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Monetary Compensation Definition – Explanation – Example

Monetary Compensation Definition

Monetary Compensation

Monetary compensation is an exchange of value, often between an employer trading cash or currency to an employee for their labor or services.  The employer pays an employee in cash or currency in exchange for using their labor to execute specific designated activities. Therefore, monetary compensation is a financial incentive given to a person who does labor in the context of employment. It is also known as monetary benefits, representing the monetary amount paid to an individual by their supervisor in exchange for labor services.

In general, monetary compensation is provided to an employee in the context of employment.  It is given in exchange for providing labor services to their employer. As a result, the employee is deemed to trade their work services for a periodic monetary benefit. However, there are instances in which an employer may freely gift an employee beyond the company’s stated agreements. For example, an employer who gives a one-hundred-dollar holiday present to an employee. In that situation, it is not really considered monetary compensation. This is because it is not remuneration for labor services but rather a gift. Nor, is it really considered a bonus as there were no milestones or objectives in place to measure achievement.

Types of Monetary Compensation

Employees can receive monetary compensation in a variety of ways. The following are some common examples of monetary compensation.

Wages

Wages are defined as monetary compensation paid to laborers per unit of time delivered. The most frequent sort of wage is tabulated hourly.  The employee is paid an agreed-upon sum of money per hour for providing labor or services. The government has an impact on the minimum wage at which workers can be reimbursed. The minimum wage serves as a price floor below which a company cannot compensate an employee. The U.S. Department of Labor enforces the Fair Labor Standards Act (FLSA), which sets basic minimum wage standards.

Salary 

A salary is the amount of money that someone is paid by their employer each month.  Especially, if they work in a profession such as teaching, law, or medicine. A salaried individual gets paid a set sum per pay period, whereas a wage earner is paid by the hour. Someone who is given a salary receives a fixed amount in each pay period.  The total of these fixed payments over a complete year equals the annual salary amount. A base salary is the amount of money consistently earned before any additions or deductions affect their earnings. For example, bonuses can increase a paycheck beyond the base salary.  Likewise, withholdings of state and federal taxes or the cost of shared benefits can decrease a paycheck.  Basic salary additions and deductions can have a considerable impact on the size of an employee’s paycheck.

Commissions

A commission is a form of monetary compensation provided to an employee for completing a task.  For example, selling a specified number of goods or services. Sales commissions are occasionally used as incentives by employers to boost worker productivity. A commission can be paid in addition to or in place of a wage. (Source: US Department of Labor)

Bonuses

A bonus is a monetary compensation given to an employee by their employer.  It is above and beyond the employee’s base income or salary. A corporation may use bonus incentives to recognize accomplishments or express appreciation.  For example, to reward employees who reach milestones, or persuade new employees to join the ranks.

Overtime Wages

Overtime wages describe the monetary compensation to an employee for working beyond 40 hours in a workweek. Beyond 40 hours, employees are entitled to an additional amount if they work extra time. The government sets minimum overtime wages where an employer has to pay an employee one and half times the basic pay rate per unit of work. For example, consider an employee receiving an hourly wage of $30/ hour.  Therefore, the time-and-a-half overtime wage must be at least $45/ hour ($30 + $15). The U.S. Department of Labor enforces the Fair Labor Standards Act (FLSA), which sets basic overtime pay standards.

The federal overtime provisions are contained in the Fair Labor Standards Act (FLSA). Unless exempt, employees covered by the Act must receive overtime pay for hours worked over 40 in a workweek at a rate not less than time and one-half their regular rates of pay.  The Act applies on a workweek basis. An employee’s workweek is a fixed and regularly recurring period of 168 hours — seven consecutive 24-hour periods. It need not coincide with the calendar week but may begin on any day and at any hour of the day. Different workweeks may be established for different employees or groups of employees. (Source: dol.gov)

Direct Monetary Compensation vs. Indirect Compensation

The cash monetary compensation an employee receives is often seen as the most significant incentive for their efforts. This includes their base salary and variable pay.  However, there are non-monetary compensation incentives that may not fit in an employee’s wallet.  However, that doesn’t mean indirect compensation is not an essential part of a firm’s overall pay package.

  • Direct financial or monetary compensation – This is the amount of money paid directly to the employee by the company in exchange for their labor and services. Direct compensation is the most well-recognized kind of income, whether it is hourly wages, set yearly salaries, bonuses, stock options, incentives, tips, or commissions.
  • Indirect financial compensation – Indirect compensation covers the contractual obligations of the employer.  For example, temporary leaves of absence (i.e. maternity leave), benefits, and retirement plans.
  • Non-monetary compensation – This category of compensation is another component of indirect compensation.  However, it is not usually covered in contractual obligations. It includes additional rewards or advantages that do not affect an employee’s direct income.  For example, personal days off, gift cards, paid parking or transit passes, a new office, and so on. Non-monetary remuneration is fringe benefits that have nothing to do with an employee’s contract or end-of-year salary.

Monetary Compensation for Legal Damages

Damages in civil law relate to a remedy in the form of monetary compensation to the injured or affected party. The law provides compensation for loss or suffering as a result of another party’s lawful violation. You must demonstrate that you were hurt, that the other party is legally accountable for that injury, and the amount of loss.  If successful, the court may award you the compensation that will be paid by the other party. Damage awards are often classified into two types:

  • Actual Damages or Compensatory Damages –  Actual damages are meant to recompense you for your loss or injury.  This monetary compensation should restore you to the position you were in before the harm. Actual damages are the amount of money that the court will allow for the injury that you have incurred. Moreover, these injuries must be demonstrated to be the result of the other party’s action.  Or, the other party’s failure to do something that they should have done.
  • Punitive Damages – Punitive damages are financial compensation meant to punish the person who caused the harm (or failed to do some action that resulted in the harm). Punitive damages are additional money awarded to punish the defendant.  The Court awards them when a defendant’s conduct is particularly egregious or done with malice. The goal is to punish the defendant for their conduct as a deterrent from it happening again.

Up Next: IRS Transcript Codes – Transaction Codes on IRS Transcript 2022-2023

IRS Transcript CodesIRS Transcript Codes are made up of three digits. The codes are used to identify transactions once the IRS receives a tax return and enters it into the Master File.  Transaction codes keep track of actions posted to a taxpayer’s account as it is processed within the IRS system.

Your IRS Tax Account Transcript displays basic information like filing status, taxable income, and payment kinds. It also indicates internal routings and adjustments made after your original return was filed. This transcript is accessible from the IRS – Get Transcript Online for the current and nine preceding tax years.  You can also get a Transcript by mail or by calling 800-908-9946 for the current and three prior tax years.

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