Compensation affects both attracting and retaining employees. An important overall compensation decision is pay level. Pay level reflects top management’s choice to be a high-, medium-, or low-paying organization. There are three general pay methods, and an organization can use all three.

Wages are paid on an hourly basis. Salary is based on time—a week, a month, or a year. A salary is paid regardless of the number of hours worked. Incentives are pay for performance. Incentives include piece rate (pay based on production), commissions (pay based on sales), merit raises (the more productive workers get paid more), and bonuses. Common types of bonuses are a specific reward for reaching an objective, profit sharing in which employees get a part of the profits, and company stock and options to buy the stock at below market value.

The use of pay for performance rather than hours worked is the trend today. The HR department develops pay systems including benefits and pay determination and keeps records in compliance with laws. A difficult decision is how much to pay each employee. It is very important to determine an amount that is within your budget but at the same time high enough to retain your current and future employees. Organizations commonly group jobs into pay grades, creating a pay dispersion. The higher the grade of the job, the higher the pay. The external and internal approaches are often used together.