Introduction

Meaning of Compensation in Human Resource Management

Compensation (also known as Total Rewards) can be defined as all of the rewards

earned by employees in return for their work performance. This includes: Direct
financial compensation consisting of pay received in the form of wages, salaries,
bonuses and commissions provided at regular and consistent intervals.
Compensation is the total amount of both monetary and non-monetary pay
provided by employerto employee in return for work performance.

The term compensation is used to indicate the employee’s gross earnings in the
form of financial rewards and benefits. It is a system of rewards that can motivate
the employees to perform, a tool that is used to foster values and culture, and an
instrument that enables an organization to achieve its objectives. 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.

The Role of Compensation and Reward in organizations:

The compensation system ensures that both intrinsic and extrinsic needs of
employees at all levels are adequately provided for compensation develops
organizational integrity, policy, procedures and practices capable of improving
organizational productivity. Reward and compensation is concerned with
employees and organization performance development through which better result
can be achieved by understanding and managing reward and compensation with in
an agreed framework, planned goals, standard, and competency requirements.
Reward system is the instrument used to increase employee productivity. It seeks
to attract and retain suitable employees, encourage good management, and
employee relationship and commitment and minimizes tension and conflict as it
deals with all types of financial returns, tangible service, and mechanism and good
relationship.
It should be noted that compensation systems effectively control labor costs,
improve employee productivity, and boost quality of services. Rewards and
recognition play an important part in motivating employees and improving
performance. A carefully designed reward system can greatly enhance an
organization's effectiveness and productivity. Today, complex reward systems are
needed to meet the demands of a more diverse workforce. These systems differ
both within and between organizations.

Increasingly, organizations are finding they must focus on the total compensation
package for employees. Organizations are also developing more complex
recognition programs which focus on non-monetary rewards for employees.
Labour plays vital role in bringing about the process of production/business in
motion. So, compensation and rewarding employees is a vital role of employers.
The role of compensation are:
1. To attract capable employees to the organization.
2. To motivate them toward superior performance.
3. To retain their services over an extended period of time.
4. To establish a positive corporate reputation.
5. To increase or maintain morale/satisfaction.

Concept of Award and Reward in Human Resource Management:

Award:
An award is an honour given to somebody for achieving something. It is a prize
given to somebody for accomplishing something great. It is a prize or other mark
of recognition given in honor of an achievement.It is something (such as a prize)
that is given to someone or something for being excellent or for doing
something that is admired.

Reward:
The reward is the benefit (monetary or otherwise) given to an individual, for
his hard work to achieve something. It is the fair return for services
rendered by an individual. Pay off for efficient and effective performance may
be regarded as reward. The most obvious reward employees get from work is pay,
However, also include promotions, desirable work assignments, and a host of
otherless obvious payoffs – a smile, acceptance by a peer, a covert of overt
implication that oneis doing a good job, or a kind word of recognition.

Rewards are quite related to expectancy theory of motivation: since people behave

in ways that they believe are in their best interests, they constantly look for payoffs
for their efforts. They expect good job performance to lead to organizational
rewards, and they further seek rewards that will satisfy their individual goals or
needs.
Organizations, then, use rewards to motivate people. They rely on rewards to
motivate job candidates to join the organization. They certainly rely on rewards to
get employees to come to work and perform effectively once they are hired.

Differences between award and reward:

1. An award is a prize given to somebody for performing something. But

reward is an acknowledgement given to somebody for efforts.

2. The forms of award are medals, trophies, scholarships, certificates, prize,

cash, etc. Rewards may be financial and non-financial benefits.

3. An award is publicized/ an award is given in front of the mass public. But

rewards are normally given in private.

4. An award is decided by expert panel. But reward is decided by an individual.

5. Nominations are done for every award. Nominations are not done for every
reward.

6. An award is granted for incredible work or tremendous contribution in

specific areas, achievement, etc. A reward is given for efforts done, service
rendered, selfless act, helping someone, meeting targets in time, honesty and
merit, etc.
 7. Awards are publicly presented. Rewards, on the other hand, are only private
or personal affairs. While awards get publicized, rewards are not. When
awards are formal or public affairs, rewards are just the opposite.

8. Rewards are ‘given’ and awards are ‘awarded’. An award is a recognition

that one gets after a decision in that regard has been taken by certain persons
or judges or a committee of judges. But rewards are not taken as such and
most of the time it is an individual who takes the decision.
9. A reward is something that is given for a person’s merit, service or hardship.
But an award is a token given for merit.

10.Award is used in more formal and official situations.Reward is used in less

formal and official situations.Reward can be either monetary or non-
monetary. For example, if a person helps other people, and lead a just and
fair lifestyle he’ll be rewarded with a happy and hassle-free life. On the
other hand, if a person returns someone’s lost pet, he might get a monetary
reward as a means of thankfulness for his effort.

11.A reward is something that directly benefits the recipient in exchange for
something good they have done, often, but not always, financially. For
example: a child is rewarded for tidying their room with a bag of sweets.

An award (noun) is something that recognizes something that someone has

done. People are awarded medals for courage, the Oscar figurine is an award
for excellence in film making etc. It need not have any financial value. 

Types of reward:

A motivated workforce can be a significant factor in organizational success. When

employees are motivated to work at higher levels of productivity, the organization
as a whole runs more efficiently and is more effective at reaching its goals. This is
in contrast to an unmotivated workforce, who can negatively disrupt an
organization and distract employees from their work. For this reason, it is
imperative that managers understand the power of reward systems and how they
are used to influence employee behavior.
Rewards are positive outcomes that are earned as a result of an employee's
performance. These rewards are aligned with organizational goals. When an
employee helps an organization in the achievement of one of its goals, a reward
often follows. The types of reward are:

Intrinsic versus extrinsic rewards: The satisfactions one gets from the job itself
are its intrinsic rewards. These satisfactions are self initiated rewards, such as
having pride in one’s work, having a feeling of accomplishment, or being part of a
team. The techniques of flexi time, job enrichment, shorter work weeks, and job
rotation, can offer intrinsic rewards by providing interesting and challenging jobs
and allowing the employee greater freedom.

On the other hand extrinsic rewards include money, promotions, and fringe

benefits. Their common thread is that extrinsic rewards are external to the job and
come from an outside source, mainly, management.

Thus, if an employee experiences feelings of achievement or personal growth from

a job, we would label such rewards as intrinsic. If the employee receives a salary
increase or a write up in the company magazine, those rewards are
extrinsic.Intrinsic rewards makes the employee feel better in the organization,
while Extrinsic rewards focus on the performance and activities of the employee in
order to attain a certain outcome. The principal difficulty is to find a balance
between employees' performance (extrinsic) and happiness (intrinsic).

 Financial versus Non financial rewards: Rewards may or may not enhance the
employee’s financial wellbeing. If they do they can do this directly through wages,
bonuses, profit sharing, and the like, or indirectly through supportive benefits such
as pension plans, paid vacations, paid sick leaves and purchase discounts.

Non financial rewards cover some of desirable extras that are potentially at the
disposal of the organization. They do not increase the employee’s financial
position, instead of making the employees life better off the job, non financial
rewards emphasize making life on the job more attractive.
Some workers are very status conscious. An attractive office, a carpeted floor, a
large executive desk, or a private bathroom may be just the office furnishing that
stimulates an employee towered top impressive job title, their own business cards,
their own secretary, or a well located parking space with their name clearly painted
underneath the “Reserved” sign.

Performance based versus membership based rewards: The rewards that the

organization allocates can be said to be based on either performance criteria or
membership criteria.

While the managers in most organizations will vigorously argue that

their reward system pays off for performance, we should recognize that this is
almost invariably not the case.

Few organizations actually rewards employees based on performance. However,

without question, the dominant basis for reward allocations in organization is
membership.

Performance based rewards are exemplified by the use of commission, piecework

pay plans, incentive systems, group bonuses, or other forms of merit pay plans.

On the other hand, membership based rewards include cost of living increases,
profit sharing, benefits, and salary increases attributable to labor market conditions,
seniority or time in rank, credentials (such as a college degree or a graduate
diploma), or future potential (the recent M.B.A. from a prestigious university). 

Reward management:

Reward management is concerned with formulation and implementation of

strategies that aim to reward people fairly, equitably and consistently in accordance
with their value to the organization. Reward management consists of analysing and
controlling employee remuneration, compensation and all of the other benefits for
the employees. Reward management aims to create and efficiently operate a
reward structure for an organization. Reward structure usually consists of pay
policy and practices, salary and payroll administration, total reward, minimum
wage, executive pay and team reward.

Benefits to employees:
Benefits are any perks offered to employees in addition to salary. The most
common benefits are medical, disability, and life insurance; retirement benefits;
paid time off; and fringe benefits.

Benefits can be quite valuable. Medical insurance alone can cost several hundred
dollars a month. That's why it's important to consider benefits as part of the total
compensation.

Employee benefits are optional, non-wage compensation provided to employees in

addition to their normal wages or salaries. These types of benefits may include
group insurance (health, dental, vision, life etc.), disability income protection,
retirement benefits, daycare, tuition reimbursement, sick leave, vacation (paid and
non-paid), funding of education, as well as flexible and alternative work
arrangements. Although expensive, there are many intrinsic benefits to providing
employees with a comprehensive benefit plan. For most, it is the ability to find and
keep highly qualified staff that is the key driver. With the sector being highly
competitive and the number of new employees entering the workforce dwindling,
employers are challenged to become even more creative and responsive in the
design, timing and generosity of their benefit plans. The more progressive the
organization, the more flexible the structure is in response to today’s challenges:
i.e. like having four different generations of employees working side by side.
Employers who continue to provide the more traditional and limited program, may
find it more difficult to find and keep different types of employees.
Here are just a few of the advantages of offering benefits to employees:
 For employers:
 By providing increased access and flexibility in employee benefits,
employers can not only recruit but retain qualified employees.
 Providing benefits to employees is seen as managing high-risk coverage at
low costs and easing the company's financial burden.
 Employee benefits have been proven to improve productivity because
employees are more effective with they are assured of security for themselves
and their families.
 Premiums are tax deductible as corporation expense, which means savings
for the organization.

For employees:
 Employees can experience a peace of mind which leads to increased
productivity and satisfaction by being assured that they are their families are
protected in any mishap.
 Employees with personal life and disability insurance can enjoy additional
protection including income replacement in the event of serious illness or
disability.
 Employees can feel a sense of pride in their employer if they are satisfied
with the coverage they receive.

The monetary benefits provided to employees are:

1. Fringe benefits: These are monetary benefits provided to employees.
These include the benefit of:
a. Provident fund: A fund into which the employer and employee
both pay money regularly, so that when the employee retires or
leaves the company, he or she receives a sum of money. It is a
form of social safety net.Employee Provident Fund is a very
important investment for the necessities of our future. The tax
free interest and the maturity award ensure a very good growth
to your money. If the PF money continued for a very long
period of time, it can help in meeting employee's requirements
including his retirement goals.
b. Gratuity: Gratuity is part of salary that is received by an
employee from his/her employer in gratitude for the services
offered by the employee in the company.Gratuity is actually a
benefit for services rendered in the past. It is a reward of good,
efficient and faithful service for a substantial period of time. It
can be understood as a form of tip paid by employer to the
employee for services offered in the company. Since tips are a
function of culture, various countries have various gratuity
limits that are doled out by employers.
c. Medical care: Medical insurance covers the costs of physician
and surgeon fees, hospital rooms, and prescription drugs.
Dental and optical care might be offered as part of an overall
benefits package. It may be offered as separate pieces or not
covered at all. Coverage can sometimes include the employee's
family (dependents).Employers usually pay all or part of the
premium for employee medical insurance. Often employees pay
a percentage of the monthly cost. The cost of insurance
isthrough an employer.
d. Canteen facilities: Health, safety and welfare are basic
requirements at work, and can be divided into four broad
categories: the working environment, welfare facilities,
workplace safety and housekeeping.The provision of adequate
welfare arrangements is important both in terms of complying
with the law, and keeping the workforce happy. People tend to
perform better and be happier at their work if they are working
in a safe and healthy environment. Suitable rest facilities should
be provided for people to eat meals, etc. particularly where food
eaten in the workplace could become contaminated.Where there
is no on-site canteen, or facility close by where hot food can be
obtained, the employer should provide facilities for heating
food (usually a kettle and microwave would meet these
requirements).Canteens can be used as rest facilities, providing
there is no obligation to purchase food.
e. Perquisites: These are special benefits offered to
managers/executives. The purpose is to retain competent
executives. Perquisites include the following:
i. Company car for traveling
ii. Club membership
iii. Paid holidays
iv. Furnished house or accommodation
v. Stock option scheme: It is only granted to specific
employees who have the right to buy a certain amount
of company shares at a predetermined price for a
specific period of time.
f. Recreational facilities: There are a wide range of recreational
facilities that should be available to employees including a large
number of eating facilities, sports centers, social club, etc for a
harmonious job.
g. Promotion: Promotion refers to an upward movement of an
employee from one job to another job, which commands higher
pay scales and allowances, upper status and prestige, more
authority, power and responsibility, challenges, and further
opportunities to rise. Promotion is given to the employee in the
same organisation. It is the internally upward mobility of an
employee. Promotion leads to change in the environment,
privileges, facilities, place, and working hours etc. Promotion
puts an employee or executive on a career path which goes
upward.
h. Pension: Pension arrangements have a number of
advantages, such as when people come to retire they will
experience a reduction in income - a pension makes up for
some of this loss of income in retirement; also, pension
schemes can provide protection in the form of lump sums
and pensions to dependants in the event of a member's
death.
 i. Conveyance: Organizations provide for cab facilities to
their employees. Few organizations also provide vehicles
and petrol allowances to their employees to motivate them.
j. Mobile bill: This is beneficial to employees if organizations pay
these expenses for them.
k. Child education care: This is beneficial to employees if
organizations provide money for child care education.
l. Festival bonus: There are some religious festivals which people
of different religions celebrate, such as Muslims celebrate Eid-
ul-fitr. For this reason, companies should pay festival bonuses
to eligible employeeswhich are generally a positive strategy and
can provide real motivation in employees’ performance and
provide social security to employees. The bonus amount usually
amounts to one month’s salary of the employee.Companies also
extend their bonus-schemes to cover a wider range of factors,
reflecting a broader set of business objectives. In addition to
financial considerations; bonus schemes increasingly take into
amount factors such as attendance, customer service, quality,
safety, team and individual performance or various HR- related
measures.
The Non-monetary benefits provided to employees are:
a. Recognition of merit through certificates: A certificate of merit is a
document that recognizes the achievements of an individual or a
group. The certificate is one of respect and gratitude, but mostly
honor. The certificate is not bestowed upon individuals unless the
recognition has been earned.The word "merit" is described in three
distinct terms in reference to individuals: a person having an
admirable quality, someone who does good deeds for others and one
who exhibits good behavior. These terms are used in educational
settings, businesses and organizations to consider issuing certificates
of merit to well-deserving individuals. Individuals must have made a
recognizable contribution or have made a noticeable difference within
 the school, company, organization or community to receive a
certificate of merit.
b. Offering challenging job responsibilities: These challenges may be
directly related to their jobs, such as meeting performance
expectations, or they may be personal challenges that have an effect
on employment situations. With the rising number of employees who
are always connected to the workplace via technology, such as
laptops, smartphones, pagers and other devices, it's a challenge for
many workers to separate their lives from their work. In addition,
scheduling family obligations such as child care, school meetings or
care for an ailing family member can also present challenges for
employees. Employers who realize this offer benefits packages that
include telecommuting or flexible scheduling, and generous paid time
off to accommodate their employees.
c. Promoting growth prospects: Human Resource Development includes
such opportunities as employee developments, and HRD philosophies
that value human beings and promote their development. Even an
organization that has reached its limit of growth needs to adapt to the
changing environment.
d. Comfortable working conditions: A happy employee is a productive
employee. To achieve this, a happy and a healthy comfortable work
environment is vital for employees. It boosts productivity and morale
while acknowledging the time spent in an office. Managerial
responsibility should be encouraged. . Managers should set an
example to their teams both in how they carry out their work and how
they behave in the workplace. Bullying and harassment are
unacceptable. Dealing with problems with employees concerning the
workplace and regularly ask for feedback on how to improve the
workplace is vital.
e. Competent supervision: Providing competent clinical supervision is
challenging for the practitioner both in determining, construct, and
discuss competency based clinical supervision.
f. Job sharing and flexi time: Job sharing is an employment arrangement
where typically two people are retained on a part time or reduced time
basis to perform a job normally fulfilled by one person working full
time. Since all positions are shared thus leads to a net reduction in per
employee income.