What do contributory earnings in a defined-benefit pension plan represent?

In a defined-benefit pension plan, contributory earnings represent the earnings that are subject to pension contributions. These earnings are typically used to determine the pension benefits that an employee will receive upon retirement. The amount contributed to the pension plan is calculated based on these earnings, which usually include the employee’s salary and may also encompass bonuses and other forms of compensation deemed eligible under the plan's guidelines.

Understanding contributory earnings is crucial because they directly influence the benefit calculations outlined in the pension plan. The greater the contributory earnings, the larger the potential pension benefit at retirement, as these earnings contribute to the overall calculation of the benefit formula used by the plan.