BY: WINSTON MATTIS
Employees trade services with a unionized-or alternatively a non-unionized employer for money. Every North American jurisdiction ensures that employees are entitled to compensation in the presence of an employer-employee relationship. That is slavery is dead. Compensating employees, though, is not as straight forward as it may appear at first Instance. There are many levels to an employee’s compensation package. Compensation of unionized employees is a very different beast than that of non-unionized employees. A unionized employee is entitled to be compensated in accordance with the terms of the collective agreement, which more often than not set out classifications and pay bands within a particular classification. It is important to note that a bargaining agent typically has no power to establish a classification. That is within the sole province of management rights. Once management establishes a classification, the bargaining agent can and does negotiate the total compensation package. Having said all of that what exactly is meant by “compensation?
Employee compensation refers to the sum total of all payments that an employee receives for providing services to her/his employer. One dictionary definition of compensation is as follows:
The Webster’s dictionary defines compensation as “the act or state of compensation , as by rewarding someone for service, or by making up for someone’s loss, in injury by giving the injured party an appropriate benefit”. A second definition states that compensation is “something given, or received as an equivalent for services, debt, loss, in injury, suffering, lack, etc., indemnity”.
For employment purposes each of the two definitions has a shortcoming. The Webster’s definition speaks about “reward”, which does not capture the entitlement dimension of earnings for services provided. Similarly, the second definition lacks clarity because earnings are not “given”, as is suggested.
Wikipedia describes compensation as follows:
“Financial compensation refers to the act of providing a person with money or other things of economic value in exchange for their goods, labour, or to provide for the costs of injuries that they have incurred”.
The Wikipedia’s definition stresses the fact that compensation, in the context of an employer-employee relationship is an “economic” issue that is designed as an exchange for “labour”. Furthermore, this economic exchange can involve more than simply an exchange of money.
At HRCouncil.ca one finds the following definition of “compensation:
Compensation, (also known as Total Rewards) can be defined as all of the rewards earned by an employee in return for their labour. This includes:
Direct financial compensation: consisting of pay received in the form of wages, salary bonuses, commissions, provided at regular and consistent intervals.
Indirect compensation including all financial rewards that are not included in direct compensation and understood to form part of the social contract between the employer and the employee such as benefits, leaves, retirement plans, education and employer services.
Non–financial compensation such as career development, and advancement opportunities for recognition, as well as work environment and conditions.”
Take note of the point that remuneration and compensation are often used interchangeably in the world of employee compensation. One definition of “remuneration” is the compensation one receives for the work or services performed. Typically, this consists of monetary reward, also referred to as wage, or salary. …”Remuneration is one component of “reward management”.
While the HR Council’s definition is comprehensive, WINN takes a bit of issue HR Council’s definition. For instance, WINN disputes that compensation necessarily forms part of a “social contract” between and employer and an employee. Moreover, “opportunities for advancement” are not typically understood as part of a compensation package per se. Whether an employee is selected for career advancement is most often a discretionary decision made by management following some assessment of competence. For the purposes of WINN, “entitlement” is a necessary dimension of compensation, as used in the employer-employee context. Entitlement arises as a result of either an individual employment contract, or a collective agreement. In the case of an individual contract of employment, entitlement can be traced either to a mandatory provision in the contract, or in the case of discretionary provision when management makes the decision to award the employee with the compensation item.
For the “ordinary” wage earner, the approach to compensation differs somewhat in unionized as compared to non-unionized work environments. In a unionized environment, each trade union certified as a bargaining unit for a class of employees within the establishment negotiates wage rate and other aspects of compensation for each classification within the trade union’s purview. In no-unionized work environments, each individual employee is theoretically responsible for negotiating her/his compensation package, prior to the commencement of employment.
While human resources professionals often group compensation and benefits together, WINN drops the idea that benefits are somehow separate from “compensation”. So, what are some of the things that may be included in a compensation package? Before answering this question, take note that, other than wages/salary, many compensation items are either discretionary or mandatory. In some cases the contract with the employee may provide for entitlement to be conditional, what is typically referred to as a condition precedence or a condition subsequent. In either case, entitlement can only be established after reviewing the language of the contract.
Wages: Wages typically refer to the amount of money that an employee is entitled to be paid for each hour of work. Persons paid by the hour are more often than not entitled to overtime pay after working the provincially prescribed number of hours of work after which overtime pay is mandatory. Consult the relevant minimum standards legislation to get particulars on the appropriate over time wage payable and the maximum number of hours to be worked before overtime wages are payable by an employer. Collective agreements benefit bargaining unit members in that it standardizes wage rates as part of the union negotiations pertaining to compensation for job classification. As a general rule, non-unionized employees ability to negotiate a specific wage rate decreases as a function of the job’s position within the corporate hierarchy.
Salary: Salary refers to the fixed amount a person earns, regardless of the number of hours worked. Salary earners are typically in management or white “color workers”, although not necessarily. Salary is often designated as an amount per annum.
Commission: Commissions grew up as a way of compensating sales agents. Commissions refers to an amount an employee receives for each unit of a good sold. This proportion is often called the commission rate. Occupations such as insurance sales people, car sales agents, etc., are frequently paid by way of commission. Draw against commission means that a commission paid employee makes a deal with the employer to pay an advance which is then deduced from the commissions earned. Some occupations combine commission with a base pay, in part, to ensure that commission employees are able to pay expenses while waiting for earned commissions to come in.
Bonus: By definition, a bonus is amount of money an employer paid to an employee for achieving a specified performance target. A bonus can either be discretionary or non-discretionary. A non-discretionary bonus is part and parcel of an individual’s contract. Here, the bonus is often based on a formula agreed upon by the corporation and the individual employee.
Signing bonus: Executive compensation often has a signing bonus feature. Signing bonuses are also prevalent in the world of sports. Most often the signing bonus is not refundable.
Stock options: The management of some publicly traded companies offers up options for stocks as part of how they compensate members of their management team. Distributing stocks options to employee is not always reserved for management. In some organizations stock options are part and parcel of all employees’ compensation arrangement. It is important to note that an option to receive stocks from the organization is not stocks themselves. It is just an option. In compensation parlance stock option when initially granted are not vested. It is only after the options are vested that the employee has actual stocks.
Deferred stock options: These are options for the employee to receive stocks of the company at some deferred date which is negotiated between the parties. Deferred stock options rarely form part of the compensation package for ordinary employees, although there are some organizations that make this available to their
Profit sharing: Profit-sharing has a long history in North America. Profit sharing refers to a reward/compensation program within a corporation that provides all, or some of its employee with a portion of its profit as part of the employee’s compensation package.
Retirement Contributions: Some organizations provide retirement contributions for its employees. There are several models associated with retirement contributions. There are three broad models. Defined benefit pension plans specify the amount an employee receives each month upon retirement. Employers’ contribution to an individual, or multi-employer pension plan varies and is determined largely by actuarial calculations designed to ensure that the pension plan’s liability is fully funded. A defined contribution pension plan is one in which the employer’s contribution to the pension plan is fixed. Somewhere between the defined-benefit and the defined-contribution pension plan is a model in which the employer matches an employee’s contributions either to a “capped”, or “uncapped” amount.
Banked sick time: An employee can negotiate sick time and a provision to bank, and in some cases cash in that sick time. Banking sick time can be costly for an employer, especially when employees have the right not only to bank sick time, but to carry them over indefinitely. For example, an employee entitled to bank and or cash in 2.5 days a month sick time can have a maximum of 150 banked days. After 25 years of employment this employee could have over seven hundred, or three years of banked days that could be converted to cash.
Individual Pay for Performance: In pay for performance arrangements, the employer tries to motivate the employee to achieve performance targets through performance pay schemes. The exact pay for performance arrangement varies as a function of the employers’ interests.
Vacation: Employees in each Canadian province are entitled to vacation pay. Employment standards legislation in each province prescribes the minimum vacation pay to which an employee is entitled. An employer is free to pay more than the statutory minimum vacation pay either through negotiation with each individual employee or by way of a collective agreement.
Termination Pay: termination pay refers to the amount of pay to which an employee is entitled to be paid when an employer severs the employment relationship without a cause to do so. Termination pay is payable to an employee whether unionized or not. Each Canadian province has enacted legislation prescribing termination pay and the minimum circumstances under which it is payable. In non-unionized workplaces, termination pay is always the subject of each employee’s contract and can be negotiated at the time of hire, or promotion. Many executive or management contracts contain one or more clause that address(es) termination pay.
“Relocation costs”:Sometimes, an employer and an employee negotiate a term in the employment contract that requires the employer to compensate the employee who relocates to assume the duties of a particular position.
Danger pay: Danger pay forms part of the employment contract when the nature of the work the employee performs is presents unusual risks and danger.
Isolation pay: Isolation pay is typically negotiated in circumstances when the employee performs work in isolated and remote environments.
“Education allowance”: Several large employers reimburse employees’ tuition for taking “work-related” course. Some employers and employees negotiate a provision to reimburse the employee for tuition for any course, regardless of whether the content of the course is directly tied to the employee’s job.
Fringe benefits: The content of a fringe benefit package can be extensive. Its value can be as high as 30% of a person’s total compensation package. Fringe benefits can include items such as sick benefits, dental plan, other health and welfare benefits, safety shoes, eyeglasses, flex vacation, reimbursement for travel, company vehicle, accommodation, etc. There is theoretically no limit to what an employer may include in its fringe benefit package.
Readers should not believe for a moment that the above list is exhaustive. It is not. As stated earlier, compensation arrangementIndividual employees about to be employed or promoted are well advised to negotiate hard for a package that suits their needs. There is nothing stopping you from asking a solicitor to review the terms of an individual contract of employment before signing it.