Base Pay
Monetary compensation includes both guaranteed (base) and variable pay. The basic element of guaranteed pay is the base salary, paid on an hourly, daily, weekly, bi-weekly, or monthly rate. Many countries dictate the minimum base salary by defining a minimum wage.
U.S. Minimum Wage Map, 2007
A map of the United States comparing state minimum wage laws to the federal minimum wage. Kansas is the only state with a minimum wage rate lower than the federal one.
Individual skills and experience levels of employees leave room for differentiation of income levels within the job-based pay structure. In addition to base salary, other pay elements are based solely on employee/employer relations, such as salary and seniority allowance. Salaries and wages are tied to a job description that lays out the expectations and responsibilities of an employee. Management can refer to job descriptions to determine whether employees qualify for raises.
Variable Pay
Variable pay is a monetary reward that is contingent on discretion, performance, or results achieved. There are different types of variable pay plans, such as bonus schemes, sales incentives (commission), overtime pay, and more. Variable pay is common in industries such as real estate or insurance, where pay is based on commission or the amount of sales generated by the employee. In a typical variable pay plan, the salesperson might receive 50 percent of every dollar he brings in up to a defined level of revenue, after which pay increases to 85 percent for every dollar earned.
Bonuses represent another type of variable pay, one based on an employee's performance during a certain period of time. Employees who are performing particularly well during a year may receive an additional bonus that is above their base salary or commission percentage.
Monetary Compensation and Behavior
From a behavioral perspective, bonuses have been studied to ascertain their effectiveness as an employee incentive to improve performance. B.F. Skinner, a behavioral psychologist, studied behavioral reactions to extrinsic environmental consequences such as reinforcement or punishment. Drawing on Skinner's perspective, bonuses have served for a number of years as an incentive program to reinforce positive, efficient behavior among employees.
Additionally, behavioral and organizational psychologists have considered salaries in comparison with skill level to determine how employees perform based on their wage level. The results of these studies show that employees who feel that they are underpaid relative to their skill levels will not perform as well as they would if they felt that they were appropriately compensated.
The effect of compensation on employee job satisfaction has also been studied. Not surprisingly, employees who are paid more are more satisfied with their jobs and less inclined to leave their employers—up to a certain point (i.e., salary level). While the amount of that exact point is frequently debated, experts generally agree that somewhere beyond the ballpark of a six-figure salary range reflects diminishing returns (i.e., no additional benefit to the organization for paying the individual more).