Follow the Money (Part 1)

How do people get paid?

Source: Wikipedia

Our pay is one of the few taboos left in modern society. People just don’t talk about money—at least, not about what they make. Whether it’s because we’re embarrassed or envious or worried about someone posting our personal information on the web, we’re nervous about sharing our earnings.

But what we’re paid has a big impact on what we do, and how we do it. Where you stand often depends on where you sit, and who’s paying you to sit there. It’s also significantly affected by how we’re paid. The way our paychecks are calculated can be motivating or demotivating. It affects a firm’s culture. And it impacts our behavior on the margin.

There are three major types of compensation: commissions, wages, and salaries. There are usually benefits attached to pay as well—most importantly health insurance and retirement savings, but also disability insurance, sometimes life insurance, flexible spending plans and other items. These perks are important—indeed, benefits payments account for almost one third of all employee compensation.

But the perks don’t change much. It’s our wages and salaries that we notice in our pay-stub: how much is left over after taxes, co-payments, employee contributions, and savings. A little more than half of all workers are paid at an hourly rate, 40% are paid a salary, and 10% work on commission, or have some other arrangement.

Photo: Dodgerton Skillhause; Source: Morguefile

How we’re paid affects our motivation. It can create ethical and moral issues. For example, sales professionals who work on varying commission schedules might be tempted to steer their customers toward a more lucrative product. That’s what’s behind a lot of the recent discussion regarding fiduciary standards in retirement accounts: it’s really about how people get paid.

Compensation matters. When people have “skin in the game”—when their pay is tied to their performance in a meaningful way—it affects what they do and how they do it. But it’s critical that customers are properly cared for in the process. Because if they aren’t happy, no one will get paid anything.

Douglas R. Tengdin, CFA

Chief Investment Officer

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