Compensation: Salary, bonus, expenses, equity participation
⚡TL;DR
- Salary is not the only component of an employee's compensation. Bonuses, commissions, expenses, and equity participation also play a role.
- Think about your compensation strategy holistically to ensure it incentivizes in line with your company's goals.
Salary is the cash payment paid to your employees on an hourly, weekly, or monthly basis.
In traditional employment relationships, the salary is defined annually and paid monthly (i.e., over 12 months). You can agree on an additional salary (i.e., the 13th salary) and when it will be paid (e.g., in December).
Best practices
13th salary: It is clearly stated whether the salary is paid 12 or 13 times per year.
Bonuses are usually discretionary, meaning that it is solely up to the employer to decide whether a bonus will be paid and the extent of said bonus.
However, bonuses can be mandatory, meaning they are part of the legally owned salary, and the employee can claim such bonuses. This is the case when:
- The bonus is tied to certain goals (e.g., sales commission tied to sales targets); or
- The bonus is paid in a similar amount for three consecutive years.
Best practices
Bonus: Bonuses are either tied to specific measurable goals, or labelled as discretionary in the employment agreement and on every single bonus payment letter.
In addition to the base salary or any bonuses, the employer and the employee can agree on commissions.
A commission is a percentage of a particular transaction in which the employee was involved.
There can be a lag between the moment a commission is owed and when it is paid. Indeed, a commission is owed when the transaction giving rights to it enters into force. It is then paid later as per the parties' agreement.
Best practices
Commissions: The types of transactions giving rights to commissions are clearly defined in the employment agreement, and a cap is added to limit the maximum amount that can be due as a commission on a yearly basis.
Expenses compensate payments made by the employee for the company,for example, when buying a train ticket to meet a client
Having a ruling is benficial for both the company and the employees. Indeed, his allows the company to pay a flat-fee expense reimbursement per employee per month, simplifying its accounting andgiving a tax advantage to the company and its employees.
Expense payments to employees are not subject to social security payments. Additionally, your employees won't have to pay income tax on expenses since this is merely a reimbursement.
Best practices
Expenses: A ruling is obtained from the competent Cantonal tax authority regarding the company's expense policy.
Another compensation option is to (partially) remunerate your employees (or freelancers, board members, etc.) with equity.
This can be done via an Employee Stock Option Plan or a Phantom Stock Option Plan. Check out our page on ESOP/PSOP for more details.
The best compensation strategy depends on various factors such as:
- Cash flow;
- Need to incentivize employees;
- Position and responsibilities of each employee;
- Stage of development of your company;
- Etc.
Generally, such a strategy will combine various elements and will differ depending on each employee.
Book a free call with us here and register for our Compensation Strategy Workshop.