Longevity pay is a contractual agreement by which an employee receives compensation according to seniority. The manner in which this compensation is distributed varies widely among different companies. Most organizations have a policy that outlines the amount to be paid, the percentage of increase, and on what schedule payments will be made.
Typically, longevity pay is given to the top earning employees in a company. The payment is often looked upon as a means of giving due compensation to workers who have made a significant contribution to the firm. It is also sometimes meant to reward loyalty and encourage continuing employee satisfaction.
In most situations, longevity pay is only given to full-time employees. It is meant to encourage the company’s core performers. The payments are also usually given up to a certain number of years. Most programs will end after approximately 40 years, as this is when many workers retire.
Longevity pay usually begins after the employee has been with the company for a few years. The way that the compensation is calculated and paid depends upon the policy of the company. Some organizations have set monthly amounts for each level of seniority, while others determine payment based on a percentage of the employee’s salary.
When using a set amount per month for longevity pay, increases depend upon the date range of the employee’s time with the company. For example, an employee that has been with a company for two years may get one monthly amount, while another who has worked there twice as long may get double that payment. With this sort of system, increases tend to be in similar increments which steadily increase until the employee leaves, is terminated, or reaches retirement age.
Another method of determining longevity pay is by basing compensation on a percentage of the employee’s salary. This can be determined based solely on annual salary or it can include all other forms of compensation, such as bonuses. With this method, the payment is often made annually, such as during performance review or when the employee receives a raise.
In some cases a company may have wage caps on positions. Longevity pay is typically adjusted according to these limits. For example, an employee who has received a raise that almost reaches the cap for that position will only receive longevity pay that extends the limits of the cap.