of premiums between the company and the employee
• Building deductibles into the coverage
• Considering the level of coverage, or “co-insurance” (e.g., does the employer cover 80% of dental costs, or 90%, or 100%?)
• Capping coverage at certain limits (e.g., $400 for vision care over a set period of time)
• Limiting carry-over of unused sick days