Basis for Compensation Fixation

Compensation refers to compensating any damage, loss or mental harassments, wages or salaries as reward for physical and/or mental efforts to perform any agreed task or job. But the concept of equity in remunerating any work or task has forced us to perceive wages and salaries as compensation, because people work efficiently only when they are paid according to their worth or feel satisfied with the remunerations. Besides basic salaries or wages, companies are forced to view the benefits and services to justify the positional and esteem needs of employees and to provide adequate cushion for inflations. Though the cost of human resources is estimated at between 2% to 20% of the operating cost (depending upon the type of industry), to retain the employees or to avoid job-hopping, some of the industries are even forced to adopt varying scales and benefits.

Compensation is the reward that the employees receive in return for the work performed and services rendered by them to the organization. Compensation includes monetary payments like bonuses, profit sharing, overtime pay, recognition rewards and sales commission, etc., as well as non­monetary perks like a company-paid car, company-paid housing and stock opportunities and so on.

Apart from the basic financial pay the employees receive paid vacations, sick leave, holidays and medical insurance, maternity leave, free travel facility, retirement benefits, etc., and these are called benefits.

The Fixation or determination of compensation involves considering various factors and elements to arrive at a fair and competitive remuneration package for employees. The basis for compensation fixation may vary across industries, organizations, and job roles. The Combination of these factors, tailored to the specific needs and priorities of the organization, forms the basis for the fixation of compensation. Organizations often develop a comprehensive compensation strategy that integrates these elements to attract, retain, and motivate a talented and satisfied workforce.

• Market Conditions:

Aligning compensation with prevailing market rates for similar positions in the industry or geographic location. Ensures competitiveness in attracting and retaining talent.

• Job Evaluation:

Systematically assessing the relative value of different jobs within the organization based on factors like skills, responsibilities, and complexity. Establishes internal equity and aids in determining appropriate compensation levels.

• Industry Standards:

Considering compensation benchmarks and practices established within a specific industry. Helps organizations stay competitive and in line with industry norms.

• Organization’s Financial Health:

Evaluating the financial capacity of the organization to sustain and afford the proposed compensation structure. Ensures that compensation is aligned with the organization’s financial resources.

• Employee Performance:

Linking compensation to individual or team performance, often through performance appraisals and merit-based systems. Rewards and motivates high-performing employees, fostering a performance-driven culture.

• Cost of Living:

Adjusting compensation based on the cost of living in a particular region or country. Accounts for variations in living expenses and ensures fair compensation.

• Skill and Experience:

Recognizing the level of skills and experience possessed by an employee. Differentiates between entry-level and experienced employees, reflecting their contributions.

• Legal Compliance:

Ensuring compliance with local, state, and national labor laws and regulations related to minimum wage, overtime, and other compensation standards. Mitigates legal risks and ensures ethical employment practices.

• Union Agreements:

Adhering to terms negotiated and agreed upon in collective bargaining agreements with labor unions. Reflects the terms and conditions established through negotiations with employee representatives.

• Market Positioning:

Positioning the organization’s compensation strategy relative to competitors in the talent market. Influences the organization’s attractiveness to potential employees and helps in talent acquisition.

• Employee Benefits:

Including non-monetary benefits, such as health insurance, retirement plans, and other perks, in the overall compensation package. Enhances the total rewards offered to employees, contributing to their overall well-being.

• Job Complexity and Risk:

Recognizing the complexity and level of risk associated with specific job roles. Reflects the nature of the job and the skills required, influencing compensation levels.

• Retention and Succession Planning:

Considering the organization’s long-term talent strategy, including the retention of key employees and planning for future leadership needs. Aligns compensation with strategic workforce planning goals.

• Employee Value Proposition (EVP):

Evaluating the overall value proposition offered to employees beyond monetary compensation, including career development opportunities, work-life balance, and organizational culture. Considers factors that contribute to employee satisfaction and engagement.

• Global Considerations:

Adapting compensation practices to account for variations in economic conditions, cultural norms, and legal requirements in different countries for multinational organizations. Ensures consistency and compliance across diverse geographic locations.