meaning, role & important concepts
If you pick the right people and give them the opportunity to spread their wings - and put compensation and rewards as a carrier behind it - you almost don’t have to manage them.”
— Jack Welch
What is Compensation?
Compensation is a systematic approach to providing monetary value to employees in exchange for work performed. Compensation may achieve several purposes assisting in recruitment, job performance, and job satisfaction.
Most of us would have heard the term “compensation” in the context of getting paid for the work that we do. The work can be as part of full time engagement or part time in nature. What is common to them is that the “reward” that we get for expending our energy not to mention the time is that we are compensated for it.
From the perspective of the employers, the money that they pay to the employees in return for the work that they do is something that they need to plan for in an elaborate and systematic manner. Unless the employer and the employee are in broad agreement (We use the term broad agreement as in many cases, significant differences in perception about the employee’s worth exist between the two sides), the net result is dissatisfaction from the employee’s perspective and friction in the relationship.
It can be said that compensation is the “glue” that binds the employee and the employer together and in the organized sector, this is further codified in the form of a contract or a mutually binding legal document that spells out exactly how much should be paid to the employee and the components of the compensation package. Since, this article is intended to be an introduction to compensation management, the art and science of arriving at the right compensation makes all the difference between a satisfied employee and a disgruntled employee.
How is Compensation used?
Compensation is a tool used by management for a variety of purposes to further the existence of the company.
Compensation may be adjusted according the business needs, goals, and available resources.
Compensation may be used to:
· Recruit and retain qualified employees.
· Increase or maintain morale/satisfaction.
· Reward and encourage peak performance.
· Achieve internal and external equity.
· Reduce turnover and encourage company loyalty.
· Modify (through negotiations) practices of unions.
Recruitment and retention of qualified employees is a common goal shared by many employers. To some extent, the availability and cost of qualified applicants for open positions is determined by market factors beyond the control of the employer. While an employer may set compensation levels for new hires and advertise those salary ranges, it does so in the context of other employers seeking to hire from the same applicant pool. Morale and job satisfaction are affected by compensation. Often there is a balance (equity) that must be reached between the monetary value the employer is willing to pay and the sentiments of worth felt be the employee. In an attempt to save money, employers may opt to freeze salaries or salary levels at the expense of satisfaction and morale. Conversely, an employer wishing to reduce employee turnover may seek to increase salaries and salary levels. Compensation may also be used as a reward for exceptional job performance. Examples of such plans include: bonuses, commissions, stock, profit sharing, gain sharing. Employee compensation refers to all forms of pay or rewards going to employees and arising from their employment, and it has two main components. There are direct financial payments in the form of wages, salaries, incentives, commissions and bonuses and there are indirect payments in the form of financial benefits like employee paid insurance and vacations. So in nutshell we can say that employee compensation refers to all the forms of pay or rewards going to employees and arising from their employment Compensation includes direct cash payments, indirect payments in the form of employee benefits & incentives to motivate employees to strive for higher levels of productivity is a critical component of employment relationship. Compensation is affected by many factors like labor market factors, collective bargaining, government legislation & top management philosophy regarding pay benefits.
The Significance of Compensation
· From individual standpoint -remuneration is a major source of an individual’s purchasing power. It determines his or her status, prestige and worth in society.
· From enterprise standpoint- compensation is a crucial element in the cost of production, which is expected to permit adequate profits leading to increase in new capital, expansion production, and capacity.
· From national point of view –dissatisfied work force hampers equitable distribution of aggregate real income among various group involved. It causes inflation.
A Sound Compensation Structure Tries to Achieve These Objectives:
· To attract manpower in a competitive market.
· To control wages and salaries and labor costs by determining rate change and frequency of increment.
· To maintain satisfaction of employees by exhibiting that remuneration is fair adequate and equitable.
· To induce and reward improved performance, money is an effective motivator.
For the employee:
1. Employees are paid according to requirements of their jobs, i.e., highly skilled jobs are paid more compensation than low skilled jobs. This eliminates inequalities.
2. The chances of favoritism (which creep in when wage rates are assigned) are greatly minimized.
3. Job sequences and lines of promotion are established wherever they are applicable.
4. Employees’ morale and motivation are increased because of the sound compensation structure.
To Employers:
1. They can systematically plan for and control the turnover in the organization.
2. A sound compensation structure reduces the likelihood of friction and grievances over remuneration
3. It enhances an employee’s morale and motivation because adequate and fairly administered incentives are basic to his wants and needs.
4. It attracts qualified employees by ensuring and adequate payment for all the jobs.
Principles of Compensation
· Differences in pay should be based on differences in job requirements.
· Wage and salary level should be in line with those prevailing in the job market.
· Follow the principle of equal pay for equal work.
· Recognize individual differences in ability & contributions.
· The employees and trade unions should be involved in while establishing wage rates.
· The wages should be sufficient to ensure for the worker and his family reasonable standard of living.
· There should be a clearly established procedure for readdress of grievances concerning wages
· The wage and salary structure should be flexible .
· Wages due to employees should be paid correctly and promptly.
· A wage committee should review and revise wages from time to time.
— Jack Welch
What is Compensation?
Compensation is a systematic approach to providing monetary value to employees in exchange for work performed. Compensation may achieve several purposes assisting in recruitment, job performance, and job satisfaction.
Most of us would have heard the term “compensation” in the context of getting paid for the work that we do. The work can be as part of full time engagement or part time in nature. What is common to them is that the “reward” that we get for expending our energy not to mention the time is that we are compensated for it.
From the perspective of the employers, the money that they pay to the employees in return for the work that they do is something that they need to plan for in an elaborate and systematic manner. Unless the employer and the employee are in broad agreement (We use the term broad agreement as in many cases, significant differences in perception about the employee’s worth exist between the two sides), the net result is dissatisfaction from the employee’s perspective and friction in the relationship.
It can be said that compensation is the “glue” that binds the employee and the employer together and in the organized sector, this is further codified in the form of a contract or a mutually binding legal document that spells out exactly how much should be paid to the employee and the components of the compensation package. Since, this article is intended to be an introduction to compensation management, the art and science of arriving at the right compensation makes all the difference between a satisfied employee and a disgruntled employee.
How is Compensation used?
Compensation is a tool used by management for a variety of purposes to further the existence of the company.
Compensation may be adjusted according the business needs, goals, and available resources.
Compensation may be used to:
· Recruit and retain qualified employees.
· Increase or maintain morale/satisfaction.
· Reward and encourage peak performance.
· Achieve internal and external equity.
· Reduce turnover and encourage company loyalty.
· Modify (through negotiations) practices of unions.
Recruitment and retention of qualified employees is a common goal shared by many employers. To some extent, the availability and cost of qualified applicants for open positions is determined by market factors beyond the control of the employer. While an employer may set compensation levels for new hires and advertise those salary ranges, it does so in the context of other employers seeking to hire from the same applicant pool. Morale and job satisfaction are affected by compensation. Often there is a balance (equity) that must be reached between the monetary value the employer is willing to pay and the sentiments of worth felt be the employee. In an attempt to save money, employers may opt to freeze salaries or salary levels at the expense of satisfaction and morale. Conversely, an employer wishing to reduce employee turnover may seek to increase salaries and salary levels. Compensation may also be used as a reward for exceptional job performance. Examples of such plans include: bonuses, commissions, stock, profit sharing, gain sharing. Employee compensation refers to all forms of pay or rewards going to employees and arising from their employment, and it has two main components. There are direct financial payments in the form of wages, salaries, incentives, commissions and bonuses and there are indirect payments in the form of financial benefits like employee paid insurance and vacations. So in nutshell we can say that employee compensation refers to all the forms of pay or rewards going to employees and arising from their employment Compensation includes direct cash payments, indirect payments in the form of employee benefits & incentives to motivate employees to strive for higher levels of productivity is a critical component of employment relationship. Compensation is affected by many factors like labor market factors, collective bargaining, government legislation & top management philosophy regarding pay benefits.
The Significance of Compensation
· From individual standpoint -remuneration is a major source of an individual’s purchasing power. It determines his or her status, prestige and worth in society.
· From enterprise standpoint- compensation is a crucial element in the cost of production, which is expected to permit adequate profits leading to increase in new capital, expansion production, and capacity.
· From national point of view –dissatisfied work force hampers equitable distribution of aggregate real income among various group involved. It causes inflation.
A Sound Compensation Structure Tries to Achieve These Objectives:
· To attract manpower in a competitive market.
· To control wages and salaries and labor costs by determining rate change and frequency of increment.
· To maintain satisfaction of employees by exhibiting that remuneration is fair adequate and equitable.
· To induce and reward improved performance, money is an effective motivator.
For the employee:
1. Employees are paid according to requirements of their jobs, i.e., highly skilled jobs are paid more compensation than low skilled jobs. This eliminates inequalities.
2. The chances of favoritism (which creep in when wage rates are assigned) are greatly minimized.
3. Job sequences and lines of promotion are established wherever they are applicable.
4. Employees’ morale and motivation are increased because of the sound compensation structure.
To Employers:
1. They can systematically plan for and control the turnover in the organization.
2. A sound compensation structure reduces the likelihood of friction and grievances over remuneration
3. It enhances an employee’s morale and motivation because adequate and fairly administered incentives are basic to his wants and needs.
4. It attracts qualified employees by ensuring and adequate payment for all the jobs.
Principles of Compensation
· Differences in pay should be based on differences in job requirements.
· Wage and salary level should be in line with those prevailing in the job market.
· Follow the principle of equal pay for equal work.
· Recognize individual differences in ability & contributions.
· The employees and trade unions should be involved in while establishing wage rates.
· The wages should be sufficient to ensure for the worker and his family reasonable standard of living.
· There should be a clearly established procedure for readdress of grievances concerning wages
· The wage and salary structure should be flexible .
· Wages due to employees should be paid correctly and promptly.
· A wage committee should review and revise wages from time to time.