Compensation Term Paper

This paper gives an overview of the various common forms of wage and compensation. These include various forms of income, fringe benefits, and other forms of deferred compensation. In detailing some of the complexity of researching economic well-being through compensation, the paper calls for the young researcher to go beyond the analysis of annual income. Combining the various forms of compensation with factors such as race and gender that correlate to disparities in pay and access to high- paying jobs, the author constructs a list of variables that should be considered when approaching the issues of wage, compensation, and economic well-being.

Keywords Income; Fringe Benefits; Minimum Wage; Restricted Stock; Salary Sacrifice; Stipend; Stock Options; Transfer Payments; Wealth



The two primary factors sociologists use in measuring economic well-being are income and wealth. Traditionally, income — payments an individual receives from a job or transfer program during a calendar year — is the primary tool utilized. This is because the relevant information routinely gathered by the US Census is readily available for researchers. Some have argued that this approach is too narrow and does not take into consideration the ability of an individual or household to withstand economic hardships such as loss of a job, prolonged illness, or death of a family member. To this end, some sociologists also take into account wealth. Wealth, the value of everything an individual owns less what the individual owes, allows individuals and households to withstand periods of economic hardship until they can reestablish a level of income or adjust their standard of living to current income levels. The level of wealth needed to withstand a prolonged period of hardship is outside of the reach of most Americans. For most people, the ability to build wealth is greatly determined by wages and compensation. Unfortunately, most Americans do not earn enough to create significant wealth outside of the equity in their homes. What an individual can afford and how much an individual can save from their income often have a great deal to do with other forms of compensation. Health insurance, short- term disability, and long-term disability are forms of compensation that can help an employee withstand the economic hardship of prolonged illness. Without these forms of compensation (usually not measured in income or wealth), an individual can quickly lose savings, home, and other assets.

Analyzing wages and compensation to understand how most individuals build wealth and secure economic well-being isn't as straightforward as measuring income. Elements of compensation such as medical benefits, memberships, stipends, meals and lodging, stock options, and deferred compensation are often not reported as income. These fringe benefits can significantly improve an individual's wealth and economic well-being. Finally, when considering wage and compensation, it is important to look at the roles race and gender play in individual earnings and economic well-being. This paper outlines various forms of wages and compensation that must be taken into consideration when attempting to understand issues around economic well-being.



The primary difference between a salary and a wage in the United States economy is that salary is paid for a period of time without regard to the number of hours worked and a wage is calculated based on an hourly rate or in a piecemeal manner. The Fair Labor Standards Act exempts salaried employees from minimum wages and overtime guidelines. To be classified as an exempt employee, that employee must be an executive, professional, outside sales person, commissioned sales person, computer professional, driver, loader, mechanic, farmer on a small farm, or a seasonal worker working at a seasonal or recreational business opened less than seven months a year. Because of the number of executives, professionals, and sales people among salaried employees, the difference in income between salaried and wage employees is substantial. Additionally, salaried employees are more likely to receive other forms of compensation.

One of the primary concerns of the Department of Labor is to make sure that low-compensated employees are not treated like exempt employees by companies. A non-exempt employee is protected by regulations that require a minimum wage be paid and that overtime is paid. Abuse of the exempt/non-exempt status of employees carries a hefty fine from the Department of Labor.


Overtime is for many employees a two-edged sword. On one hand, overtime wages are a valuable source of additional income, and many employees come to depend on the extra pay in paychecks. On the other hand, overtime can be abused by employers. Research shows that too much overtime can lead to stress, poor health, obesity (Lallukka et al., 2008), and poor well-being at home (Golden & Wiens-Tuers, 2008). The guidelines for overtime were laid out in the Fair Labor Standards Act of 1938. In the United States, each state has the option to set its minimum wage at or above the federally required minimum wage. Research shows that immigrant workers tend to avoid states with low minimum wages, and native workers who do not complete high school tend to suffer more adverse employment effects in these states (Zavodny, 2008). Other issues concerning overtime include employers' attempts to work wage employees more than forty hours per week without paying the overtime premium. In response to this practice, the Department of Labor fines employers $1,100 for each incident of not properly paying employee overtime.

Stock Options

Stock options and restricted cash are two other forms of compensation usually associated with executive compensation. Though some companies do offer employee stock option (ESO) plans, stock options are more closely associated with executives. Restricted stock is almost exclusively offered to executives.

A stock option is a contract offered to an employee that grants the employee the right to purchase company stock at a fixed price (the "strike price"). The holder of the stock option is usually given a period of time (duration), usually ten years, in which to exercise the option. The idea is to align the efforts of the employee with the performance of the company. The option increases in value if the company’s stock price goes up over time, as the employee is able to buy the much more expensive stock at the strike price in their option contract. Also, the gains on the stock purchased are taxed at a much lower capital gains rate than the income tax rate. On the other hand, if the stock price drops, the option need never be exercised.

Restricted stock is granted with conditions to an employee as part of his or her compensation. The stock cannot be sold until a certain period of time elapses and specific performance levels are attained. When the conditions are met, the stock is granted to the employee. Unlike stock options, the employee receives the full value of the stock. The value of the stock when granted is treated as income and taxed accordingly. Any future gains on the restricted stock are treated as capital gains for tax purposes.

Fringe Benefits

Fringe benefits are a significant part of an individual's compensation, often about 40 percent of an individual's salary or wages, and play a significant role in improving one's economic well-being (Graves, Sexton, & Arthur, 1999). Fringe benefits include both legally required employer-paid benefits and discretionary employer-paid benefits. Legally required benefits paid by an employer, matching the amount deducted from an employee's pay, includes workers' compensation, state unemployment programs, Social Security, Medicare, and Medicaid. Legally required benefits have been put in place to create a social safety net for those who encounter economic hardship. Discretionary fringe benefits include health insurance, short- and long-term disability, life insurance, retirement plans, paid leave, day care, and other perquisites.

Workers' compensation provides income and medical assistance to workers injured on the job. Unemployment payments are made solely by employers. Unemployment payments are based on the employer's history of having ex-employees file unemployment claims. Social Security provides retirement income, disability benefits including income and medical care through Medicaid, and widow/widower benefits. Social Security contributions by employee and employer are capped annually, ceasing for the year once an employee exceeds $90,000 in income. Medicare provides medical assistance for the elderly.

Discretionary fringe benefits have a greater immediate impact on economic well-being than required fringe benefits. For example, employer-provided health insurance is a significant financial benefit. The costs of a reasonably comprehensive health insurance plan purchased for a family can cost between $400 and $1,000 per month, a figure that many families cannot afford on their own, without the significant subsidies offered by employer health plans. Studies have shown that lapses in insurance correlate with poor health and long-term habits of putting off preventative care, physician visits, and follow-up...

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