Compensation Management

Compensation Meaning and Components of Compensation

Compensation Meaning – Employee compensation or remuneration is the payment an employee receives in return for his or her contribution to the organisation. Compensation occupies an important place in the life of an employee. His or her standard of living, status in the society, motivation, loyalty, and productivity depends upon the compensation he or she receives. For the employer too, employee compensation is significant because of its contribution to the cost of production.

Besides, many battles (in the form of strikes and lock-outs) are fought between the employer and the employees on issues relating to wages or bonus. For HRM too, employee compensation is a major function. The HR specialist has a difficult task of fixing wages and wage differentials acceptable to employees and their leaders. A typical compensation of an employee comprises of financial as well as non-financial compensation.

Components of Compensation

A compensation package is a list of compensation components that can be awarded to employees belonging to a particular compensation group. A typical compensation of an employee comprises of following components –

  • Monetary rewards or compensation, and
  • Non-monetary rewards or compensation.

Monetary Rewards

Monetary rewards or monetary compensation refers to financial benefits offered and provided to employees in return of the services they provide to the organisation. It includes –

(1) Basic Salary – An employee’s base salary is the minimum annual money received, or the standard salary that an employee receives for doing a specific job. Basic salary is the core of salary, and many other components may be calculated based on this amount. It is determined by personal factors such as age, years of employment, academic qualification, sex, etc. A company has to contribute a percentage of the basic salary to the various long-term funds. The basic salary is benchmarked with the competition to be on level fields to attract and retain good talent. The basic salary is the nodal point of discussion in union- management negotiations. The union always fights for increases in basic salaries as it impacts other benefits automatically.

(2) Bonus – Bonus represents a share of profits made by an industry as a result of the joint contribution of capital and labour in a particular year. Bonus is no more an ex-gratia payment. Bonuses can be based on objective goal attainment or a subjective rating. Bonuses are additions to pay that are linked to individual or team performance and are measured against a set of objective criteria. It is paid to employees in accordance with

rules concerning eligibility, performance targets, time period, and size and form of payments. Historically, bonus payments have been an important component of the pay packet of many manual workers, often linked to productivity in manufacturing companies. Examples of bonuses include – a) Attendance bonus, e.g., to some workers in manufacturing, b) Profit-related bonus, e.g., in retail management, c) Performance bonus payments for high achievers, and d) Work study related bonus payments for manual workers in manufacturing or local authorities.

(3) Allowances – Allowance is generally defined as a fixed quantity of money or other substance given regularly in addition to salary for the purpose of meeting some particular requirements connected with the service rendered by the employee or as compensation for unusual conditions of that service. There are generally three types of allowances for the purpose of income tax – some are taxable while some are fully or partially exempted.

Some of the well-known allowances are dearness allowance, house rent, travel allowance, daily allowance in case of outstation travel, shift allowance, etc. The concept of allowance is based on the cost of living index as dearness allowance and house rent allowance are to compensate for the extra efforts needed to perform ones normal duties. Allowances can be added to the basic depending upon the contingencies of the job. Some organisations pay high risk allowance for the extra ordinary hazards in the job as in petroleum industry or forest fire fighting. The exact quantum of most allowances is usually linked to the basic salary as they represent a percentage of the basic.

(4) Incentives – An incentive is anything which attracts an employee’s attention and stimulates him to work effectively. Incentive programmes are usually built on financial rewards but may also include non-financial rewards. It acts as an inducement to employees for achieving higher productivity and profitability for the organisation. Incentives also encourage the commitment of employees and reinforce existing cultures and values where these foster high levels of performance, innovation and teamwork.

(5) Leave Policy – The leave policy enables the employees in organisations to enjoy the leaves allotted to them. It is the right of employee to get adequate number of leave while working with the organisation. The organisations provide paid leaves such as, casual leaves, medical leaves (sick leave), and maternity leaves, statutory pay, etc.

(6) Overtime Policy – Overtime is the time put in by employees and work done by them beyond normal hours of work. Employees should be provided with the adequate allowances and facilities during their overtime, if they happened to do so, such as transport facilities, overtime pay, etc. According to the Factories Act 1948, every worker is to be paid overtime at a higher rate, generally at double the normal wage rate, if he is required to work for more than 8 hours a day.

(7) Hospitalisation – The employees should be provided allowances to get their regular check-ups, for example, at an interval of one year. Even their dependents should be eligible for the medical claims that provide them emotional and social security.

(8) Insurance – Organisations also provide accidental insurance and life insurance to their employees. This gives them the emotional security and they feel themselves valued in the organisation.

(9) Leave Travel – The employees are provided with leaves and travel allowances to go for holiday with their families. Some organisations arrange tours for their employees. This is usually done to make the employees stress free.

(10) Retirement Benefits – Organisations provide pension plans and other benefits for their employees which benefits them after they retire from the organisation at the prescribed age.

(11) Holiday Homes – Organisations provides holiday homes and guest house for their employees at different locations. These holiday homes are usually located in hill station and other most wanted holiday spots. The organisations make sure that the employees do not face any kind of difficulties during their stay in the guest house.

Non-Monetary Rewards

Non-monetary rewards or non-monetary compensation consists of the satisfaction that a person receives from the job itself or from the psychological and/or physical work environment in which the person works. Non-monetary rewards are of no actual financial value to the employee, but they provide him with the stimulus to increase his work performance. Non-monetary rewards can be given in the following forms –

(1) Achievement – The need for achievement is defined as the need for competitive success measured against a personal standard of excellence. Achievement motivation can take place by providing people with the opportunity to perform and the scope in their jobs to use their skills and abilities.

(2) Recognition – Recognition means showing appreciation to employees for effective performance, significant achievements, and important contributions to the organisation. Financial rewards, especially achievement bonuses awarded immediately after the event, are clear symbols of recognition to which tangible benefits are attached, but recognition need not necessarily be in the form of tangible benefits to employees. It may be any gesture from the employer which should come at the right time. Even a word of appreciation from employers would motivate the employees to maintain the same level of performance or do even better.

This positive form of recognition is known as praise. Praise, however, should be given judiciously – it must be related to real achievements. Praise is not the only form of recognition. When recognition is in negative form it is known as criticism. All criticisms should be in private, in order to minimise the effect of criticism on the employee and his/her standing among peer employees. Criticisms should be concluded with encouragement to improve performance.

(3) Responsibility – People can be motivated by being given more responsibility for their own work. This is essentially what empowerment is about and is in line with the concept of intrinsic motivation based on the content of the job. It is also related to the fundamental concept that individuals are motivated when they are provided with the means to achieve their goals.

(4) Influence – People can be motivated by the drive to exert influence or to exercise power. The organisation, through its policies for involvement can provide motivation by putting people into situations where their views can be expressed, listened to, and acted upon. This is another aspect of empowerment.

(5) Personal Growth – The personal growth of any individual is a unique experience. An individual who is experiencing such growth senses his or her development and can see how his or her capabilities are being expanded. By expanding capabilities, a person is able to maximise or atleast satisfy skill potential.

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