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Compensation Terminologies

Provided by Small Business Resource Referral Network, content partner for the SME Toolkit.

This glossary below is provided as an excerpt by the™ community.

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Aging factor - A percentage that represents the adjustment for pay increases for a specific period of time.

Alternative minimum tax - An income tax system designed in 1969 to ensure that wealthy individuals and corporations pay at least some tax regardless of their deductions. Taxpayers compare their regular tax results to a flat rate and pay whatever amount is higher. Because the program was never indexed to inflation, the tax applies to an ever-increasing number of people.

Annual bonus - Companies that offer annual bonuses can do so in a variety of ways. Some offer profit sharing, which rewards every employee for a job well done after a successful quarter or year. Typically, an employer will set aside a predetermined percentage of its payroll budget (between 2.5 and 15 percent) and divide that amount among employees in the form of bonuses. This type of bonus does not necessarily take into account an individual's performance, since every employee receives either the same bonus or a bonus equivalent to a percentage of base salary. It's not uncommon, however, for a company to award annual bonuses to top-performing employees only and base the amount of the bonus on an individual's achievements or performance, for example.

Attendance bonus - Some employers reward employees who have a perfect attendance record for the year. This is often a one-time cash bonus awarded at the end of a certain period, typically the calendar year or a company's fiscal year.

Average - The sum of a list of data points divided by the number of data points.

Average hourly wage - The monetary compensation paid by an employer to a worker for a given number of hours worked, exclusive of premium payments for overtime, shift differentials, cost-of-living allowances, etc.

Average work week - Typically refers to the expected or actual period of employment for the week expressed in hours. Some uses of the term relate to the outside dimensions of a week (i.e. seven consecutive days).



Base pay - The fixed pay an employee receives for carrying out standard duties; this pay does not change due to performance or results achieved. 

Benchmark - An internal job matched to an external job of similar content.

Benefit - A program in addition to monetary pay, designed to ensure employee health, financial well-being, and quality of life. Examples of benefits include health insurance, vacation time, parental leave, retirement plans, and life insurance.

Beta - A measure of the level of financial risk in a company. It is one of the factors used to determine what kind of return an investor should expect.

Bonus - A payment or reward given to an employee, a team, a division, or an entire company, because of performance. Bonuses can be paid as cash, but also as stock options, shares, or other valuable things.

Broad banding - A type of salary structure in which the various salary grades are collapsed into a few very wide bands.


Central tendency - In statistics, some clustering around a central value in a distribution of data, usually determined by one of the measures of location (mean, mode, or median).

Change of control clause - A provision in a golden parachute used to define a specific amount that will be paid if there is a takeover of the company or some other change in control or leadership. 

Commission - An amount paid to a salesperson for a sale, usually expressed in terms of percentage of sales.

Compensation philosophy - The employer's articulated approach to how it will pay employees, including its target position in relation to the compensation market for various jobs and its position on how it will motivate and reward employees for contributing to the company's success.

Compensation survey - A survey of compensation practices and trends among participating companies, compiled by an independent research organization. Compensation surveys enable their participants to learn market compensation practices for jobs offered in their organizations.

Consumer Price Index - A measure of the average change in prices paid by urban consumers for a fixed group of good and services. It is calculated and issued monthly by the Bureau of Labor Statistics. Also known as Producer Price Index.

Current profit sharing - A type of bonus in which employees receive some percentage of the profits each year as a reward on top of base salary. Usually expressed in terms of a percentage of an employee's salary, and the rate may differ according to levels in the organization.


Dependent - Someone whose livelihood depends on your financial support - for example, children or elderly parents. Many employer benefits cover dependents in addition to the employee.

Discretionary bonus - A reward given out at the employer's discretion, often as a result of skipping or ignoring the process of setting goals, monitoring performance against them, etc.

Domestic partner - A person who lives with someone in a committed relationship. Legal definitions and employer definitions vary from state to state and benefit to benefit.


Education/certification bonus - Many employers offer financial rewards to employees who pursue additional education or training that's directly related to the job. Ultimately, this education makes the employee a more valuable asset to the company, allowing the company to bill him or her out at a higher rate, for example.

Elevator story - A summary of an idea, especially a business plan or a job seeker's objectives, that is brief and focused enough to be related convincingly to an important contact during a ride in an elevator.

Employment Cost Index (ECI) - A fixed, employment-weighted index which tracks quarterly changes in labor costs (wages, salaries, and employer costs for employee benefits), free from the influence of employment shifts among occupations and industries. Occupations in the private sector and state and local governments are surveyed. The ECI is published quarterly by the Bureau of Labor Statistics.

Employee stock purchase plan - Participants in this type of plan are often able to purchase stock at a discounted price (usually at a 15 percent discount from the current market value). Participants don't pay taxes on the investment until they sell their stock (presumably for a profit).

Equity - In compensation terms, stock options. Equity is the value of a business beyond any claims on it; or it is the funds provided from the sale of stock. To have equity is to have (partial) ownership.

Exempt - Exempt employees are those who are not subject to the provisions of the Fair Labor Standards Act. Examples include executive, administrative, outside sales, and professional employees; and employees of federal, state, and local governments. Exempt employees are almost always salaried (except various computer professionals). 

Exercise - The process by which an employee purchases stock he or she has the option to purchase. Being offered an option does not require the employee to purchase the stock or exercise the option.

Exercise price - The price at which a holder of stock options is able to purchase the stock. Also called the strike price.

Expiration date - The date by which the owner of the option must decide whether to exercise the option and actually purchase the stock.

External job - A job outside the employing organization. See also internal job.


FLSA status - The Fair Labor Standards Act, which was designed to protect and maintain fair, just working conditions. The act's provisions, which include minimum wage, overtime, and a few others, do not apply to all employees. Some employees are legally exempt from the regulations, and others are legally nonexempt. Those who are nonexempt get overtime and must be paid at least minimum wage; while those who are exempt are not eligible. 

Fixed compensation clause - A provision in a golden parachute that determines the amount the executive will be paid if he or she is asked to leave before the end of the employment contract. 

Fixed-term, fixed-sum clause - A provision in a golden parachute that defines the amount to be paid if a fixed-term employment contract is not renewed. 


Gain sharing - A bonus program by which employees or groups of employees are rewarded for determining and implementing ways to save the company money that are consistent with the company's business objectives.

Geographic differential - A number used to pinpoint the difference in salary levels for two regions or cities. The U.S national average typically has a value of 100.0, as it is usually the point of comparison. For example, at a salary of $30,000, Dallas, Texas, has a geographical differential of 95.0, which means this salary is 95 percent of the national average.

Golden handcuffs - Related to golden parachutes, these are financial incentives designed to ensure that top-level executives do not terminate employment within a specified period as a result of a merger or acquisition. 

Golden parachute - A payment or compensation package negotiated in advance and given to a top executive who loses his or her job as a result of a merger or acquisition. Golden parachutes usually include a severance package, bonuses, the continuation of benefits, vested stock options, and other perks. See also change of control clause, fixed compensation clause, fixed-term, fixed-sum clause, golden handcuffs, and rolling contract clause.

Grade - Medium-sized and large companies classify jobs into grades to provide guidance as to how much to pay people for different types of work. A grade (or level) has a midpoint and a range, and often a number to identify it. The employees who are paid the least are usually not called 1s, but 3s or 4s.


Health Maintenance Organization (HMO) - A type of medical insurance under which insurance companies must approve certain services (other than emergencies), hospitalization, or tests. Patients are limited by participating doctors and hospitals, and must be referred from their primary care physician (PCP) to specialists. HMO practitioners get paid both by capitation (a fee the company pays the practitioner with each patient who signs on) and by volume of patients, which is sometimes very large.

Holiday bonus - In conjunction with the holiday season, many employers choose to offer employees a cash bonus as a way of saying, "Happy Holidays and thank you."

HR (Human Resources) - Refers to the individuals within a business organization, and to the portion of the organization that deals with hiring, firing, training, and other personnel issues, such as the personnel department.


Incentives - A synonym for often used to refer to bonuses, commissions, or other pay that depends on employee performance.

Incentive Stock Option - This type of stock option meets certain requirements set up by the Internal Revenue Code. It's available only to employees of a company. With this type of option, income is reported only when the stock is sold, not when the option is received or exercised. If the stock is held long enough, the employee may report long-term capital gains instead of compensation income, which could offer a significant tax savings.

Incumbent - A person doing a job; the employee.

Indemnity plan - Employees with indemnity plans as medical insurance have absolute freedom of choice in selecting a physician or specialist. These plans, which are more expensive than some alternatives, still use old methods such as claim forms and reimbursement checks. Also known as fee-for-service.

Index option - An option you are not allowed to exercise unless your company's stock offers a better return than the financial instrument to which the option is indexed, often U.S. treasury bills. Unless your company is doing very poorly, you probably wouldn't exercise at this rate anyway.

Individual incentive - A bonus based on your performance, separate from any bonuses based on the performance of a team or group.

Individual Retirement Account (IRA) - A tax-advantaged retirement account which enables an employed person to invest up to $2,000 each year.

Inflation - The rate at which the price of goods and services rises.

Initial Public Offering (IPO) - This is the first sale of stock of a company in a publicly traded market such as the New York Stock Exchange. Also referred to as going public.

Instant incentive - A reward (bonus) on the spot for a particular achievement.

Internal compression - When new hires are brought in at higher salary levels than incumbents. Also referred to as salary compression.

Internal equity - The practice of paying employees consistent with the organization's pay structure.

Internal job - A job within the employing organization. 

Intrinsic reward - Job satisfaction an employee experiences out of the pleasure of working in a rewarding job in a good company.

IPO - An initial public offering. This is the first sale of stock of a company in a publicly traded market such as the New York Stock Exchange. Also referred to as going public.


Job category - A collection of similar jobs that can be found in a variety of industries. An accountant, for instance, can be found in accounting, banking, or financial services. Within each job category are a number of job titles.

Job classification system - A means of organizing and assigning levels to jobs based on job content. Classification systems form the foundation of pay structures.

Job content - The qualifications, responsibilities, and duties of a job, as described in a job description.

Job description - A summary of the primary responsibilities of a job. Job descriptions play a critical role in determining the market value of a job.


Labor markets - Labor, like other services, behaves according to market dynamics including supply and demand. Just as businesses must be responsive to market conditions for goods and services in general, they must be cognizant of market conditions that pertain to the "purchase" and "sale" of labor. The employee is the seller, and the company is the buyer.

Lockup period - A period of time after an IPO during which an employee is restricted from exercising his or her stock options.

Long-term incentive - Pay that rewards people for the company's performance over time, in part to keep good people longer. Sometimes limited to people at certain levels.

Lump-sum distribution - What you get when you withdraw all your money from your retirement plan in the same year.

Lump-sum payment - A lump sum cash payment is a single- or double-payment merit award used to recognize a high level of performance by individuals with base salaries significantly above the market value.


Major medical policy - This is a type of fee-for-service policy geared toward those with catastrophic illnesses, and cover large, more obscure expenses, such as live-in nurses or laboratory tests. Premiums are very low (sometimes lower than those of HMOs), but deductibles are very high, so if a patient were not totally healthy, but not particularly ill, this plan will not be cost-effective.

Market adjustment - A market adjustment is an increase in an individual's base salary intended to provide a more fair and consistent pay level. An employer may make a market adjustment (or equity adjustment, as they are sometimes called when the comparison is made internally) to keep the position competitive in the labor market. See also equity adjustment.

Market competitive ratio - The result of taking a person's salary figure, divided by a median salary figure as obtained by a data source.

Market price - The value of a job on the labor market. Compensation professionals consult relevant compensation surveys to determine the market price for a job in the company's classification system by benchmarking jobs according to job content as depicted in job descriptions.

Market sample - The set of companies selected to be the relevant group for comparison of survey data.

Market value - The value of a job in the external market as defined by the company. For example, if the company's strategy is to target base pay at the 50th percentile, then the 50th percentile may also be called the market value in that company.

Mature ISO stock - When purchasing incentive stock options (ISO), especially if the company is about to go public or has recently gone public, employees are commonly required to hold on to the stock (not sell their shares) for a predetermined period, often several years. When this holding period is over, the stock the employee owns is considered mature ISO stock and may be sold. The profit is then considered a capital gain as opposed to compensation income.

Maximum - In the SalaryWizard®, the highest salary level for a particular job; synonymous with the 75th percentile.

Mean - The simple arithmetic average from a set of numbers.

Median - The item in the middle when a set of data points is ranked from the lowest to the highest, so that there is an equal number of data points below and above it.

Medical savings accounts - This is a variation on flexible spending accounts (FSAs). Similar to IRAs, employees make tax-free contributions to these accounts, to be used for medical expenses. With FSAs, the money contributed must be used the same year, or else it is forfeited.

Milestone-based bonus - This type of bonus is offered as a reward to an employee, department (group of employees), or an entire organization for achieving a milestone or goal. This type of bonus may be given to a salesperson who achieves a level of sales or to a group of employees who meet a specific deadline or successfully complete a project or objective in a timely manner.

National average - In the SalaryWizard®, an average of all salaries encompassing the United States for certain jobs. Also the point of comparison for geographic differentials used to determine a specific salary for a particular city and/or region.

Nonexempt - Nonexempt employees are those who are covered by the provisions of the Fair Labor Standards Act. Examples include employees engaged in or producing goods and services for interstate commerce; employees of certain hotels, restaurants, or motels; and others. Nonexempt employees may be salaried or may be paid according to a variety of other structures, as long as minimum wage standards and overtime regulations are met. 

Nonqualified stock option - With this type of stock option, which has become very popular, the employee must report income upon exercising the stock. The gain - the difference between the sale price and the purchase price - is treated as income for tax purposes.


Option - The right, but not the obligation, to purchase something at a specific price at a specific time. In the context of compensation, this is referred to as a stock option.

Option agreement - This document (or series of documents) outlines the terms of and rules pertaining to an employee's stock options.

Organization-wide bonus - A reward across the board to acknowledge employees' contribution to a company's success.

Overhang - The number of stock options issued to employees, plus the number of stock options that could still be issued, divided by the total number of shares outstanding. Overhang puts downward pressure on stock prices that can be countered by the effect of employee ownership. These plans are a common way in which a shareholders' ownership can significantly be diluted.


Pay for performance - Adjustments to base compensation, i.e., merit raises, as well as incentives and bonuses that are tied to individual or company performance.

Pay mix - The combination of various types of rewards - such as base pay, performance incentives, stock options, and benefits - that an individual receives. Different types of jobs have a different pay mix; and the pay mix varies from company to company.

Pay structure - A company's system for assigning levels and pay ranges for all of its jobs. It follows from the company's pay philosophy and depends on having a solid job classification system.

Performance-based variable pay - One kind of pay for performance, designed to reward people for meeting their own or the company's objectives. Skill pay, incentive pay, bonus plans, commissions, gain sharing, and results sharing are some examples.

Perk - Short for perquisite. Perks refer to non-cash rewards that recognize exceptional performance or commitment to the company, its goals, and its values. Examples of perks include tickets to sporting and cultural events, extra time off, dinners, and awards ceremonies.

Preferred Provider Organization (PPO) - A type of medical insurance that offers more options than HMOs. The system is the same as an HMO in that insurance companies contract with a group of practitioners. Patients, however, are not limited to these contracted practitioners, and may choose whomever they desire, although staying within the network will reduce fees. Patients do not need a referral to visit a specialist. This plan is best for those who wish to remain with a familiar specialist; those who expect to meet their deductibles quickly; or those to whom choosing a doctor is of utmost importance.

Premium option - A type of option offered by about 5 percent of companies. It creates a fixed exercise price at some value that may be based on the historical performance of a peer group of stocks or some other measure.

Principal - The original investment. In a savings account, the principal is the amount you put into the account. The principal on U.S. savings accounts is insured by the federal government. The principal on investments in the stock market is not insured.

Productivity - A term used mostly in manufacturing and processing, but applicable to any working process. It is the measure of output of any worker, unit of workers, machine, or an entire national economy, in the production of goods and services. Productivity is strong when the output level and input level are in proportion.

Promotional increase - Employees get promotions typically when they have gained sufficient experience and skill and proven sufficient performance to qualify for a position at a higher level. Typically, but not always, a raise accompanies a promotion.

Prospectus - When a company offers stock, it is required to issue a prospectus, which is a document describing the financial details associated with the investment opportunity. It contains background information about the company, its products/services, its financial situation, and its financial forecasts. A prospectus is designed to help an investor make educated decisions about an investment opportunity.

Public company - A company whose shares are traded on public markets such as the New York Stock Exchange.


Recognition award - A cash or non-cash bonus that acknowledges special achievement, sometimes through an elaborate ceremony in front of other employees.

Referral bonus - Since finding top-notch and highly motivated employees is an ongoing challenge, many employers offer their current employees a special bonus for helping to recruit new people. Simply for introducing an employer to a job applicant who ultimately gets hired, a person could receive a referral bonus.

Reload option - Options that, when exercised using shares of stock you already own, bring in more shares. You don't get cash, but you get shares for shares.

Retention bonus - Employers offer this type of bonus to employees who stay on the job for a period or through the completion of a specific project.

Return on investment - ROI. The rate of growth of the value of an investment. Riskier investments pay higher rates of return, while safer investments, such as U.S. treasury bills, pay little more than the rate of inflation.

Risk - The possibility of losing value or failing to gain value. Risk is measurable, while uncertainty is not.

ROI (Return on Investment) - The rate of growth of the value of an investment. Riskier investments pay higher rates of return, while safer investments, such as U.S. treasury bills, pay little more than the rate of inflation.

Rolling contract clause - A provision in a golden parachute that says the amount an executive will be paid is defined by the amount of time the compensation will continue from the time he or she gives notice. 

Rollover IRA - A conduit IRA. This Individual Retirement Account holds money taken from your 401(k) plan while you figure out what to do with it.


SAR (Stock Appreciation Right) - This is a variation on stock options that lets an employee take the amount that a group of stocks has appreciated over time; one SAR is equivalent to one stock option.

Salary - The compensation an employee receives for accomplishing the basic responsibilities of the job. In some companies' communications about compensation, the word salary is used as a synonym for base pay for exempt and nonexempt employees and their international counterparts. The use of the word salary is not intended to be a determination of FLSA status according to U.S. law. 

Salary compression - When new hires are brought in at higher salary levels than incumbents. Also called internal compression.

Savings rate - The rate at which one's total wealth changes over a set period of time.

Shareholder - Someone who owns stock (shares) in a company. These are the people to whom the company is ultimately accountable for its financial performance. 

Short-term incentive - A cash payment to an employee when company or individual goals have been reached. Payouts are typically made at the close of the year.

Sign-on bonus - This is typically a one-time cash award for accepting a job offer with a company. For a middle management or executive level position, a sign-on bonus equivalent to between 10 and 20 percent of base salary is common practice.

Small group incentive - Also known as a team incentive. A type of bonus paid to a team, department, or other group for its achievement.

Spread - The difference between the current market value of a stock and the strike price.

Stakeholder - A person or a group that has a vested interest, financial or otherwise, in the performance of a company. Examples include customers, employees, shareholders, residents of the area in which the company operates, environmental groups, and prospective investors. 

Startup - A company at the very early stages of its lifecycle, defined in various ways: less than two years old; less than $5 million in financing; fewer than 20 employees; or startup-like in culture (operating at a fast-and-furious pace, people playing several roles, paying close attention to conserving cash).

Stock appreciation right - SAR. This is a variation on stock options that lets an employee take the amount that a group of stocks has appreciated over time; one SAR is equivalent to one stock option.

Stock purchase plan - Offers made to employees allowing them to purchase a stated number of shares of stock.

Strike price - The price at which a holder of stock options is able to purchase the stock. Also called the exercise price.


Tax-deferred retirement plan - A plan that allows you to set aside part of your pay for retirement without paying tax on the money until it is withdrawn from the plan.

T-bills - United States Treasury securities. Considered the closest thing to a risk-free investment, these pay slightly more than the rate of inflation. Often used as a benchmark against which to measure the risk and return profile of other investments.

Team incentive - Also known as small group incentive. A type of bonus paid to a team, department, or other group for its achievement.

Total cash compensation - The overall cash payments made to an employee for his or her services during a given year.

Tracking stock - A security established by a parent company to track the performance of a division, especially an Internet or other high-technology division. The assets of the division are still owned by the parent company.


Unemployment rate - The percentage of people in a given population who want to work, but are without a job.

Upside potential - The possibility of making a lot of money. Stock options provide upside potential because the stock price could increase significantly from the price at which the employee has the right to exercise.


Vest - Vesting is the period over which an employee has the ability to realize rights, usually stock options and/or employer matching contributions to retirement savings plans. For example, a retirement savings plan might have a five-year vesting schedule, where after each year of employment the employee has the right to keep an additional 20 percent of employer contributions to the account. Or, an employee might be vested in 25 percent of his or her stock options after each six months of employment. Vesting schedules vary from company to company. A stock is considered 'vested' when the employee may leave the job, yet maintain ownership of the stock with no consequences. Employees of some companies may need to meet certain requirements after exercising options, such as remaining with the employer for a predefined period, in order to keep the stock.

Vision care - Vision plans are mostly supplements to HMO or PPO plans, or can be purchased separately. These cover basic eye examinations, and sometimes discounts on eye correction equipment, but do not include surgical procedures.

Volatility - The degree of ups and downs of the price of an investment.


Withdrawal - In a retirement plan, money paid out to you from your account. If this occurs before age 59 1/2, you cannot put the money back and you must pay a premature withdrawal penalty of 10 percent before even ordinary income taxes are assessed.

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Michael Juarez  |  April 07, 2011
One thing I would have liked to have seen covered in greater detail would be benefits/drawbacks of the different comp plans. For example, commissions can be industry specific and salary can sometimes inhibit motivation.<br/><br/>Additionally, an array of tools are available to help all of your compensation needs. One thing which is commonly overlooked is the development of a commissions plan which doesn't properly utilize available tools. An example would be a compensation plan which includes commissions but then doesn't involve a proper commissions reporting tool. An example of a tool can be found at<br/><br/>All in all, great article. Thanks!