In 2021, employee retention has become a trending topic. The company feared labor shortages and the media covered the so-called “Big Resignation”.
However, in the second quarter of 2022, inflation drove down stock prices and forced some companies to lay off state-owned or venture capital-backed companies. The demand for labor may have weakened slightly.
Regardless of the ebb and flow of the economic tides, companies must consider how employee compensation enriches both company shareholders and the employees themselves.
Focusing on monetary compensation or compensation, excluding perks and benefits, it could be argued that there are three essential factors or considerations.
- Is the compensation appreciated in the short term or in the long term?
- Is compensation guaranteed or performance-based?
- Can the employee access the compensation value?
A few examples will help clarify these factors.
Salary or salary
Remuneration can take the form of an hourly wage or a negotiated annual salary paid in regular installments after the work is completed.
This form of employee compensation is both guaranteed and short-term.
The employee expects a paycheck to arrive on a designated date. And the interval between payments is usually only a week or two.
Short-term guaranteed payouts provide employees with ground-level financial stability. They have predictable income to help guide their financial decisions.
There are also short-term, but performance-based forms of employee compensation. Perhaps the most common are commissions paid to salespeople, profit-sharing proceeds distributed among workers, and bonuses for exceptional work and merit.
These employee payments can be added to a regular paycheck or split quarterly or annually. This form of compensation can be considered short-term and performance-based.
These payments give workers a goal to achieve and help the company rally them around set goals.
Company pension plans are most beneficial to employees when the company matches the worker’s contribution.
So if someone decides to save 7% of each paycheck and put it — pre-tax — into a 401(k) plan, the employer adds 7% in matching, doubling the investment.
A good 401(k) match begins on the first day of work and is both fully guaranteed and long-term. The employee can depend on the match but will not benefit from it until retirement.
A 401(k) matching plan ensures that employees can look forward to retirement and be sure they will have funds available when they are no longer working. These programs can also contribute to better employee retention.
The Hearst Corporation, a large media company, is known for having a well-funded and effective employee retirement plan that began in 1967.
In the case of the Hearst pension, employees will receive a regular payment after retirement prorated to their peak salary and time spent with the company.
Like 401(k) plans, pension plans offer guaranteed long-term compensation.
This form of compensation may not be as popular with relatively new companies, but many companies still use it, especially with unionized workers.
When employees share ownership of a business, they receive long-term, performance-based compensation.
Equity is the value an owner (shareholder) would receive if a business were sold and its debts paid off.
The long-term nature of equity means that the business (or part of it) is sold before the employee can enjoy its value.
Equity is performance-based because the business must thrive, or at least survive, before it sells.
Finally, equity is a favorite of employees because in some companies it can make employees quite wealthy. Imagine receiving equity from Amazon at the start.
Combine compensation types
When a company develops its employee compensation plan, it may be good to include at least four types of compensation.
- Short term and guaranteed,
- Short-term and performance-based,
- Long lasting and guaranteed,
- Long term and performance based.
When a company offers this type of compensation, it helps its workers find financial security now and in the years to come.
A final consideration is an employee’s ability to access value when needed.
Here are two more examples that will help explain the benefit of making money available to workers.
Access salaries now
For the first example, consider a new employee at a retail store. Paid by the hour, this individual could be among the most financially vulnerable workers in a company.
A report by LendingClub and PYMNTS estimated that 67% of American workers were living paycheck to paycheck in January 2022. If that were the case for the retailer described above, something so common that a minor car problem could be an emergency.
Too often, that employee will have to turn to an almost usurious payday loan to survive, paying annual interest rates as high as 499% in some places.
This one-time loan can impact employee attendance and performance as the worker turns to a second job or gigs like Doordash or Uber to cover interest.
Some companies help solve this problem by making part of a worker’s salary available on demand.
For example, the retail worker described above might be able to access something like 70% of her daily wage one hour after the end of a shift.
In this case, availability could help a vulnerable employee avoid high-interest loans.
Hourly workers aren’t the only ones living paycheck to paycheck. The same LendingClub and PYMNTS report estimated that 48% of workers who earned more than $100,000 a year were living paycheck to paycheck in January 2022.
According to the report, these employees would not be able to cover an emergency of just $400.
This report implies that many salaried and highly paid workers have either high debt or high expenses, which they could mitigate with the value stored in equity.
To this end, some companies allow employees to sell their vested options. These sales can take the form of a direct purchase from the company or a secondary sale.
For example, AngelList Venture offers a liquidity product called Transfers that effectively allows shareholders to sell shares. A company could schedule this type of sale every 24 months, allowing invested employees to access their equity value to pay off debt or buy a home.
Companies that care about employees will develop compensation plans that ultimately lead to financial security.