Small business growth often necessitates hiring additional employees, and with these employees comes the issue of how to pay them. The are three common methods of employee compensation: commission, hourly rate, and salary. Each method has its benefits and limitations, so finding the best way to compensate your workers will really depend on the nature of your business.
Let’s take a look at these three methods and how they would work for small businesses:
Commission is payment to an employee based on the completion of some quantitative task or the selling of a specific amount of goods or services. Thus, a worker can be paid for each item that is assembled, and a salesman can earn a percentage of completed sales.
By law, an employer does not have to pay minimum wage since earnings are based on the performance of the employee: the more an employee sells or completes, the greater are his earnings. On the other hand, an employer can choose to offer commission on top of an hourly wage or set salary
Paying on a commission will give employees an incentive to be as productive as they can. The business benefits further by only paying for completed work.
The downside is that not all businesses or positions are suited for this method of compensation. It also can discourage workers who may feel that they are not earning enough money, especially if production or sales are slow.
The most popular method of paying employees is with an hourly rate. Here, an employee’s income is based on a set amount of money per hour up to 40 yours a week. After 40 hours, and employee paid on an hourly basis in most cases will get time and a half, or overtime pay. This means that a person who earns $7 an hour and works 50 hours in a given week will earn $385 [($7 x 40hrs) + (10.5 x 10hrs)].
Employees who earn money by the hour are entitled to receive an amount equal to or above the federal minimum wage. Currently, the minimum wage is holding at $5.85 per hour.
If you will be paying your employees by the hour then make sure to check with your state’s employment laws. Some states may require a minimum wage that is higher than the federal amount, and some states have further regulations. Vacation, sick leave, holiday and severance pay are not required by federal law. But again, you should check your state’s employment laws to see if there are any differences.
Though an hourly rate is not as motivating to employees as working on commission, it still encourages workers to work for longer. The business also does not have to worry about providing vacation, sick leave, holiday and severance pay.
Employees enjoy the simplicity of earning wages by the hour and being rewarded for the amount of time worked.
A salary is a pre-determined amount paid to the employee on a regular basis throughout the year. The amount paid generally does not vary from one payment period to the other, irregardless of actual hours worked. Often the salary already includes any bonuses or overtime that the employee is likely to work.
Many of these positions also come with a benefits package that includes some form of vacation, sick leave, holiday and severance pay.
Employers like this approach for its simplicity. Among employees, however, this method is not so popular. Wages are completely disconnected from both the amount of time that an employee works as well as the employee’s productivity. A worker who needs to work overtime, for example, may feel a little cheated when the same standard pay is later received.