Employee compensation includes all forms of pay going to employees and arising from their

employment. It has two main components, direct financial payments (wages, salaries, incentives,
commissions, and bonuses) and indirect financial payments (financial benefits like employer-paid
insurance and vacations). In turn, employers can make direct financial payments to employees based
on increments of time or based on performance. Time-based pay still predominates. Blue-collar and
clerical workers receive hourly or daily wages, for instance. Others, like managers or Web designers,
tend to be salaried and paid weekly, monthly, or yearly. The second direct payment option is to pay
for performance. For example, piecework ties compensation to the amount of production (or
number of “pieces”) the worker turns out. Sales commissions tie pay to sales. Many employers’ pay
plans combine time-based pay and incentives

The compensation plan should first advance the firm’s strategic aims—management should produce
an aligned reward strategy. This means creating a compensation package that produces the
employee behaviors the firm needs to achieve its competitive strategy.2 Put another way, there
should be a clear “line of sight” between each reward and specific business goals. We will see that
many employers formulate a total rewards strategy to support their strategic aims. Total rewards
encompass traditional pay, incentives, and benefits, but also “rewards” such as more challenging
jobs (job design), career development, and recognition