asim fatigue

8/6/2019 Asim Fatigue

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Remuneration

Remuneration is the total compensation that an employee receives in exchange for the service

they perform for their employer. Typically, this consists of monetary rewards, also referred to as

wage or salary. A number of complementary benefits, however, are increasingly popularremuneration mechanisms.

Types

Remuneration can include:

y Commissiony Compensation

o Executive compensationo Deferred compensation

y Compensation methods (in online advertising and internet marketing)y Employee stock optiony Fringe benefity Salaryy Wage

Commission (remuneration)

The payment of commission as remuneration for services rendered or products sold is a

common way to reward sales people. Payments often will be calculated on the basis of apercentage of the goods sold. This is a way for firms to solve the principal-agentproblem, by attempting to realign employees' interests with those of the firm.

Although many types of commission schedules exist, a common form is known as OnTarget Earnings, where commission rates are based on the achievement of specifictargets that have been agreed upon between management and the salesperson.Commissions are intended to create a strong incentive for employees to investmaximum effort into their work.

Note that often times a firm embracing a commission structure may not involve

employees, but may solely establish themselves using independent contractors. Anexample of this could be a real estate agent.

Offering compensation in the form of commission alone is known as straightcommission. Compensation may also take the form of commission plus a fixed salary.Industries where commission is commonly paid include car sales, property sales,insurance broking and many other sales jobs.


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A side effect of commissions is that in some cases, they can result to salespeopleresorting to dishonest and fraudulent business practices in order to increase their sales.

Executive pay is financial compensation received by an officer of a firm, often as a mixture ofsalary, bonuses, shares of and/or call options on the company stock, etc. Over the past threedecades, executive pay has risen dramatically beyond the rising levels of an average worker'swage.[1]Executive pay is an important part of corporate governance, and is often determined bya company's board of directors.

Types of compensation

There are six basic tools of compensation or remuneration.

y salaryy bonuses, which provide short-term incentivesy long-term incentive plans (LTIP)y employee benefitsy paid expenses (perquisites)y insurance (Golden parachute)

In a modern US corporation, the CEO and other top executives are paid salary plusshort-term incentives or bonuses. This combination is referred to as Total CashCompensation (TCC). Short-term incentives usually are formula-driven and have someperformance criteria attached depending on the role of the executive. For example, theSales Director's performance related bonus may be based on incremental revenuegrowth turnover; a CEO's could be based on incremental profitability and revenuegrowth. Bonuses are after-the-fact (not formula driven) and often discretionary.Executives may also be compensated with a mixture of cash and shares of the companywhich are almost always subject to vesting restrictions (a long-term incentive). To beconsidered a long-term incentive the measurement period must be in excess of one year(35 years is common). The vesting term refers to the period of time before the recipienthas the right to transfer shares and realize value. Vesting can be based on time,performance or both. For example a CEO might get 1 million in cash, and 1 million incompany shares (and share buy options used). Vesting can occur in two ways: Cliffvesting and Graded Vesting. In case of Cliff Vesting, everything that is due to vest vests

at one go i.e. 100% vesting occurs either now or a later point in time at year X. In case ofgraded vesting, partial vesting occurs at different times in the future. This is furthersub-classified into two types: Uniform graded vesting (eg. Same percentage i.e. 20% ofthe options vest each year for 5 years) and Non-uniform graded vesting (eg. differentproportion i.e. 20%, 30% and 50% of the options vest each year for the next three years).Other components of an executive compensation package may include such perks as


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generous retirement plans, health insurance, a chauffered limousine, an executive jet,interest free loans for the purchase of housing, etc.

Stock options

Supporters of stock options say they align the interests of CEOs to those ofshareholders, since options are valuable only if the stock price remains above theoption's strike price. Stock options are now counted as a corporate expense (non-cash),which impacts a company's income statement and makes the distribution of optionsmore transparent to shareholders. Critics of stock options charge that they are grantedexcessively and that they invite management abuses such as the options backdating ofsuch grants. Stock options also pose a conflict of interest in which a CEO can artificiallyraise the stock price to cash in stock options at the expense of the company's long-termhealth, although this is a problem for any type of incentive compensation that goesunmonitored by directors. Indeed, "reload" stock options allow executives to exercise

options and then replace them in part (and sometimes in whole), essentially selling thecompany stock short (i.e., profiting from the stock's decline). For various reasons,including the accounting charge, concerns about dilution and negative publicity relatedto stock options, companies have reduced the size of grants to executives.

Stock options also incentivize executives to engage in risk-seeking behavior. This isbecause the value of a call option increases with increased volatility. (cf. optionspricing). Stock options therefore - even when used legitimately - can incentivizeexcessive risk seeking behavior that can lead to catastrophic corporate failure.

In the Financial crisis of 2007-2009 in the United States, pressure mounted to use morestock options than cash in executive pay. However, since many then-proportionallylarger 2008 bonuses were awarded in February, 2009, near the March, 2009, bottom ofthe stock market, many of the bonuses in the banking industry turned out to havedoubled or more in paper value by late in 2009. The bonuses were under particularscrutiny, including by the United States Treasurys new special master of pay, KennethR. Feinberg, because many of the firms had been rescued by government TroubledAsset Relief Program (TARP) and other funds.

Restricted stock

Executives are also compensated with restricted stock, which is stock given to anexecutive that cannot be sold until certain conditions are met and has the same value asthe market price of the stock at the time of grant. As the size of stock option grants havebeen reduced, the number of companies granting restricted stock either with stockoptions or instead of, has increased. Restricted stock has its detractors, too, as it hasvalue even when the stock price falls. As an alternative to straight time vested restrictedstock, companies have been adding performance type features to their grants. These


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grants, which could be called performance shares, do not vest or are not granted untilthese conditions are met. These performance conditions could be earnings per share orinternal financial targets.

Tax issues

Cash compensation is taxable to an individual at a high individual rate. If part of thatincome can be converted to long-term capital gain, for example by granting stockoptions instead of cash to an executive, a more advantageous tax treatment may beobtained by the executive.

Levels of compensation

The levels of compensation in all countries has been rising dramatically over the pastdecades. Not only is it rising in absolute terms, but also in relative terms.

Fortune 500 compensation

During 2003, about half of Fortune 500 CEO compensation was in cash pay andbonuses, and the other half in vested restricted stock, and gains from exercised stockoptions according to Forbes magazine.[3] Forbes magazine counted the 500 CEOscompensation to $3.3 billion during 2003 (which makes $6.6 million a piece), a figurethat includes gains from stock call options used (the options may have been rewardedmany years before the option to buy is used).

Forbes categories of compensation

The categories that Forbes use are (1) salary (cash), (2) bonus (cash), (3) other (marketvalue of restricted stock received), and (4) stock gains from option exercise (the gainsbeing the difference between the price paid for the stock when the option was exercisedand that days market price of the stock). If you see someone "making" $100 million or$200 million during the year, chances are 90% of that is coming from options (earnedduring many years) being exercised.

Typical compensation

The typical salary in the top of the list is $1 million - $3 million. The typical top cashbonus is $10 million - $15 million. The highest stock bonus is $20 million. The highestoption exercise have been in the range of $100 million - $200 million.


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Compensation protection

Senior executives may enjoy considerable income protection unavailable to many otheremployees. Often executives may receive a Golden Parachute that rewards themsubstantially if the company gets taken over or they lose their jobs for other reasons.

This can create perverse incentives.

One example is that overly attractive Golden Parachutes may incentivize executives tofacilitate the sale of their company at a price that is not in their shareholders' bestinterests.

It is fairly easy for a top executive to reduce the price of his/her company's stock - dueto information asymmetry. The executive can accelerate accounting of expectedexpenses, delay accounting of expected revenue, engage in off balance sheettransactions to make the company's profitability appear temporarily poorer, or simply

promote and report severely conservative (eg. pessimistic) estimates of future earnings.Such seemingly adverse earnings news will be likely to (at least temporarily) reduceshare price. (This is again due to information asymmetries since it is more common fortop executives to do everything they can to window dress their company's earningsforecasts).

A reduced share price makes a company an easier takeover target. When the companygets bought out (or taken private) - at a dramatically lower price - the takeover artistgains a windfall from the former top executive's actions to surreptitiously reduce shareprice. This can represent 10s of billions of dollars (questionably) transferred fromprevious shareholders to the takeover artist. The former top executive is then rewardedwith a golden handshake for presiding over the firesale that can sometimes be in thehundreds of millions of dollars for one or two years of work. (This is nevertheless anexcellent bargain for the takeover artist, who will tend to benefit from developing areputation of being very generous to parting top executives).

Similar issues occur when a publicly held asset or non-profit organization undergoesprivatization. Top executives often reap tremendous monetary benefits when agovernment owned, mutual or non-profit entity is sold to private hands. Just as in theexample above, they can facilitate this process by making the entity appear to be infinancial crisis - this reduces the sale price (to the profit of the purchaser), and makes

non-profits and governments more likely to sell. Ironically, it can also contribute to apublic perception that private entities are more efficiently run reinforcing the politicalwill to sell of public assets.

Again, due to asymmetric information, policy makers and the general public see agovernment owned firm that was a financial 'disaster' - miraculously turned around bythe private sector (and typically resold) within a few years.


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Regulation

There are a number of strategies that could be employed as a response to the growth ofexecutive compensation.

y In the United States, shareholders must approve all equity compensation plans.Shareholders can simply vote against the issuance of any equity plans. This wouldeliminate huge windfalls that can be due to a rising stock market or years of retainedearnings.

y Independent non-executive director setting of compensation is widely practised.Remuneration is the archetype of self dealing. An independent remuneration committeeis an attempt to have pay packages set at arms' length from the directors who are gettingpaid.

y Disclosure of salaries is the first step, so that company stakeholders can know anddecide whether or not they think remuneration is fair. In the UK, the Directors'Remuneration Report Regulations 2002[8] introduced a requirement into the oldCompanies Act 1985, the requirement to release all details of pay in the annual accounts.This is now codified in the Companies Act 2006. Similar requirements exist in mostcountries, including the U.S., Germany, and Canada.

y A say on pay - a non-binding vote of the general meeting to approve director paypackages, is practised in a growing number of countries. Some commentators haveadvocated a mandatory binding vote for large amounts (e.g. over $5 million). The aim isthat the vote will be a highly influential signal to a board to not raise salaries beyondreasonable levels. The general meeting means shareholders in most countries. In most

European countries though, with two-tier board structures, a supervisory board willrepresent employees and shareholders alike. It is this supervisory board which votes onexecutive compensation.

y Progressive taxation is a more general strategy that affects executive compensation, aswell as other highly paid people. There has been a recent trend to cutting the highestbracket tax payers, a notable example being the tax cuts in the U.S. For example, theBaltic States have a flat tax system for incomes. Executive compensation could bechecked by taxing more heavily the highest earners, for instance by taking a greaterpercentage of income over $200,000.

yMaximum wage is an idea which has been enacted in early 2009 in the United

States,where they capped executive pay at $500,000 per year for companies receiving

extraordinary financial assistance from the U.S. taxpayers. The argument is to place acap on the amount that any person may legally make, in the same way as there is a floorof a minimum wage so that people can not earn too little.

y Debt Like Compensation - It has been widely accepted that the risk taking motivation ofexecutives depends on its position in equity based compensation and risky debt. Addingdebt like instrument as part of an executive compensation may reduce the risk taking


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motivation of executives. Therefore, as of 2011, there are several proposals to enforcefinancial institutions to use debt like compensation.

y Indexing Operating Performance is a way to make bonus targets business cycleindependent. Indexed bonus targets move with the business cycle and are therefore

fairer and valid for a longer period of time.

Criticism

Many newspaper stories show people expressing concern that CEOs are paid too muchfor the services they provide. In Searching for a Corporate Savior: The Irrational Quest forCharismatic CEOs, Harvard Business School professor Rakesh Khurana documents theproblem of excessive CEO compensation, showing that the return on investment fromthese pay packages is very poor compared to other outlays of corporate resources.

Defenders of high executive pay say that the global war for talent and the rise of privateequity firms can explain much of the increase in executive pay. For example, while inconservative Japan a senior executive has few alternatives to his current employer, inthe United States it is acceptable and even admirable for a senior executive to jump to acompetitor, to a private equity firm, or to a private equity portfolio company. Portfoliocompany executives take a pay cut but are routinely granted stock options forownership of ten percent of the portfolio company, contingent on a successful tenure.Rather than signaling a conspiracy, defenders argue, the increase in executive pay is amere byproduct of supply and demand for executive talent. However, U.S. executivesmake substantially more than their European and Asian counterparts.

Shareholders, often members of the Council of Institutional Investors or the InterfaithCenter on Corporate Responsibility have often filed shareholder resolutions in protest.21 such resolutions were filed in 2003.[14] About a dozen were voted on in 2007, withtwo coming very close to passing (at Verizon, a recount is currently in progress). TheU.S. Congress is currently debating mandating shareholder approval of executive paypackages at publicly traded U.S. companies.[16]

The U.S. stood first in the world in 2005 with a ratio of 39:1 CEO's compensation to payof manufacturing production workers. Britain second with 31.8:1; Italy third with 25.9:1,New Zealand fourth with 24.9:1.

United States

The U.S. Securities and Exchange Commission (SEC) has asked publicly tradedcompanies to disclose more information explaining how their executives' compensationamounts are determined. The SEC has also posted compensation amounts on itswebsite to make it easier for investors to compare compensation amounts paid by


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different companies. It is interesting to juxtapose SEC regulations related to executivecompensation with Congressional efforts to address such compensation.

In 2005, the issue of executive compensation at American companies has been harshlycriticized by columnist and Pulitzer Prize winner Gretchen Morgenson in her Market

Watch column for the Sunday "Money & Business" section of the New York Timesnewspaper.

A February 2009 report, published by the Institute for Policy Studies notes the impactexcessive executive compensation has on taxpayers:

U.S. taxpayers subsidize excessive executive compensation by more than $20 billionper year via a variety of tax and accounting loopholes. For example, there are nomeaningful limits on how much companies can deduct from their taxes for the expenseof executive compensation. The more they pay their CEO, the more they can deduct. A

proposed reform to cap tax deductibility at no more than 25 times the pay of the lowest-paid worker could generate more than $5 billion in extra federal revenues per year.Although a proposal such as this one would tighten controls on pay to executives, thisstudy does take into consideration (or at least does not address) the tax obligations ofthe individual (CEO) that receives this compensation. Every dollar that is deductedfrom the firm's income is subject to the personal tax of the individual receiving suchpay.

Unions have been very vocal in their opposition to high executive compensation. TheAFL-CIO sponsors a website called Executive Paywatch which allows users to comparetheir salaries to the CEOs of the companies where they work.

In 2007, CEOs in the S&P 500, averaged $10.5 million annually, 344 times the pay oftypical American workers. This was a drop in ratio from 2000, when they averaged 525times the average pay.

To work around the restrictions and the political outrage concerning executive paypractices, banks in particular turned to using life insurance policies to fund bonuses,deferred pay and pensions owed to its executives. Under this scenario, a bank insuresthousands of its employees under the life insurance policy, naming itself as thebeneficiary of the policy. Bank undertake this practice often without the knowledge or

consent of the employee and sometimes with the employee misunderstanding the scopeof the coverage or the ability to maintain employee coverage after leaving the company.In recent times, a number of families became outraged by the practice and complainedthat banks should not profit from the death of the deceased employees. In one case, afamily of a former employee filed a lawsuit against the bank after the family questionedthe practices of the bank in its coverage of the employee. The insurance companyaccidentally sent the widow of the deceased employee a check for a $1.6 million that


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was payable to the bank after the former employee died in 2008. In that case, bankallegedly told the employee in 2001 that the employee was eligible for a $150,000supplemental life insurance benefit if the employee signed a consent form to allow thebank to add the employee to the bank's life insurance policy. The bank fired theemployee four months after the employee consented to the arrangement. After that

employee's death, the family collect no benefits from the employee life insurancepolicies provided by the bank, since the bank had canceled the employee's benefit afterthe firing. The family claimed that the former employee was "cognitively disabled"because of brain surgery and medical treatments at the time of signing the consent formto understand fully the scope of insurance coverage under the bank's master insurancebenefit plan.

The practice of financing executive compensation using corporate-owned life insurancepolicies remain controversial. On the one hand, observers in the insurance industry notethat "businesses enjoy tax-deferred growth of the inside buildup of the [life insurance]

policys cash value, tax-free withdrawals and loans, and income tax-free death benefitsto [corporate] beneficiaries." On the other hand, critics frowned upon the use of"janitor's insurance" to collect tax-free death benefits from insurance policies coveringretirees and current and former non-key employees that companies rely on as informalpension funds for company executives. To thwart the abuse and reduce theattractiveness of corporate-owned life insurance policies, changes in tax treatment ofcorporate-owned insurance life insurance policies are under consideration for non-keypersonnel. These changes would repeal "the exception from the pro rata interestexpense disallowance rule for [life insurance] contracts covering employees, officers ordirectors, other than 20% owners of a business that is the owner or beneficiary of the

contracts."

A study by University of Florida researchers found that highly paid CEOs improvecompany profitability as opposed to executives making less for similar jobs.

On the other hand, a study by Professors Lynne M. Andersson and Thomas S.Batemann published in the Journal of Organizational Behavior found that highly paidexecutives are more likely to behave cynically and therefore show tendencies ofunethical performance.

Australia

In Australia, shareholders can vote against the pay rises of board members, but the voteis non-binding. Instead the shareholders can sack some or all of the board members.


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Trends in executive compensation

There are some examples of exceptionally high chief executive officer pay in the earlytwentieth century. When the United States government took control of the railroadindustry during the 1910s, they discovered enormous salaries for the railroad bosses.

After the Securities and Exchanges Commission was set up in the 1930s, it wasconcerned enough about excessive executive compensation that it began requiringyearly reporting of company earnings to help reign in abuse. These examples show thatexceptionally high CEO pay is not a new phenomenon, just perhaps not as common astoday.

Anecdotal evidence for the General Electric corporation suggest that after examples ofexcess early last century and the Great Depression, following World War II executivepay remained fairly constant at GE for almost three decades. This may have been in partdue to high income taxes on the wealthy. To get around this, companies like General

Electric began to offer stock options in the late 1950s. The United States governmenteventually pared down the income taxes on the wealthy from 91% in the 1950s, to 28%in the 1980s. Thus the level of pay for GEs top three managers increased at a slow rateof about two percent per year from the 1940s to the 1960s but this period of little growthwas followed by a rapid acceleration in top management pay. Mostly encouraged bythe increasing use of stock options since the 1980s and of restricted stock since the1990s. From the 1970s to the present, the compensation of the three highest-paid officersat GE has grew at the significantly higher annual rate of eight percent yearly.

The years 1993 -2003 saw executive pay increase sharply with the aggregate

compensation to the top five executives of each of theS

&P 1500 firms compensationdoubling as a percentage of the aggregate earnings of those firms - from 5 per cent in19935 to about 10 per cent in 20013.

The Financial Crisis has had a relatively small net effect on executive pay. According tothe independent research firm Equilar, median S&P 500 CEO compensation fellsignificantly for the first time since 2002. From 2007 to 2008, median total compensationdeclined by 7.5 percent. A sharp decline in bonus payouts contributed most to declinesin total pay, with median annual bonus payouts for S&P 500 CEOs dropping to $1.2million in 2008, down 24.5 percent from the 2007 median of $1.6 million. Additionally,20.6 percent of CEOs received no bonus payout at all for 2008.

On the other hand, equity compensation changed little from 2007 to 2008, despite themarket turmoil. The median value of option awards and stock awards rose by 3.5percent and 1.4 percent, respectively. Options maintained its place as the mostprevalent equity award vehicle, with 72.2 percent of CEOs receiving option awards. In2008, nearly two-thirds of total CEO compensation was delivered in the form of stock oroptions.


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Deferred compensation

Deferred compensation is an arrangement in which a portion of an employee's incomeis paid out at a date after which that income is actually earned. Examples of deferred

compensation include pensions, retirement plans, and stock options. The primarybenefit of most deferred compensation is the deferral of tax to the date(s) at which theemployee actually receives the income.

USA

In the US, Section 409A now imposes fairly detailed requirements on the timing ofdeferral elections and of distributions with the cudgel of imposing additional tax on thetaxpayer prior to actual receipt of the deferred income if these requirements are notcomplied with.

This is not tax or legal advice. Any questions relating to a specific situation should bereferred to qualified counsel. While technically deferred compensation is anyarrangement where an employee receives wages after they have earned them, the morecommon use of the phrase refers to a specific part of the tax code that provides a specialbenefit to corporate executives and other highly compensated corporate employees.

What is deferred compensation? Deferred compensation is a written agreementbetween an employer and an employee where the employee voluntarily agrees to havepart of their compensation withheld by the company, invested on their behalf, andgiven to them at some pre-specified point in the future. Deferred compensation is alsosometimes referred to as deferred comp, DC, non-qualified deferred comp, NQDC orgolden handcuffs.

Who gets deferred comp? Deferred comp is only available to senior management andother highly compensated employees of companies. Although DC isn't restricted topublic companies, there must be a serious risk that a key employee could leave for acompetitor and deferred comp is a "sweetener" to try and entice them to stay. If acompany is closely held (i.e. owned by a family, or a small group of related people), theIRS will look much more closely at the potential risk to the company. A top producingsalesman for a pharmaceutical company could easily find work at a number of good

competitors. A parent who jointly owns a business with their children is highly unlikelyto leave to go to a competitor. There must be a "substantial risk of forfeiture," or a strongpossibility that the employee might leave, for the plan to be tax-deferred. Among otherthings, the IRS may want to see an independent (unrelated) Board of Directors'evaluation of the arrangement.


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When is deferred comp used? ERISA, the Employee Retirement Income Security Act of1974, created qualified plans. (They "qualify" to be considered part of ERISA). ERISA,which is too complicated to get into in this article, has a few important points that needto be mentioned, because what a non-qualified deferred comp plan is partially definedby what it's not - an ERISA plan. 1) Assets in plans that fall under ERISA (for example, a

401(k) plan) must be put in a trust for a sole benefit of its employees. If a company goesbankrupt, creditors aren't allowed to get assets inside the company's ERISA plan.Deferred comp, because it doesn't fall under ERISA, is a general asset of thecorporation. While the corporation may choose to not invade those assets as a courtesy,legally they're allowed to and may be forced to give deferred compensation assets tocreditors in the case of a bankruptcy. A special kind of trust called a rabbi trust (becauseit was first used in the compensation plan for a rabbi) may be used. A rabbi trust puts a"fence" around the money inside the corporation and protects it from being raided formost uses other than the corporation's bankruptcy/insolvency. However, planparticipants may not receive a guarantee that they'll be paid prior to creditors being

paid in case of insolvency. 2) ERISA plans may not discriminate in favor of highlycompensated employees on a percentage basis. If the president of the company ismaking $1,000,000/year and a clerk is making $30,000, and the company declares a 25%profit sharing contribution, the president of the company gets to count the first $230,000only (2008 limit) and put $57,500 into his account and $7,500 into the clerk's account. Forthe president, $57,500 represents only 5.75% of total income that grows tax deferred,and if the company wants to provide an additional tax incentive, DC may be an option.3) Federal income tax rates change on a regular basis. If an executive is assuming taxrates will be higher at the time they retire, they should calculate whether or not deferredcomp is appropriate. The top federal tax rate in 1975 was 70%. In 2008, it was 35%. If an

executive defers compensation at 35% and ends up paying 70%, that was a bad idea. Ifthe reverse is true, it was brilliant. Unfortunately, only time will tell, but the decision topay the taxes once the rates have changed is irreversible so careful consideration mustbe given.

Where are deferred comp agreements made? Plans are usually put in place either at therequest of executives or as an incentive by the Board of Directors. They're drafted bylawyers, recorded in the Board minutes with parameters defined. There's a doctrinecalled constructive receipt, which means an executive can't have control of theinvestment choices or the option to receive the money whenever he wants. If he'sallowed to do either of those 2 things or both, he often has to pay taxes on it right away.For example: if an executive says "With my deferred comp money, buy 1,000 shares ofMicrosoft stock" that's usually too specific to be allowed. If he says "Put 25% of mymoney in large cap stocks" that's a much broader parameter. Again, ask legal counselfor specific requirements.

How do the taxes work? In an ERISA-qualified plan (like a 401(k) plan), the company'scontribution to the plan is deductiable to the plan as soon as it's made, but not taxable to


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the participants until it's withdrawn. So if a company puts $1,000,000 into a 401(k) planfor employees, it writes off $1,000,000 that year. If the company is in the 25% bracket,the contribution actually $750,000 (because they didn't pay $250,000 in taxes - 25% of1M). In a deferred comp plan, the company doesn't get to deduct the taxes in the yearthe contribution is made, they deduct them the year the contribution becomes non-

forfeitable. For example, if ABC company allows SVP John Smith to defer $200,000 ofhis compensation in 1990, which he will have the right to withdraw for the first time inthe year 2000, ABC puts the money away for John in 1990, John pays taxes on it in 2000.If John keeps working there after 2000, it doesn't matter because he was allowed toreceive it (or "constructively received") the money in 2000.

Other circumstances around deferred comp. Most of the provisions around deferredcomp are related to circumstances the employee's control (such as voluntarytermination), however deferred comp often has a clause that says in the case of theemployee's death or permanent disability, the plan will immediately vest and the

employee (or estate) can get the money

Compensation methods

Compensation methods (Remuneration), Pricing models and business models used forthe different types of internet marketing, including affiliate marketing, contextualadvertising, search engine marketing (including vertical comparison shopping searchengines and local search engines) and display advertising.

Contents

y 1 Predominant compensation methods in affiliate marketingy 2 Pricing models in search engine marketingy 3 Pricing modes in display advertisingy 4 Compensation methods in contextual advertisingy 5 Compensation methods grid

Predominant compensation methods in affiliate marketing

The following models are also referred to as performance based pricing/compensationmodel, because they only pay if a visitor performs an action that is desired by theadvertisers or completes a purchase. Advertisers and publishers share the risk of avisitor that does not convert.


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Pay-per-sale (PPS) - (revenue share)

Cost-per-sale (CPS). Advertiser pays the publisher a percentage of the order amount(sale) that was created by a customer who was referred by the publisher. This form ofcompensation is also referred to as revenue sharing.

Pay-per-lead (PPL)/pay-per-action (PPA)

Cost-per-action or cost-per-acquisition (CPA), cost per lead (CPL). Advertiser payspublisher a commission for every visitor referred by the publisher to the advertiser(web site) and performs a desired action, such as filling out a form, creating an accountor signing up for a newsletter. This compensation model is very popular with onlineservices from internet service providers, cell phone providers, banks (loans, mortgages,credit cards) and subscription services.

Special CPA compensation models

Pay-per-call

Similar to pay per click, pay per call is a business model for ad listings in search enginesand directories that allows publishers to charge local advertisers on a per-call basis foreach lead (call) they generate (CPA). Advertiser pays publisher a commission for phonecalls received from potential prospects as response to a specific publisher ad.

The term "pay per call" is sometimes confused with click-to-call, the technology thatenables the pay-per-call business model. Call-tracking technology allows to create a

bridge between online and offline advertising. Click-to-call is a service which lets usersclick a button or link and immediately speak with a customer service representative.The call can either be carried over VoIP, or the customer may request an immediate callback by entering their phone number. One significant benefit to click-to-call providers isthat it allows companies to monitor when online visitors change from the website to aphone sales channel.

Pay-per-call is not just restricted to local advertisers. Many of the pay-per-call searchengines allows advertisers with a national presence to create ads with local telephonenumbers. Pay-per-call advertising is still new and in its infancy, but according to the

Kelsey Group, the pay-per-phone-call market is expected to reach US

$3.7 billion by2010.

Pay-per-install (PPI)

Advertiser pays publisher a commission for every install by a user of usually freeapplications bundled with adware applications. Users are prompted first if they reallywant to download and install this software. Pay per install is included in the definition


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for pay per action (like cost-per-acquisition), but its relationship to how adware isdistributed made the use of this term versus pay per action more popular to distinguishit from other CPA offers that pay for software downloads. The term pay per install isbeing used beyond the download of adware.

Some botnets are known to operate PPI scams to generate money for their operators.Essentially, the compromised computer with the bot agent is instructed to install thesoftware package from a registered PPI source via the bots command and controlsystem. The bot operator then receives payment from the PPI agency and, after a shortperiod of time, uninstalls the software package and installs a new one.

Pricing models in search engine marketing

Pay-per-click (PPC)

C

ost-per-click (C

PC

). Advertiser pays publisher a commission every time a visitor clickson the advertiser's ad. It is irrelevant (for the compensation) how often an ad isdisplayed. commission is only due when the ad is clicked.

Pay per action (PPA)

Cost-per-action (CPA). Search engines started to experiment with this compensationmethod in spring 2007.

Pricing modes in display advertising

Pay-per-impression (PPI)

Cost-per-mil (mil/mille/M = Latin/Roman numeral for thousand) impressions.Publisher earns a commission for every 1,000 impressions (page views/displays) of text,banner image or rich media ads.

Pay per action (PPA) or cost per action (CPA)

Cost-per-action (CPA). Used by display advertising as pricing mode as early as 1998. Bymid-2007 the CPA/Performance pricing mode (50%) superseded the CPM pricing mode

(45%) and became the dominant pricing mode for display advertising.

Shared CPM

Shared Cost-per-mil (CPM) is a pricing model in which two or more advertisers sharethe same ad space for the duration of a single impression (or page view) in order to saveCPM costs. Publishers offering a shared CPM pricing model generally offer a discountto compensate for the reduced exposure received by the advertisers that opt to share


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online ad space in this way. Inspired by the rotating billboards of outdoor advertising,the shared CPM pricing model can be implemented with either refresh scripts (client-side JavaScript) or specialized rich media ad units. Publishers that opt to offer a sharedCPM pricing model with their existing ad management platforms must employadditional tracking methods to ensure accurate impression counting and separate click-

through tracking for each advertiser that opts to share a particular ad space with one ormore other advertisers.

Compensation methods in contextual advertising

Pay-per-click (PPC)

PPC/CPC in Search engine marketing.

Pay-per-impression (PPI)

PPI/CPM in Display Advertising

Google AdSense offers this compensation method for its "Advertise on this site" featurethat allows advertisers to target specific publisher sites within the Google contentnetwork.

Employee stock option

An employee stock option is a call option on the common stock of a company, issued

as a form of non-cash compensation. Restrictions on the option (such as vesting andlimited transferability) attempt to align the holder's interest with those of the business'shareholders. If the company's stock rises, holders of options generally experience adirect financial benefit. This gives employees an incentive to behave in ways that willboost the company's stock price.

Employee stock options are mostly offered to management as part of their executivecompensation package. They may also be offered to non-executive level staff, especiallyby businesses that are not yet profitable, insofar as they may have few other means ofcompensation. Alternatively, employee-type stock options can be offered to non-

employees: suppliers, consultants, lawyers and promoters for services rendered.Employee stock options are similar to warrants, which are call options issued by acompany with respect to its own stock.

Stock option expensing became a controversy in the early 2000s, and it was eventuallydetermined that by the Financial Accounting Standards Board that the options shouldbe expensed at their fair value as of the grant date.


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Contents

y 1 Overviewo 1.1 Contract differences

y 2 Valuationy 3 Employee stock options in the United States

o 3.1 GAAPo 3.2 Types of employee stock optionso 3.3 Taxation of employee stock options in the United States

y 4 Financial accounting solutions for employee stock optionsy 5 Criticism

Overview

Employee stock options (ESOs) are non-standardized calls that are issued as a privatecontract between the employer and employee. Over the course of employment, acompany generally issues ESOs to an employee which can be exercised at a particularprice set on the grant day, generally the company's current stock price. Depending onthe vesting schedule and the maturity of the options, the employee may elect to exercisethe options at some point, obligating the company to sell the employee its stock atwhatever stock price was used as the exercise price. At that point, the employee mayeither sell the stock, or hold on to it in the hope of further price appreciation or hedgethe stock position with listed calls and puts. The employee may also hedge theemployee stock options prior to exercise with exchange traded calls and puts and avoid

forfeiture of a major part of the options value back to the company thereby reducingrisks and delaying taxes.

Contract differences

Employee stock options have the following differences from standardized, exchange-traded options:

y Exercise price: The exercise price is non-standardized and is often the current price ofthe company stock at the time of issue. Alternatively, a formula may be used, such assampling the lowest closing price over a 30-day window on either side of the grant date.

On the other hand, choosing an exercise at grant date equal to the average price for thenext sixty days after the grant would eliminate the chance of back dating and springloading. Often, an employee may have ESOs exercisable at different times and differentexercise prices.

y Quantity: Standardized stock options typically have 100 shares per contract. ESOsusually have some non-standardized amount.

y Vesting: Often the number of shares available to be exercised at the strike price willincrease as time passes according to some vesting schedule.


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y Duration (Expiration): ESOs often have a maximum maturity that far exceeds thematurity of standardized options. It is not unusual for ESOs to have a maximummaturity of 10 years from date of issue, while standardized options usually have amaximum maturity of about 30 months.

y Non-transferable: With few exceptions, ESOs are generally not transferable and musteither be exercised or allowed to expire worthless on expiration day. There is asubstantial risk that when the ESOs are granted (perhaps 50%) that the options will beworthless at expiration. This should encourage the holders to reduce risk by hedgingwith listed options.

y Over the counter: Unlike exchange traded options, ESOs are considered a privatecontract between the employer and employee. As such, those two parties are responsiblefor arranging the clearing and settlement of any transactions that result from thecontract. In addition, the employee is subjected to the credit risk of the company. If forany reason the company is unable to deliver the stock against the option contract uponexercise, the employee may have limited recourse. For exchange-trade options, thefulfillment of the option contract is guaranteed by the Options ClearingCorp.

y Tax issues: There are a variety of differences in the tax treatment of ESOs having to dowith their use as compensation. These vary by country of issue but in general, ESOs aretax-advantaged with respect to standardized options.

Valuation

The value of an ESO follows the valuation techniques used for standardized options.The same models used in valuing standardized options, such as Black-Scholes and thebinomial model, are also used for ESOs. Often, the only inputs to the pricing model thatcannot be readily determined is the estimate of future volatility of the stock, and theappropriate expected time to expiration to use. However, there are a variety of services

that are now offered to help determine appropriate values.

As of 2006, the International Accounting Standards Board (IASB) and the FinancialAccounting Standards Board (FASB) agree that the fair value at the grant date should beestimated at the grant date using an option pricing model. The majority of public andprivate companies apply the Black-Scholes model, however, through September 2006,over 350 companies have publicly disclosed the use of a binomial model in SEC filings.

Employee stock options in the United States

GAAP

FAS 123 Revised, does not state a preference in valuation model. However, it does statethat "a lattice model can be designed to accommodate dynamic assumptions of expectedvolatility and dividends over the options contractual term, and estimates of expectedoption exercise patterns during the options contractual term, including the effect ofblackout periods. Therefore, the design of a lattice model more fully reflects thesubstantive characteristics of a particular employee share option or similar instrument.


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Nevertheless, both a lattice model and the Black-Scholes-Merton formula, as well asother valuation techniques that meet the requirements in paragraph A8, can provide afair value estimate that is consistent with the measurement objective and fair-value-based method of this Statement." The simplest and most common form of a latticemodel is a binomial model.

According to US generally accepted accounting principles in effect before June 2005,stock options granted to employees did not need to be recognized as an expense on theincome statement when granted, although the cost was disclosed in the notes to thefinancial statements. This allows a potentially large form of employee compensation tonot show up as an expense in the current year, and therefore, currently overstateincome. Many assert that over-reporting of income by methods such as this byAmerican corporations was one contributing factor in the Stock Market Downturn of2002.

Employee stock options have to be expensed under US GAAP in the US. Each companymust begin expensing stock options no later than the first reporting period of a fiscalyear beginning after June 15, 2005. As most companies have fiscal years that arecalendars, for most companies this means beginning with the first quarter of 2006. As aresult, companies that have not voluntarily started expensing options will only see anincome statement effect in fiscal year 2006. Companies will be allowed, but notrequired, to restate prior-period results after the effective date. This will be quite achange versus before, since options did not have to be expensed in case the exerciseprice was at or above the stock price (intrinsic value based method APB 25). Only adisclosure in the footnotes was required. Intentions from the international accountingbody IASB indicate that similar treatment will follow internationally.

Method of option expensing: SAB 107, issued by the SEC, does not specify a preferredvaluation model, but 3 criteria must be met when selecting a valuation model: Themodel 1) is applied in a manner consistent with the fair value measurement objectiveand other requirements of FAS123R; 2) is based on established financial economictheory and generally applied in the field; and 3) reflects all substantive characteristics ofthe instrument (i.e. assumptions on volatility, interest rate, dividend yield, etc.) need tobe specified...

Types of employee stock options

In the U.S., stock options granted to employees are of two forms, that differ primarily intheir tax treatment. They may be either:

y Incentive stock options (ISOs)y Put options (POs)y Non-qualified stock options (NQSOs or NSOs)


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Taxation of employee stock options in the United States

Because most employee stock options are non-transferable, are not immediatelyexercisable although they can be readily hedged to reduce risk, the IRS considers thattheir "fair market value" cannot be "readily determined", and therefore "no taxable

event" occurs when an employee receives an option grant. Depending on the type ofoption granted, the employee may or may not be taxed upon exercise. Non-qualifiedstock options (those most often granted to employees) are taxed upon exercise.Incentive stock options (ISO) are not, assuming that the employee complies with certainadditional tax code requirements. Most importantly, shares acquired upon exercise ofISOs must be held for at least one year after the date of exercise if the favorable capitalgains tax are to be achieved.

However, taxes can be delayed or reduced by avoiding premature exercises andholding them until near expiration day and hedging along the way. The taxes applied

when hedging are friendly to the employee/optionee.

Financial accounting solutions for employee stock options

y EASi (Operated by Equity Administration Solutions, Inc.) - Helps companies with thecomplexity and risk of managing and reporting on equity compensation plans.

y eProsper (Operated by SVB Financial Group) - Helps manage all the components of acompany's equity structure, allowing users to access, record and manage option plansand grants online.

y Equity Edge (Operated by E-Trade) - A stock plan management and reporting softwarethat provides control over a company's equity compensation program. The first

administrative solution for stock based compensation since 1985.[2]y MyLeo (Operated by ING Bank N.V.) - is a user-friendly internet application which

handles the offering, registration, order handling and settlement of all types of LongTerm Incentive Plans. MyLeo is part of the ING group which means that MyLeo meetsall INGs security, reliability, integrity and compliance standards.

y Norse Options (Operated by Norse Solutions AS) - A software as a service (SaaS) thatprovides all the functionality and reports necessary for administration of corporatefinance, accounting, company tax and investor relations purposes related to share-basedcompensation.

y OptionEase (Operated by OptionEase Inc.) - A software as a service (SaaS) equityadministration, valuation, and compliance solution.

y OPTRACK (Operated by SyncBASE Inc.) - A software as a service (SaaS) that handlesoption activities including administration, valuation, expensing, reporting, tax, andshare dilution. The first accounting solution for stock based compensation since 2004.[3]

y Shareworks (Operated by Solium Capital) - A fully integrated solution for therecordkeeping, real time trade execution, administration and reporting of stock plans.

y tOption (Operated by http://www.monidee.com) - Monidee provides professional rewardplan administration services and compliance solutions tailored to meet each clientsspecific needs. The Software as a Service Platform offers a suitable, efficient and cost-


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effective solution to administer complex reward plans that can meet the individualneeds of both public and privately held domestic, national or multi-national companiesof any size.

y Transcentive (Operated by Solium Capital) - Provides a centralized repository for planinformation to manage the administrative and financial reporting requirements for

equity compensation plans.y " Truth In Options" (www.optionsforemployees.com) offers services to communicate

the nature of, the value of, and the proper management of an employee's stock optionsto minimize risk, and maximize gains while delaying and reducing taxes from employeestock options.

Criticism

Charlie Munger, vice-chairman of Berkshire Hathaway and chairman of WescoFinancial and the Daily Journal Corporation, has criticized stock options for companymanagement for the following reasons:

y "[A] stock option plan is capricious, as employees awarded options in a particular yearwould ultimately receive too much or too little compensation for reasons unrelated toemployee performance. Such variations could cause undesirable effects, as employeesreceive different results for options awarded in different years."

y "[A] conventional stock option plan would fail to properly weigh the disadvantage toshareholders through dilution."

Instead of stock options, Munger prefers a profit-sharing plan.

Employee benefit

Employee benefits and (especially in British English) benefits in kind (also calledfringe benefits, perquisites, perqs or perks) are various non-wage compensationsprovided to employees in addition to their normal wages or salaries. Where anemployee exchanges (cash) wages for some other form of benefit, this is generallyreferred to as a 'salary sacrifice' or 'salary exchange' arrangement. In most countries,most kinds of employee benefits are taxable to at least some degree.

Some of these benefits are: housing (employer-provided or employer-paid), groupinsurance (health, dental, life etc.), disability income protection, retirement benefits,daycare, tuition reimbursement, sick leave, vacation (paid and non-paid), socialsecurity, profit sharing, funding of education, and other specialized benefits.

The purpose of the benefits is to increase the economic security of employees.


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The term perqs (also perks) is often used colloquially to refer to those benefits of a morediscretionary nature. Often, perks are given to employees who are doing notably welland/or have seniority. Common perks are take-home vehicles, hotel stays, freerefreshments, leisure activities on work time (golf, etc.), stationery, allowances forlunch, andwhen multiple choices existfirst choice of such things as job assignments

and vacation scheduling. They may also be given first chance at job promotions whenvacancies exist.

Contents

y 1 Canaday 2 United Statesy 3 United Kingdomy 4 Fringe Benefits Taxy 5 Disadvantages of employee benefits

o 5.1 Employee disadvantage

Canada

Employee benefits in Canada might include additional health coverage that are notincluded in the provincial plan such as (medical, prescription, vision and dental plans);Group Disability (STD/LTD), Employee Assistance Plans (EAP), Group Term Life &Accidental Death & Dismemberment, health and dependent care; retirement benefitplans (addition to Canada Pension Plan (CPP); and long term care insurance plans; legal

assistance plans; transportation benefits; and possibly other miscellaneous employeediscounts wellness programs, discounted shopping, hotels and resorts, and so on.

United States

Employee benefits in the United States might include relocation assistance; medical,prescription, vision and dental plans; health and dependent care flexible spendingaccounts; retirement benefit plans (pension, 401(k), 403(b)); group-term life and longterm care insurance plans; legal assistance plans; adoption assistance; child carebenefits; transportation benefits; and possibly other miscellaneous employee discounts

(e.g., movies and theme park tickets, wellness programs, discounted shopping, hotelsand resorts, and so on).

Some fringe benefits (for example, accident and health plans, and group-term lifeinsurance coverage up to US$50,000) may be excluded from the employee's grossincome and, therefore, are not subject to federal income tax in the United States. Somefunction as tax shelters (for example, flexible spending accounts, 401(k)'s, 403(b)'s).Fringe benefits are also thought of as the costs of keeping employees other than salary.


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These benefit rates are typically calculated using fixed percentages that vary dependingon the employees classification and often change from year to year.

Normally, employer provided benefits are tax-deductible to the employer and non-taxable to the employee. The exception to the general rule includes certain executive

benefits (e.g. golden handshake and golden parachute plans).

American corporations may also offer cafeteria plans to their employees. These planswould offer a menu and level of benefits for employees to choose from. In mostinstances, these plans are funded by both the employees and by the employer(s). Theportion paid by the employees are deducted from their gross pay before federal andstate taxes are applied. Some benefits would still be subject to the FICA tax, such as401(k)[2] and 403(b) contributions; however, health premiums, some life premiums, andcontributions to flexible spending accounts are exempt from FICA.

If certain conditions are met, employer provided meals and lodging may be excludedfrom an employee's gross income. If meals are furnished (1) by the employer; (2) for theemployer's convenience; and (3) provided on the business premises of the employerthey may be excluded from the employee's gross income per Section 119(a). In addition,lodging furnished by the employer for its convenience on the business premise of theemployer (which the employee is required to accept as a condition of employment) isalso excluded from gross income. Importantly, section 119(a) only applies to meals orlodging furnished "in kind." Therefore, cash allowances for meals or lodging receivedby an employee are included in gross income .The term "fringe benefits" was coined by the War Labor Board during World War II todescribe the various indirect benefits which industry had devised to attract and retainlabor when direct wage increases were prohibited.

Employee benefits provided through ERISA are not subject to state-level insuranceregulation like most insurance contracts, but employee benefit products providedthrough insurance contracts are regulated at the state level. However, ERISA does notgenerally apply to plans by governmental entities, churches for their employees, andsome other situations.

United Kingdom

In the UK, Employee Benefits are categorised by three terms: Flexible Benefits (Flex)and Flexible Benefits Packages, Voluntary Benefits and Core Benefits.

Flexible Benefits, usually called a "Flex Scheme", is where employees are allowed tochoose how a proportion of their remuneration is paid. Currently around a quarter ofUK employers operate such a scheme. This is normally delivered by allowingemployees to sacrifice part of their pre-tax pay in exchange for a car, additional holiday,


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a shorter working week or other similar benefits, or give up benefits for additional cashremuneration. A number of external consultancies exist that enable organizations tomanage Flex packages and they centre around the provision of an Intranet or Extranetwebsite where employees can view their current flexible benefit status and makechanges to their package. Adoption of flexible benefits has grown considerably over the

five years to 2008, with The Chartered Institute of Personnel and Developmentadditionally anticipating a further 12% rise in adoption within 2008/9. This hascoincided with increased employee access to the internet and studies suggesting thatemployee engagement can be boosted by their successful adoption.

Voluntary Benefits is the name given to a collection of benefits that employees choose toopt-in for and pay for personally. These tend to be schemes such as the government-backed (and therefore tax-efficient) Bike2Work and Childcare Vouchers (Accor Services,Busybees, Sodexho, Fideliti, KiddiVouchers, Imagine, Early Years Vouchers Ltd) andalso specially arranged discount schemes for employees such as group ISAs. Employee

Discount schemes are often setup by employers as a perk of working at theorganization. They can be run inhouse or arranged by an external employee benefitsconsultant.

Core Benefits is the term given to benefits which all staff enjoy, such as holiday, sickpay and sometimes flexible hours.

In recent years many UK companies have used the tax and national insurance savingsgained through the implementation of salary sacrifice benefits to fund theimplementation of flexible benefits. In a salary sacrifice arrangement an employee givesup the right to part of the cash remuneration due under their contract of employment.Usually the sacrifice is made in return for the employer's agreement to provide themwith some form of non-cash benefit. The most popular types of salary sacrifice benefitsinclude childcare vouchers and pensions.

Fringe Benefits Tax

In a number of countries (e.g., Australia, New Zealand, Pakistan and India) the 'fringebenefits' are subject to the Fringe Benefits Tax (FBT), which applies to most, althoughnot all, fringe benefits.

In the United States, employer-sponsored health insurance was considered taxableincome until 1954.


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Disadvantages of employee benefits

Employee disadvantage

In the UK these benefits are often taxed at the individuals normal tax rate, which can

prove expensive if there is no financial advantage to the individual from the benefit.The UK system of state pension provision is dependant upon the payment of NationalInsurance Contributions (NIC). Salary exchange schemes will result in reduced NICpayments and so are also liable to reduce the state benefits, most notably the statesecond pension.

Salary

A salary is a form of periodic payment from an employer to an employee, which may

be specified in an employment contract. It is contrasted with piece wages, where eachjob, hour or other unit is paid separately, rather than on a periodic basis.

From the point of a business, salary can also be viewed as the cost of acquiring humanresources for running operations, and is then termed personnel expense or salaryexpense. In accounting, salaries are recorded in payroll accounts.

Contents

y 1 Historyo 1.1 First paid salaryo 1.2 The Roman word salariumo 1.3 Payment in the Roman empire and medieval and pre-industrial Europeo 1.4 Payment during theCommercial Revolutiono 1.5 Share in earnings as paymento 1.6 The Second Industrial Revolution and salaried paymento 1.7 Salaried employment in the 20th centuryo 1.8 Salary and other forms of payment today

y 2 Salaries in the U.S.y 3 Salaries in Japany 4 Salaries in India

History

First paid salary

While there is no first pay stub for the first work-for-pay exchange, the first salariedwork would have required a human society advanced enough to have a barter system


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to allow work to be exchanged for goods or other work. More significantly, itpresupposes the existence of organized employersperhaps a government or areligious bodythat would facilitate work-for-hire exchanges on a regular enoughbasis to constitute salaried work. From this, most infer that the first salary would havebeen paid in a village or city during the Neolithic Revolution, sometime between 10,000

BCE and 6000 BCE.

A cuneiform inscribed clay tablet dated about BCE 3100 provides a record of the dailybeer rations for workers in Mesopotamia. The beer is represented by an upright jar witha pointed base. The symbol for rations is a human head eating from a bowl. Round andsemicircular impressions represent the measurements.

By the time of the Hebrew Book of Ezra (550 to 450 BCE), salt from a person wassynonymous with drawing sustenance, taking pay, or being in that person's service. Atthat time salt production was strictly controlled by the monarchy or ruling elite.

Depending on the translation of Ezra 4:14, the servants of King Artaxerxes I of Persiaexplain their loyalty variously as "because we are salted with the salt of the palace" or"because we have maintenance from the king" or "because we are responsible to theking."

The Roman word salarium

Similarly, the Roman word salarium linked employment, salt and soldiers, but the exactlink is unclear. The least common theory is that the word soldier itself comes from theLatin sal dare (to give salt). Alternatively, the Roman historian Pliny the Elder stated asan aside in his Natural History's discussion of sea water, that "[I]n Rome. . .the soldier'spay was originally salt and the word salary derives from it. . ." Plinius Naturalis HistoriaXXXI. Others note that soldier more likely derives from the gold solidus, with whichsoldiers were known to have been paid, and maintain instead that the salarium waseither an allowance for the purchase of salt or the price of having soldiers conquer saltsupplies and guard the Salt Roads (Via Salarium) that led to Rome.

Payment in the Roman empire and medieval and pre-industrial Europe

Regardless of the exact connection, the salarium paid to Roman soldiers has defined aform of work-for-hire ever since in the Western world, and gave rise to such

expressions as "being worth one's salt."

Yet within the Roman Empire or (later) medieval and pre-industrial Europe and itsmercantile colonies, salaried employment appears to have been relatively rare andmostly limited to servants and higher status roles, especially in government service.Such roles were largely remunerated by the provision of lodging and food, and liveryclothes, but cash was also paid. Many courtiers, such as valets de chambre in late


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medieval courts were paid annual amounts, sometimes supplemented by large ifunpredictable extra payments. At the other end of the social scale, those in many formsof employment either received no pay, as with slavery (though many slaves were paidsome money at least), serfdom, and indentured servitude, or received only a fraction ofwhat was produced, as with sharecropping. Other common alternative models of work

included self- or co-operative employment, as with masters in artisan guilds, who oftenhad salaried assistants, or corporate work and ownership, as with medieval universitiesand monasteries.

Payment during the Commercial Revolution

Even many of the jobs initially created by the Commercial Revolution in the years from1520 to 1650 and later during Industrialisation in the 18th and 19th centuries would nothave been salaried, but, to the extent they were paid as employees, probably paid anhourly or daily wage or paid per unit produced (also called piece work).

Share in earnings as payment

In corporations of this time, such as the several East India Companies, many managerswould have been remunerated as owner-shareholders. Such a remuneration scheme isstill common today in accounting, investment, and law firm partnerships where theleading professionals are equity partners, and do not technically receive a salary, butrather make a periodic "draw" against their share of annual earnings.

The Second Industrial Revolution and salaried payment

From 1870 to 1930, the Second Industrial Revolution gave rise to the modern businesscorporation powered by railroads, electricity and the telegraph and telephone. This erasaw the widespread emergence of a class of salaried executives and administrators whoserved the new, large-scale enterprises being created.

New managerial jobs lent themselves to salaried employment, in part because the effortand output of "office work" were hard to measure hourly or piecewise, and in partbecause they did not necessarily draw remuneration from share ownership.

As Japan rapidly industrialized in the 20th century, the idea of office work was novel

enough that a new Japanese word (salaryman), was coined to describe those whoperformed it, and their remuneration.

Salaried employment in the 20th century

In the 20th century, the rise of the service economy made salaried employment evenmore common in developed countries, where the relative share of industrial production


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jobs declined, and the share of executive, administrative, computer, marketing, andcreative jobsall of which tended to be salariedincreased.

Salary and other forms of payment today

Today, the idea of a salary continues to evolve as part of a system of all the combinedrewards that employers offer to employees. Salary (also now known as fixed pay) iscoming to be seen as part of a "total rewards" system which includes bonuses, incentivepay, and commissions), benefits and perquisites (or perks), and various other toolswhich help employers link rewards to an employee's measured performance.

Salaries in the U.S.

In the United States, the distinction between periodic salaries (which are normally paidregardless of hours worked) and hourly wages (meeting a minimum wage test and

providing for overtime) was first codified by the Fair Labor Standards Act of 1938. Atthat time, five categories were identified as being "exempt" from minimum wage andovertime protections, and therefore salariable. In 1991, some computer workers wereadded as a sixth category but effective August 23, 2004 the categories were revised andreduced back down to five (executive, administrative, professional, computer, andoutside sales employees). Salary is generally set on a yearly basis.

"The FLSA requires that most employees in the United States be paid at least the federalminimum wage for all hours worked and overtime pay at time and one-half the regularrate of pay for all hours worked over 40 hours in a workweek.

However, Section 13(a)(1) of the FLSA provides an exemption from both minimumwage and overtime pay for employees employed as bona fide executive, administrative,professional and outside sales employees. Section 13(a)(1) and Section 13(a)(17) alsoexempt certain computer employees. To qualify for exemption, employees generallymust meet certain tests regarding their job duties and be paid on a salary basis at notless than $455 per week. Job titles do not determine exempt status. In order for anexemption to apply, an employees specific job duties and salary must meet all therequirements of the Departments regulations."

Of these five categories only Computer Employees has an hourly wage-based

exemption ($27.63 per hour) while Outside Sales Employee is the only main categorynot to have the minimum salary ($455 per week) test though some sub categories underProfessional (like teachers and practitioners of law or medicine) also do not have theminimum salary test.

A general rule for comparing periodic salaries to hourly wages is based on a standard40 hour work week with 50 weeks per year (minus two weeks for vacation). (Example:


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$40,000/year periodic salary divided by 50 weeks equals $800/week. Divide $800/weekby 40 standard hours equals $20/hour). Real median household income in the UnitedStates climbed 1.3 percent between 2006 and 2007, reaching $50,233 according to areport released by the U.S. census bureau. This is the third annual increase in realmedian household income.

Salaries in Japan

In Japan, owners would notify employees of salary increases through "jirei". Theconcept still exists and has been replaced with an electronic form, or email in largercompanies.

Salaries in India

In India, salaries are generally paid on the last working day of the month (Government,

Public sector departments, Multinational organizations as well as majority of otherprivate sector companies). Several other companies pay after the month is over, butgenerally by the 5th of every month. However there are companies pay after this also.For instance, for companies under 'Godrej Group', salary is paid on 9th of month for thepreceding month. In case 9th is a holiday, it is paid on 10th, and in case both 9th and10th are holiday, it is paid on 8th.

The minimum wages in India are governed by the Minimum Wages Act, 1948. Detailsregarding the same can be seen at http://labourbureau.nic.in/wagetab.htm Employeesin India are notified regarding their salary increase through a hard copy letters given to

them.

Wage

A wage is a compensation, usually financial, received by workers in exchange for theirlabor.

Compensation in terms of wages is given to workers and compensation in terms ofsalary is given to employees. Compensation is a monetary benefit given to employees inreturn for the services provided by them.


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Contents

y 1 Determinants of wage ratesy 2 Wages in the United States

Determinants of wage rates

Depending on the structure and traditions of different economies around the world,wage rates are either the product of market forces (supply and demand), as is commonin the United States, or wage rates may be influenced by other factors such as tradition,social structure and seniority, as in Japan.

Several countries have enacted a statutory minimum wage rate that sets a price floor forcertain kinds of labor.

Wages in the United States

In the United States, wages for most workers are set by market forces, or else bycollective bargaining, where a labor union negotiates on the workers' behalf. The FairLabor Standards Act establishes a minimum wage at the federal level that all statesmust abide by. Fourteen states and a number of cities have set their own minimumwage rates that are higher than the federal level. For certain federal or state governmentcontacts, employers must pay the so-called prevailing wage as determined according tothe Davis-Bacon Act or its state equivalent. Activists have undertaken to promote theidea of a living wage rate which account for living expenses and other basic necessities,setting the living wage rate much higher than current minimum wage laws require.

asim fatigue

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