How to Pay Employees – 5 Compensation Options

Business owners spend a surprising amount of time dealing with employee compensation. Determining how to pay employees requires an understanding of employee and business needs alike.

​Employees primarily want to be paid quickly and effortlessly, while organizations have cash flow considerations and business objectives to manage. 

​As business operations have modernized, most organizations have shifted their compensation techniques from pay cards and checks to direct deposit for regular, full-time employees. 

A burgeoning suite of digital employee payroll providers continues to streamline ACH transfer practices to make direct deposit payments easier and more cost effective than previous payment approaches.

More sophisticated payment options include earned ownership equity and company shares in anticipation of a future IPO (Initial Public Offering). These compensation approaches, however, are only appropriate for top personnel as acquisition and retention incentives.

While some companies may rely on a single form of compensation, others may customize their payment approach based on employee type and tenure. Furthermore, businesses may have case-specific needs that necessitate non-traditional compensation strategies.

Pay Cards

Pay cards are a non-standard form of payment, and as such should not be used as a first option for regular employees. However, they can be used in special circumstances, like in lieu of check payments for employees without bank accounts. Typically, pay cards are only used for hourly temporary employees because they are inconvenient for businesses, which discourages their use as an ongoing payment form.

Pay cards are sometimes utilized illegally to pay employees under the table. Businesses that engage in this practice hide gift card purchases as regular expenditures instead of reporting the amounts as payroll, avoiding the associated tax liability. However, this risky practice can trigger a tax audit, resulting in prosecution, fines, and other penalties.

Checks

A mere 20 years ago, most employers still paid employees via check. Over the years check payments have continued to become more streamlined with widely adopted advancements like auto-mailing and e-signing. Employers looking to retain a high degree of control over payroll may still process checks in-house, but the cost to continue this practice is making it less viable over time. Other employers may resist modernization, opting to pay employees with checks to keep the status quo with what they have always done.

Some businesses prefer to pay employees with checks because it gives them float time on payroll payments, resulting in more advantageous cash flow. In the case of startups that are not yet profitable, check payments can cover cash flow gaps, providing a convenient scapegoat when money is not available to pay employees on time. For instance, some startups may blame a “glitch” or “lag” in their electronic payroll system when checks are late being sent out to cover up their intentional practice of waiting to process payroll until cash comes in from customers. However, most employees are smart enough to see through that charade.

While larger employers may recognize financial gains by keeping cash in interest-paying bank accounts longer as a result of check payments, the cost of issuing checks largely offsets those earnings. The result is often a zero net-gain, making check payments similarly priced to direct deposit, if not more expensive.

Checks are better suited for paying vendors than employees, although they continue to be used by smaller businesses for contract employees, seasonal staff, and part-time employees. However, direct deposit is still a better option for full-time employees than check payments.

Direct Deposit

While ACH transfer once required some technical savvy, it is now seamlessly integrated with every payroll portal and business banking platform. Most employers have already made the switch to direct deposit because it is the cheapest option available and employees prefer it. Employees want to be paid quickly and like the convenience that direct deposit offers. With the use of mobile banking apps on the rise, employees appreciate a payroll solution that integrates with the platforms that give them the most freedom with their money.

Equity

Ownership equity is a much more sophisticated payment approach. Obviously, equity cannot and should not be offered to every employee. However, it can be used as secondary compensation to attract top talent or retain key personnel. Employees that have been with the business since the early days are sometimes given ownership equity to reward their ongoing commitment. Other times, equity is offered to employees that are key to business growth to incentivize them to stay. Either way, anyone receiving equity should be well-liked by existing owners and management, because it ensures that they will be closely connected to the future of the business in the coming years.

Ownership equity is meant to reward employees for the sacrifices that they have made (or will make) for the business and keep them dedicated to its future success by tying business performance to individual earnings. Equity is also a clever way to stave off competitors from acquiring key personnel.

Future Shares

If a company might go public in coming years, issuing future shares is an incentive that can bolster compensation packages to reduce turnover. Employer stability is a factor that will be considered by investors as an IPO is considered, making retention vital to any employer looking to go public. While top talent may be attracted by the lure of a potentially lucrative future payoff, future shares can lose their perceived value if the time horizon on going public continues to be pushed out. Similarly, if the company does not appear to be making the strategic decisions necessary to earn a hefty valuation, employees may believe that their shares are worthless, reducing the effectiveness of this compensation approach.  
​
Payroll is more complicated than ever. Need help?  Please contact us to learn how we can help!