“Policy makers and business leaders take note: money matters. But often the best use of money as a motivator is to pay people enough to take the issue of money off the table - so that people can focus on the work rather than on the cash.”
- Daniel H. Pink (b. 1964), New York Times bestseller

A salary is a type of financial payment rewarding staff a fixed annual amount of money, but paid monthly. Hence, salaried workers do not receive any payments for working overtime. For example, the vast majority of teachers are paid salaries, so are rewarded a fixed amount each month, irrespective of how many hours they work.

During some months, they have more commitments (such as overseas school trips, mock exam marking or parents consultation evenings), but they will have fewer lessons to teach at other times (during the examination periods, for example). However, these salaried teachers are paid the same amount each month during the year.

Salaries provide stability (a sense of security) for the workers. However, salaried workers may feel aggrieved during busier periods when extra work is not remunerated with extra pay.

Most full-time teachers are paid salaries

Wages are a type of financial reward payment system based on time or output. Wages are paid as time rate (hours) or piece rate (output). Time-based payment systems reward workers based on their time input in the production process, e.g. $10 per hour. Many countries impose a national minimum wage - the lowest hourly pay, as stipulated by the law, that employers can remunerate their workers. 

Piece rate payment systems reward workers with wages based on their output or productivity, e.g. $9 per exam paper marked by an examiner. F.W. Taylor advocated the use of differentiated piece rate to reward workers who are more productive, e.g. workers might be paid $3 per unit produced up to 100 units of output but then receive $4 per unit for each item made thereafter. Although piece rate can improve staff motivation, it can create unnecessary conflict and competition between employees.

Commission is commonly used to reward real estate agents

Commission is a type of financial payment system that rewards workers a certain percentage of the sales of each good or service that they are responsible for completing. Thus, commission is used to encourage workers to sell more products. It is a common financial payment system used to motivate sales staff to increase their productivity, such as retails sales staff, real estate (property) agents, car sales personnel, stockbrokers, and insurance brokers.

However, commission can be harmful to team cohesiveness if it encourages unhealthy competition between colleagues and can cause a hostile culture in the workplace. For those who qualify for commission, most businesses will also pay their workers a base salary.

 Exam Practice Question

A health insurance broker earns a base salary of $500 per month and 1.35% commission on the value of each insurance policy sold.

Calculate her total pay is she sells $26,000 worth of health insurance this month.  [2 marks]

 Teacher only box

Answer

• Total pay = Base pay + Commission

• Total pay = $500 + ($26,000 × 1.35%) = $500 + $351

• Hence, total pay this month = $851

Award [1 mark] for the correct answer, and [1 mark] for showing appropriate working out.

How should we measure the performance of healthcare professionals?

"The achievements of an organization are the results of the combined effort of each individual.”
- Vince Lombardi (1913 - 1970), American football coach and author

Profit-related pay is a type of financial reward system which remunerates workers a certain percentage of the annual profits that the business earns. It is rewarded on top of an employee’s normal pay (wages or salaries). In many organizations, profit-related pay is given if employees meet profit targets set for that year. For example, businesses in the Philippines back in the 1970s pioneered the tradition of paying workers a 13th month bonus - extra pay that is typically equal to one month's salary if, in general, the business meets its annual profit target.

Profit-related pay creates incentives for workers to be more productive, and to work cohesively in order to meet the profit targets. It can also be used to create employee loyalty, as senior staff may earn a higher percentage or amount of the profits.

However, this financial reward system can be costly to a business, as profits are shared with employees. In addition, it can be rather demotivating if workers narrowly miss their profit targets (especially if these were unrealistically high in the first instance).

Shareholders can benefit from dividend payments and higher share prices

An employee share ownership scheme is a type of financial payment system that involves giving workers shares in the company they work for. This comes in two main forms:

• The company gives employees a number of shares, freely without any charge.

• Employees are offered the opportunity to purchase shares at a discounted price.

Share ownership schemes result in the employees becoming shareholders in the company, so they have a direct financial stake in the business. This makes employees part-owners of the company and creates incentives for them to earn a profit for the organization. This is because the greater the profits earned by the company, the larger the dividends payments will be for them as shareholders of the business. In addition, shareholders can benefit from capital gain if higher levels of profit result in the company’s share price going up.

Share ownership is also used as recognition of the value the employees have to the company. They may be given for performance and/or employee loyalty. However, share ownership schemes can be expensive for the company and dilute ownership (as there are more shareholders in the company).

Wi-Fi access at work can be a fringe benefit

Fringe payments (also known as fringe benefits or perks) are financial benefits of a job in excess of the basic pay (wage or salary). Examples of fringe benefits include:

Fringe benefits are considered to be financial benefits because such methods would cost money for the employer. Employees would ordinarily have to pay for many of these items too if they were not provided by the employer. Essentially, fringe benefits are paid for by the business (so are considered to be costs to the organization).

Some businesses uses gratuity pay as a form of fringe benefits. This refers to the use of financial rewards for workers who complete a substantial employment contract or in recognition of an employee's long-term service.

Businesses provide fringe benefits as a form of financial motivation. However, there are also tax benefits as some fringe benefits are exempt from tax. Businesses such as Google offer a wide variety of attractive fringe benefits, which helps to build a better corporate image as caring employers.

 Top tip!

Critical thinking skills are an important aspect of an IB education, as well as helping students to access the top grades in any examination. It is not always straightforward to categorise financial rewards in the way outlined in the official IB syllabus. For example, top-paid sportspeople are paid in a combination of ways including sponsorship deals for a finite period of time, along with a base salary. However, they performance also determines their financial rewards too.

Source: Statista

To test your knowledge of this section of the syllabus, answer the following true or false questions.

• Commission is a type of financial payment system that rewards workers a certain percentage of the sales of each good or service that they are responsible for completing.

• Differentiated piece rate is a financial reward system that uses different rates of pay to reward workers who are more productive.

• An employee share ownership scheme is a type of financial payment system that involves giving workers shares in the company they work for.

• Fringe benefits (also known as perks) are financial benefits of a job in excess of the basic pay (wage or salary), such as healthcare insurance, maternity leave, and pension contributions.

• Performance-related pay (PRP) is a type of financial payment system used to pay people a bonus for reaching or exceeding a set target.

• Piece rate payment systems reward workers based on their output or productivity.

• Profit-related pay is a type of financial reward system which remunerates workers a certain percentage of the annual profits that the business earns.

• A salary is a type of financial payment rewarding staff a fixed annual amount of money, but paid monthly. Salaried workers do not receive any payments for working overtime.

• Wages are a type of financial reward payment system based on time or output. Wages are paid as time rate (hours) or piece rate (output).