Deciding how much to pay staff and the best way of paying their salary is one of the first decisions a small business owner must make when hiring employees. Getting this right is important as the different ways to pay staff can affect employee performance and loyalty.

What are the different ways to pay staff?

A weekly or monthly pay cheque might be the most obvious way to pay staff, but there are alternatives. Salaries and payments can be made in a number of ways, and employers choose different ways to pay staff as a way to incentivise and reward staff productivity. As an employer, you will have to choose how to pay your staff for their work skills and performance.Pay can be calculated in a number of different ways, and pay systems generally fall into two types:

Time-related pay

 This is where staff are paid a fixed amount for a given period of time, such as £12 per hour, £420 per week or £21,840 per annum. This way of paying staff is simple to operate, cheaper and less time-consuming to administer than alternatives, but offers few incentives to workers apart from security and the certainty of a regular wage. You’ll need to keep an eye on employee performance to ensure an acceptable level of productivity is maintained.

Time-related pay is the most common way to pay employees, with staff paid for the hours they work. This is often calculated as:

• Annual salary – Employees are paid based on the number of hours they work in a year. The figure is given per annum, and the annual salary is divided into equal payments for each pay period. Pay periods are usually monthly, with staff paid on the last Friday or last working day of a calendar month.
• Hourly rate – Employees are paid for a set number of hours they work in any given time period such as a day, week or a month. This is more typical in hospitality industries such as bartending, serving staff or shift work.

Performance-related pay

 This is where all, or part, of an employee’s pay is determined by their individual performance, skills and results, such as a sales executive achieving sales targets. It is usually paid as a bonus or commission. Performance-related pay is more complicated to administer, and this type of scheme can prove costly if employees are successful in achieving their targets – however their success will help increase company profits, making it a win-win for employer and employee.

Performance-related pay is more complex, with various options available to employers for paying staff:

• Piece work – Employees are paid a set amount for every unit they produce or output. The more units an employee produces, the more they earn. This type of pay is commonly used in manufacturing and textiles businesses. For example, a machinist may be paid a set amount for each t-shirt they sew.
• Commission – Employees are paid for completing tasks such as selling a certain amount of goods. Commonly used in sales and recruitment roles, commission is typically calculated as a percentage of the amount sold. It is often paid in addition to a base salary.
• Tips – Tips earned by staff directly from customers and in relation to the quality of the service they provide go directly to the staff member. However if tips are paid into the business – such as a service charge added to a customer’s bill in a restaurant – they can be doled out to staff as regular pay from the employer. Tipping is common in hospitality and catering businesses, such as restaurants and cafes.
• Bonus payments – A business can award a bonus to an employee at its discretion or it can be linked to the performance of the employee and/or the business. Bonuses can be ad hoc or part of an employment contract. Bonuses are used by many organisations as a thank-you to workers or a team who achieve significant goals.

Additional employee pay arrangements

There are other pay arrangements you can use as different ways to pay staff, including expenses and overtime. Neither arrangements are legally required, but many businesses pay staff for any expenses they incur during their working day, such as travel to see customers or hotel accommodation.

Overtime is paid to employees who work outside their normal contracted hours. There is no requirement to pay overtime, but many businesses pay more than the contracted hourly rate for working additional hours. You should include details of overtime pay and how overtime is calculated in the employment contract.