Compensation is a wide range of financial and non-financial rewards to employees for their services rendered to the organization. It is paid in form of wages, salary, other benefits such as vacations, maternity leave, medical facilities etc. compensation helps in motivating the employees and reduce labor turnover.
Compensation can also be defined as follows:
- A system of rewards that can motivate the employees to perform.
- A tool that is used to foster values and culture.
- An instrument that enables an organization to achieve its objectives.
The management should ensure that compensation structure is designed after taking into account certain factors such as qualification, experience, attitude and prevailing rates in the markets. Compensation means the reward that is received by an employee for the work performed in an organization. It is an important function of human resource management. Employees may receive financial and non-financial compensations for the work performed by them.
Financial compensation includes salary, bonus, and all the benefits and incentives, whereas non-financial compensation includes awards, rewards, citation, praise, recognition, which can motivate the employees towards highest productivity.
Objectives of Compensation
- The compensation should be paid to each employee on the basis of their abilities and training.
- Compensation should be in the form of package.
- It should motivate the employees towards increasing productivity.
- It should be capable of taking care of employees for safety and security needs also.
- It should be flexible and clear.
- It should not be excessive.
- Compensation should be decided by the management as per the norms fixed by the legislations in consultation with the union.
Types of compensation
Base compensation involves monetary benefit to the employees in the form of wages and salaries. It is giving the remuneration to the workers for doing the work. Wages are generally given to the workers based on hourly, daily, weekly or monthly basis. But salary is the compensation given to the office employees. Wages may be based on the number of units produced i.e. piece wage system or the time wage system i.e. the time spent on the job. But salary is always based on the time spent on the job. When it is difficult to judge the production of the company then the compensation is paid in form of salary.
Supplementary compensation, now days the organizations use supplementary compensation over and above the base compensation. It helps in satisfying the employees as well as retaining them for long time. It can be given in form of various services like housing, medical, educational facility. Supplementary compensation is also called fringe benefit as well as hidden payroll. The basic purpose of fringe benefit is to maintain efficient human resources in the organization and to motivate the employees.
These are the two main types of compensation.
Supplementary compensation is again divided into following types:
(i) Protection against hazards: supplementary compensation helps in protecting against the hazards of illness, injury, old age, death, permanent disability.
(ii) Employee services: some big organizations provide housing, low-cost loan, food, medical, and day care centre for children, educational facilities to their employees for their services.
(iii) Payment for time not worked: the employees are also paid for the time they are not working like wash up time, lunch period, vacations, holidays, sick leave etc.
(iv) Legal payments: payment under this category involves unemployment; layoff compensation, old age benefits etc.
Thus, there are various kinds of supplementary compensation which are given to the employees.
Characteristics of the Compensation
The main characteristics of the compensation system are as follows:
- A hierarchy of pay levels
- A hierarchy of jobs
- A set of rules and procedures
- Qualities required for movement from one level to other
An organization’s compensation system usually consists of three separate components. Each element of the compensation package has a link with an individual need hierarchy. All allowance are linked to basic pay. In order to motivate the employees when they achieve objectives, rewards and incentives are incorporated along with basic pay. To retain the employees and to get long-term commitments, stock option plan, annual increments and promotion are provided.