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Pros & Cons of Different Compensation Structures

Pros & Cons of Different Compensation Structures


As a small business owner, it’s important to choose the right compensation structure for your employees. The structure you choose can have a significant impact on morale, productivity, and overall company culture. Different compensation structures offer pros and cons, so the key is to find the right balance to keep your employees happy, motivated, and productive.

In this article, we’ll discuss the various compensation structures available for small businesses and the pros and cons of each.

Pros & Cons of Different Compensation Structures

Pay by Hour

Pay by hour is the most straightforward compensation structure. When employees are compensated by the hour, they know exactly how many hours they need to log and how much they will be paid. This can encourage them to be productive, since they know that they can increase their income by working more hours.

However, this structure doesn’t foster collaboration or teamwork, since employees are only rewarded for their individual contributions. This structure also doesn’t encourage employees to stay with the company for the long term, since it does not provide an incentive for them to do so.

Pay by Project

Pay by project is another popular compensation structure, especially for those who are jobs are project-based. With this structure, workers are paid a fixed rate for completing a specific project or task. This can be more motivating since workers are incentivized to finish the project as quickly and efficiently as possible.

However, there is a risk that workers may rush through the project and not produce the highest-quality work. There is also the potential for dissatisfaction if the worker doesn’t receive adequate compensation for their effort. This can lead to reluctance to take on additional projects, or worse, disgruntled employees.


Bonuses can be added to any compensation structure. Paid out in either cash or stock options, bonuses can serve as a great incentive to encourage employees to increase their productivity and stay with the company long-term. Bonuses reward exceptional performance and can also be used to reward long-term employees with additional financial rewards.

But, bonuses can also quickly eat into your budget if not properly planned. Bonuses can also lead to a breakdown in morale if given to only the top performers.


Pay by salary is a popular compensation structure for employees who work regularly in one specific job. The structure is predictable and allows employees to know exactly what to expect in terms of their income each month. Salary also provides incentive for employees to stay with the company in the long term, since they know that their salary will increase over time.

However, salary structures can also lead to complacency and can be difficult to adjust in times of reduced business or budget cuts. It also doesn’t provide the same incentives as other compensation structures to increase performance or productivity.


Commission-based compensation is common in sales and is especially attractive to sales-oriented employees. As its name implies, commission is based on the sales or revenue generated by the employee, so it incentivizes workers to work hard to meet their sales goals. This can be a great incentive for top performers, as it rewards them well for their hard work.

However, commission can also lead to unhealthy competition and animosity amongst employees, as they compete to meet their sales goals. Commission-based compensation is also subject to market conditions, so it can be unpredictable.

Performance-Based Pay

Performance-based pay is an attractive alternative for employees because it rewards them for their individual performance. This structure does away with the team-orientation that pay-per-hour and salary models encourage, as rewards are based on an individual’s job-specific performances.

However, performance-based pay can easily escalate pay disparities and lead to animosity if rewards are not allocated evenly. It can also lead to gaming of the system if employees are incentivized to overlook processes or procedures in order to achieve the desired results.

No matter which compensation structure you choose, it’s important to make sure it’s fair and leads to positive outcomes for both you and your employees. Consider the pros and cons of each before coming to a decision. Choose the structure that best fits your budget and supports your company’s culture and values.

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