Compensation is an indispensable and most desirable part in every worker’s life. It can be defined as the sum of money that an employer pays to an employee for providing his services to the organisation. Compensation determines the lifestyle of employee in the society, his dedication towards the organisation, and his level of motivation. Compensation is important for the employer also as it determines the production cost in the organisation. One of the major reasons for the incidents of strikes and lockouts in an organisation is compensation. Therefore, the responsibility of determining compensation is not a very easy task for the HR personnel. A typical compensation of an employee comprises of financial as well as non-financial aspects.
Objectives of Compensation
Objectives of compensation are as follows:
Establish Equity: One of the most important reasons for making compensation plans is to establish equity. It refers to increasing the wages Of the employees who are paid low and eliminating inequalities in the organisation. For this, concept of equal work for equal pay should be followed.
Increase Worker’s Emciency: One of the most important reasons for compensation is to increase the efficiency of the employees. It plays vital role in the motivation of the employees.
Macroeconomic Stabilization: Compensation is aimed at achieving macroeconomic stability. This can be attained by high employment rate and low inflation rate.
Maintain Income-Expenditure Ratio: If there is a proper compensation plan, then the employees will get the amount of wages they deserve. They will neither be under-paid nor over-paid. In that case, employees will not switch the job and organisation will remain in a healthy financial condition.
Avoid Conflicts: If the compensation system is well planned, the workers will be satisfied and the workers’ union Will have nothing to be unhappy and this Will create harmony and peace in the organisation.
Legal Compliance: An effective compensation always complies with the laws. In this way, employer is also saved from the legal problems.
Elements of Compensation
There are various compensation components/ Elements which together constitutes a compensation package. These components can be classified as:
- Monetary components, and
- Non-monetary components.
Monetary Components
These are monetary rewards and benefits that employees receive for their services rendered. They cover:
Direct Benefits
Employees receive such benefits at a fixed interval of time. The following are included under direct benefits:
Basic Salary: Basic salary is the fundamental component Of pay structure. It is the major portion Of the employee’s compensation. Different components Of the wages such as bonuses, premiums, allowances, etc. are determined with the help of basic salary. Seniority and rank are the two factors, which considered for determining the basic salary. Basic salary is a major issue of discussion during negotiations between management and labour unions. Labour unions demand for increasing basic salary as it affects Other benefits Of the employees also.
Incentives: An incentive is a very important component of pay structure. It is given in addition to the regular wages. Incentives attract the employees and motivate them to perform better. It also motivates the employees to improve their efficiency and productivity of the organisation.
Bonus: Bonus is the payment which is given to workers as a share Of the organisation’s profits in a particular year. The profit is expected to be made due to contribution of employer and harxi work of the workers. Bonus is paid according to the performance of employees based on certain criteria, which may include their eligibility, performance standards, time span, etc. Earlier, payment of bonus was just confined for the manual workers, but now they are applicable in almost all types of organisations. Profit-related bonus, attendance bonus, work study related bonuses are some examples of bonus.
Provident Fund: Provident fund is the payment which an employee receives after his retirement or when he resigns from the organisation. Both employee and employer contribute equally in the provident fund. The provident fund is mainly given with the objective to secure the future Of employees after retirement.
Indirect Benefits
Any additional benefits (or fringe benefits) received by the employees for their services rendered are referred to as indirect benefits. The following are covered under indirect benefits:
Leave Policy: Employees are entitled to a certain amount of leaves during their period of work in an organisation. Therefore, the leave policy of an organisation makes Sure that the employees avail those allotted leaves. These leaves cover the paid leaves which include maternity leaves, sick leaves, statutory pay, casual leaves and so on.
Overtime Policy: It is the amount of compensation that an employee receives if he works for extra hours beyond his normal working hours. For example, if the working hours for an employee are 42 hours in a week but if he is working for 48 hours in a week then he has to be paid extra amount for the extra 6 hours he has worked. In case, the employee is working for more than 48 hours in a week, he should be paid at double rate.
Insurance: Life insurance and accidental insurance are also provided to the employees by their organisations. In this way, the employees feel valued and get the needed emotional support from their organisations.
Fixed Medical Allowance: This allowance is paid to employees at fixed time period at a fixed rate regardless of the actual amount of expenditure done on the medical treatment.
Leave Travel: This allowance is given to employees for spending holidays with their families. The amount of allowance depends on the designation of the employees.
Conveyance Allowance: It is an allowance which is given to employees to compensate the expenses incurred on the conveyance to perform their duties.
Non-Monetary Components
These benefits aft: non-financial in nature but motivate the employees in enhancing their performance. Employees’ job satisfaction or the satisfaction from their physical or psychological working environment constitutes the non-monetary benefits. There are different forms of non-monetary benefits which are given below:
Achievement: The need for competitive success when measured against One’s Own excellence standard is referred to as the need for achievement. Employees can be rewarded with achievement motivation when they can utilise their abilities and skills in their jobs and are given the opportunity to perform.
Recognition: Appreciating the employees in terms of their significant contribution to the organisation, personal achievements and effective performance is referred to as recognition. Achievement bonuses which are given to the employees right after they have achieved something can be a form of recognition in monetary terms. However, recognition can be non-monetary as well. For example, a verbal appreciation from the boss to an employee at the appropriate time may be a form of non-monetary recognition. Employees are motivated to perform better or maintain consistency at their jobs with the help of such appreciation. When recognition is given in a positive form, it is called praise. Praising must be done for the actual achievements only and should be given sensibly. However, the opposite of praise is criticism which is a negative form of recognition. Employers should criticise the employees in private so that its impact is minimum and the reputation of the employee among other colleagues is not hampered. A word of encouragement should always be accompanied with criticisms which will help the employees in enhancing their performance.
Responsibility: Increasing the responsibility of the employees in their individual area of work can be a form of motivation. It is a form of intrinsic motivation that comes with the job content. Increasing the responsibility of the employees can be translated to empowering them with the means to fulfil their objectives.
Influence: Giving employees the opportunity to exercise authority and influence can be a form of motivation. Various involvement policies of the organisation can motivate the employees that Will give them a platform to express views and be heard. It can also be regarded as a form of empowering the employees.
Personal Growth: It is a unique experience for an individual to grow. During such growth, the capabilities of people expand and they can sense their own development. This enables individuals to make best use of their skill potential or satisfy it at the very least.
Role of Compensation
Roles of compensation are as follows:
Helps in Attracting High Skilled People: Compensation packages which are offered by the organisations are one of the primary factors that an employee seeks in a job. So, high quality professionals will seek higher packages. Components of compensation package can be different from person-to-person. High salary will attract young and bachelor employees, whereas flexible working hours is a lucrative option for a family person. so, organisations should match the profile of the candidate and his needs in order to give him the most lucrative offer.
Improves Efficiency of Organisation: Effectiveness of an organisation can be achieved by high skilled persons. To increase efficiency of an organisation, high quality professionals are needed. High quality workers are attracted by lucrative compensation packages, so compensation is an effective way of acquiring good talent.
Acts as a Link between Employer and Employee: Compensation is a link between employee and employer as it affects both and brings them together. Thus, compensation management is good for the organisation and employees as well.
Helps in Retaining Employees: An organisation is dependent on its manpower. If talented workers continually switch the job, then the organisation cannot perform well as the of training the new employee again and again will be high and loss of talented will always be a problem for the organisation.
Motivates Employees for Better Performance: Compensation is the prime factor for motivating the employees, It not only motivates the employees but also increases their intensity of motivation. A highly motivated employee is an asset for the organisation who increases the efficiency, the overall production and returns of the organisation.
Encourages Healthy Competition and Collaboration: Compensation increases the healthy competition in the organisation, which is not counterproductive. It causes the employee to have an urge to perform better than the others and get the reward for work. Due to this, employees try to be innovative in their work which in turn proves to be beneficial for the organisation.
Maintains Organisational Harmony: If the compensation is fair and the employees are well paid, then atmosphere at the workplace is harmonised.