Common Compensation Systems: Salary, Hourly, Contractor, Pay-For-Performance

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  • 0:01 Compensation System Defined
  • 1:22 Salary and Wages
  • 2:52 Commission
  • 3:54 Pay-For-Performance
  • 4:27 Contractors & Compensation
  • 4:51 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

One of the core functions of human resource management is the development of a compensation system. In this lesson, you'll learn about the different methods organizations use to compensate their employees. A short quiz follows.

Compensation System Defined

Brittany works as an HR specialist for a large corporation that manufactures microchips. She specializes in compensation and benefit administration. Part of her job is to periodically review and recommend advisable changes to the company's compensation system.

A compensation system is the sum total of all monetary and non-monetary benefits provided to employees in exchange for their willingness to work. Compensation can be broken down into three general categories:

  • Direct financial compensation is monetary compensation, such as wages, salaries, commission and performance payments. This is the type of compensation that we'll be focusing on in this lesson.
  • Indirect financial compensation includes compensation that has financial value but does not consist of a direct monetary payment to an employee. You can think of it as a non-cash benefit. Examples include paid time off, health insurance, life insurance, disability insurance, stock options plans and services provided to employees, such as financial counseling.
  • Non-financial compensation doesn't have any monetary or economic value per se, but it involves the satisfaction an employee receives from the work environment.

Salary and Wages

William is like the vast majority of workers and is paid an hourly wage by the company. A wage is simply a specific sum of money paid for each hour worked. Of course, employees are paid for partial hours worked as well.

The Fair Labor Standards Act (FLSA) requires wage employees to be paid an overtime rate of pay at least one-and-a-half times their regular wage for any time worked over 40 hours during a weekly pay period. For example, William makes $15 per hour and is paid $22.50 per hour if he works overtime. Samantha is an executive who works in marketing. She's not paid a wage. Instead, she's paid a salary.

A salary is a set amount of compensation paid, regardless of the amount of work performed. It is often calculated on an annual basis and paid out on a monthly basis. For example, Samantha's current salary is $60,000 per year and is paid in 12 monthly installments of $5,000.

Samantha's job qualifies her as an exempt employee, which means she is not covered by the overtime provisions of the FLSA. Some of the most important exemptions to overtime pay include executive, administrative, professional, outside sales and other highly compensated employees. Each exemption requires certain criteria to be met, including a minimum level of pay.


Carl works in sales. He's paid a salary and is also entitled to earn commission. A commission is a payment a salesperson receives for selling a product or service and is usually based upon a percentage of the revenue the salesperson brings into the company from sales. Carl gets two percent of each dollar of revenue he generates in sales. So, if he brings in $2,000,000 in sales during the year, he earns $40,000 in commission. This is in addition to his regular salary.

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