Compensation Terms And Definitions

Compensation is defined as the total rewards an employee receives in exchange for work, including pay, incentives, and benefits.

The following is a glossary for terms for compensation and compensation plans.

• Allowances

  
  Fixed payments provided for specific purposes (e.g., travel, housing, meals).
  

• Annual Incentives

  
  Annual incentives determined by a formula that are awarded based on the employee's contributions, in conjunction with the organization's financial performance. Short-term incentives are based on targets of 12 months or less.

• Base Pay

  
  Fixed compensation an employee receives for performing specific job responsibilities. Base salary can be paid as a salary or hourly rate.

• Benchmark Job

  
  A job used for pay comparison because it is common and has reliable market data.
  

• Bonus

  
  A one-time discretionary payment that does not become part of an employee's base salary. The variable portion of the compensation package.

• Broadbanding

  
  Practice of using fewer pay grades having broader ranges than traditional compensation systems.

• Cliff Vesting

  
  Vesting that occurs all at once after a specified period.

• Commission

  
  Pre-determined incentive amount for each unit of sales made. Commonly expressed as a percent of each sales dollar, percent of gross margin, or dollar amount per unit sold.

• Compa-Ratio

  
  Pay level divided by the midpoint of the pay range.

• Compensation Philosophy

  
  An organization's guiding principles for how pay is determined and managed.

• Compression

  
  Situation in which pay differences among individuals with different levels of experience and performance becomes small.

• Cost-of-Living Adjustment (COLA)

  
  An increase in pay intended to offset inflation.
  Deferred Compensation
  Compensation payments that are payable to the employee at some point in the future.

• Differential Pay

  
  Additional compensation for working specific shifts or conditions (e.g., night shift, hazard pay).
  

• Draw Against Commissions

  
  Amount advanced from and repaid to future commissions earned by the employee.

• Employee Stock Ownership Plans (ESOP)

  
  A plan whereby employees gain stock ownership in the organization for which they work.

• Equity Compensation

  
  Ownership-based compensation such as stock options or restricted stock.

• Exempt Employee

  
  An employee not eligible for overtime pay under wage-and-hour laws.

• Expatriate

  
  An employee working in a unit or plant who is not a citizen of the country in which the unit or plant is located, but is a citizen of the country in which the organization is headquartered.

• External Equity

  
  Competitiveness of pay compared to the labor market.
  

• Gain Sharing Plans

  
  The sharing with employees of greater-than-expected gains in profits and/or productivity.

• Graded Vesting

  
  Vesting that occurs gradually over time.

• Green-Circle Rate

  
  Pay that falls below the minimum of the assigned pay range.

• Host-Country National

  
  An employee working in a unit or plant who is a citizen of the country in which the unit or plant is located, but where the unit or plant is operated by an organization headquartered in another country.

• Hourly Rate

  
  Payments directly calculated on the amount of time worked. The annual pay is determined by the number of hours worked during the course of the year, and the hourly rate of pay. Positions paid on an hourly rate are typically considered non-exempt, and are paid overtime.

• Hourly Wage

  
  Compensation paid based on the number of hours worked.
  

• Incentive Stock Option (ISO)

  
  A stock option that qualifies for favorable tax treatment (no tax at exercise and long-term capital gains treatment, if shares are held for one year after exercise and two years after grant before sale) and which meets other rules as specified by legislation. The applicable section of the Internal Revenue Code (IRC) is Section 422.

• Internal Equity

  
  Fairness of pay among employees within the organization.

• Job Evaluation

  
  The process of assessing the relative value of jobs within an organization.

• Long-Term Incentives

  
  Incentives determined by a formula that are awarded based on the employee's contributions, in conjunction with the organization's financial performance. Long-term incentives are based on targets of more than 12 months, and can be cash or stock based.

• Market Pricing

  
  The process of setting pay based on external labor market data.

• Merit Increase

  
  Annual increase an employee receives tied to performance and merit budget practices.

• Midpoint

  
  The market-based or internally targeted pay level within a pay range.
  

• Non-Exempt Employee

  
  An employee eligible for overtime pay.

• Non-qualified Stock Option (NQSO)

  
  A stock option that does not qualify for special tax treatment under Section 422 of the Internal Revenue Code (IRC) or which is designated by the company as not being an incentive stock option (ISO). Also called a non-statutory stock option.

• Overtime Pay

  
  Additional compensation paid to eligible employees for hours worked beyond standard limits.

• Pay Equity

  
  Similarity in pay for jobs requiring comparable levels of knowledge, skills, and abilities, even where actual job duties and responsibilities differ significantly.

• Pay for Performance

  
  Amount and timing of salary increases and incentives are based on meaningful individual performance.

• Pay Grade

  
  A grouping of individual jobs having approximately the same job worth.

• Pay Survey

  
  A collection of data on existing compensation rates for workers performing similar jobs in other organizations.

• Pay Transparency

  
  Practices and laws requiring openness about pay ranges and compensation practices.

• Performance-Based Restricted Stock

  
  Restricted shares of stock awarded to an employee in which the shares are contingent on the achievement of either internal or external performance measures or an increase in the company's stock price.

• Performance-Sharing Plan

  
  Provides rewards based on performance of a combination of quantitative and/or qualitative measures.

• Perquisites

  
  Special benefits, usually non-cash items, for executives.

• Phantom Stock

  
  An arrangement whereby someone receives the appreciation in the book, fair-market or formula value over a set period of time. Phantom shareholders do not own actual stock and typically do not have voting rights; however, they are usually eligible to receive dividends or their equivalent. Phantom stock is used by privately-held companies that want to be competitive, but cannot or do not want to grant actual stock to executives.

• Piece-Rate System

  
  Pay system in which wages are determined by multiplying the number of units produced by the piece rate for one unit.

• Position-in-Range (PIR)

  
  Indicates the extent to which an incumbent's salary actually penetrates within the salary range. The within grade range is shown as 0% to 100%.

• Premium Pay

  
  Extra compensation paid for specific circumstances, such as holidays or overtime.

• Profit Sharing

  
  Form of compensation provided to all employees based on the profits of the organization. Payouts can be provided as cash or stock.

• Promotion

  
  Movement to a higher-level position, typically with increased responsibility and pay.
  

• Red-Circle Rate

  
  Pay that exceeds the maximum of the assigned pay range.

• Restricted Stock Unit (RSU)

  
  A grant of company stock that vests over time or upon meeting conditions.

• Salary

  
  Payments that are consistent from period to period, despite the number of hours worked. Salaries are generally paid to higher level positions that are exempt from overtime pay.

• Salary Structure

  
  Structure comprised of multiple pay grades.

• Short-Term Incentive (STI)

  
  Performance-based compensation earned over a short period, typically one year or less.

• Skill-Based Pay

  
  Compensation based on the attainment and performance of required job skills.

• Stipend

  
  A fixed, recurring payment often provided for professional or work-related expenses.

• Stock Grant

  
  Stock provided to employees at no cost to them.

• Stock Option

  
  The right to purchase stock (fixed number of shares) at a fixed stock price over a specified period time period after time requirements of continued employment are met.

• Stock-Appreciation Rights (SAR)

  
  An executive incentive plan in which the corporation grants an executive the right to receive a dollar amount of value equal to the future application of its shares, often in lieu of the executive exercising a share option. An SAR typically is granted as a companion (in tandem) to a share option, and the executive must surrender a matched number of option shares to "cash-in" the SAR. SARs usually are not used except by U.S. companies operating in some foreign countries where tax and other laws preclude the use of stock options.

• Team/Group Incentives

  
  Incentives provided based on the accomplishments of a team or group.

• Third-Country National

  
  An employee who is a citizen of one country, working in a second country, and employed by an

• organization headquartered in a third country.
  Total Cash Compensation

  
  The value of base salary plus annual bonus/incentives.

• Total Direct Compensation

  
  The total value of base salary, annual bonus/incentives, the expected values of all longer-term programs, plus benefits and perquisites expenses.

• Variable Pay

  
  Compensation linked directly to performance accomplishments. Typically linked to corporate, division, and individual performance. The variable portion of the compensation package.

• Vesting

  
  The process by which an employee earns ownership of compensation over time.

• Wage Compression

  
  A situation where pay differences between roles or tenure levels become very small.

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