Components of 
Compensation Management – belt, etc. where houses are not available at a
Basic Wage, Dearness Allowance, House Rent
Allowance, Other Allowances, Incentives and
Fringe Benefits
Employee compensation is one of the most
strategic and important functions of human
resource management. It continues to evolve
as part of a system of all the combined
rewards that employers offer to employees.
Compensation is considered as part of a total
rewards system which mainly includes basic
wage, dearness allowance, house rent
allowance, other allowances, incentives and
fringe benefits.
Component # 1. Basic Wage:
Basic wage is fixed on the basis of weightage
given to jobs in an organizational context at
various levels on the basis of skills, efforts,
qualifications, etc. which are required to
perform those jobs. Determination of
weightage given to each job is done on the
basis of studies carried out by industrial
engineers along with other experts. Practices
prevailing in other similar organizations are
also taken into consideration.
Component # 2. Dearness Allowance:
Employees are employed with a particular
wage or salary rate. In due course of time due
to price increase, the real income of
employees goes down. It means with the
same level of wages employees are unable to
buy goods and services, which they were able
to buy before increase in prices. Dearness
allowance is paid to employees by way of
compensating them for the loss of real
income caused to them by increase in the
cost of living due to increase in prices.
Component # 3. House Rent Allowance:
Organizations are set up in various types of
locations such as urban centres; industrial
reasonable rent.
If the employees are required to pay house
rent as per the prevailing market rates, a
substantial portion of their wages will go as
house rent and the employees will not be left
with sufficient money to meet their other
requirements.
Component # 4. Other Allowances:
Apart from the basic, dearness allowance,
many other allowances are paid to employees
to compensate them adequately so that the
total package of remuneration provides them
suitable compensation package.
Component # 5. Incentives:
Incentive compensation is performance-
linked remuneration paid with the aim to
encourage employees to work more and
perform better. Both individual incentives
and group incentives are used. Bonus, profit-
sharing, commissions on sales are some
examples of incentive compensation.
Component # 6. Fringe Benefits/Perquisites:
Different types of benefits are paid
particularly to senior managers. Provident
funds, pensions, gratuity, encashment of
earned leave, company house, company car,
leave travel concession (LTC), medical aid,
interest free loan, holiday homes,
entertainment, stock options, etc. are
examples of such benefits.
Components of Compensation Management –
Wages and Salary, Incentives, Fringe Benefits,
Perquisites and Non-Monetary Benefits
Components of compensation means
components of remuneration to employees.
An average employees in the organized
sector is usually entitled to various benefits.
These benefits include both financial and
non-financial benefits. Specifically, the
components of remuneration to an
employee’s comprise wages or salaries,
incentives, fringe benefits, perquisites and
non-monetary benefits.
1. Wages and Salary:
Wages and salary are generally paid on
monthly basis, though many times, wages are
paid on hourly or daily basis, whereas in the
case of salary, the number of hours worked is
not at all considered. Wages and salary are
subject to annual increments. They differ
from job to job, depending upon the nature
of the job.
They also differ from employee to employee
depending upon the nature of the job,
seniority and merit. However, employees
working in the same job such as teachers,
clerks, etc. get the same salary but wages
may differ from employee to employee when
number of hours worked also differs.
2. Incentives:
Incentives which are also called ‘payments by
results’ are paid to the employees in addition
to wages and salaries. Incentives depend
upon productivity or efficiency of the
workers, sales effected, profit earned or cost
reduction efforts.
Incentives schemes may be classified as – (i)
individual incentive schemes and (ii) group
incentive schemes. Individual incentive
scheme is applicable to specific individual
employee’s performance but group incentive
scheme is applicable to a group of workers
who are required to complete collectively a
given work in a given time. The incentive
amount paid to the group is divided among
the group members on equitable basis.
3. Fringe Benefits:
Fringe benefits which are given to employee
include such benefits as provident fund,
gratuity, medical care, hospital allowance,
accident relief, health insurance, canteen
benefits, recreation, leave-travel allowance,
etc.
4. Perquisites:
Perquisites are the allowances given
executives and other higher level officers.
They include such allowances as company
car, club membership, paid holidays,
furnished residential bungalows, stock option
schemes, foreign travel benefits etc.
5. Non-Monetary Benefits:
Non-monetary benefits include such benefits
which are given in kind and not in terms of
money. They include such benefits as
recognition of merit, issue of merit
certificates, job responsibilities, growth
prospects, competent supervision,
comfortable working conditions, job-sharing,
flexi-time etc.
The Compensation Plan
The Compensation Plan (CP) under RA No. 6758
is an orderly scheme for determining rates of
compensation of government personnel. It was
crafted to attract, motivate and retain good and
qualified people to accomplish the Philippine
Government’s mission and mandates, to
encourage personal and career growth, and to
reward good performance and length of service.
To achieve these goals, the CP has a mix of
compensation components, namely; basic pay
or salaries, fringe benefits, incentives and non-
financial rewards which provide reasonable
levels of compensation packages within existing
government resources, and are administered
equitably and fairly.
3.2 Concepts of Compensation
3.2.1 Total Compensation – This represents all
financial and nonfinancial rewards and
entitlements arising from employment
relationship.
of living and personal development. These
include protection programs such as insurances,
paid leaves, perquisites and training programs.
SIGNIFICANCE OF WAGES
Minimum wage rates are determined by factors
such as poverty threshold, prevailing wage rates
as determined by the Labor Force Survey, and
socio-economic indicators (i.e. inflation,
employment figures, Gross Regional Domestic
Product, among others), which insures better
workers protection.
Wages play a major role in the economy by
giving workers spending power. This refers not
only to the money workers earn that they spend
on necessities, but also the money they save or
use in the short term for consumer goods,
recreation, travel and investing.

3.2.2 Intrinsic Rewards - These are derived

from the work environment, which are valued
internally by an individual, like quality of
worklife, job satisfaction, challenge, personal
and professional growth opportunities, feeling
of belonging, freedom to act, visionary
leadership, and the like.

3.2.3 Extrinsic Rewards/Entitlements – These

comprise all compensation benefits, both
monetary and non-monetary, and received
directly or indirectly by the employee.

3.2.4 Direct Compensation - These are cash

compensation items which are either fixed or
variable and are paid to an employee for the
performance of work. These include basic pay,
cash allowances and fringe benefits.

3.2.5 Indirect Compensation - These are usually

non-cash or in-kind benefit items that
contribute to the employee’s welfare, standard