Introduction to Compensation

Compensation administration is one of the most important areas of human

resource management because sound compensation policies, programmes and their
effective execution are essential to procure, maintain and develop the human resource
of the organization to get effective result from them. It involves the selection,
designing, development and direction of programmes designed to implement
compensation or incentive policy through financial rewards.
Beach has defined wage and salary administration as follows: “wage and
salary administration refers to the establishment and implementation of sound
policies and practices of employee compensation. It includes such areas as job
evaluation, surveys of wages and salaries, analysis of relevant organizational problems,
development and maintenance of wage structure, establishing rules for administering
wages. Wage payments, incentives, profit sharing, wage changes and adjustments,
supplementary payments, control of compensation costs and other related items”.
The traditional concept of wage and salary administration emphasized on
only determination of wage and salary structures in organizational settings. In simple
words, “compensation administration is a systematic procedure for establishing a
sound compensation structure.”
 COMPENSATION: THE CONCEPT
• Meaning of compensation: Compensation may be viewed as a
system of reward that motivates an employee to perform better.
• The term compensation is used to mean employees’ gross
earnings in the form of financial rewards and benefits as part of
employment relationship. In terms of human resource
management, compensation is referred to as money and other
benefits received by an employee for providing services to his
employer. Compensation management, also known as wage and
salary administration, remuneration management, or reward
management, is concerned with designing and implementing total
compensation package or salary structure.
• Compensation may also be viewed as:
• (a) A system of rewards that motivates employees to perform the
assigned task,
• (b) A tool used by organizations to foster the values, culture and
the behavior they require, and
• (c) An instrument that enables organizations to achieve their
business goals.
 DEFINITION
• “Compensation means something, such as money, given or received as
payment or reparation, as for a service or loss. Compensation may be
defined as money received in the performance of work, plus the many
kinds of benefits and services that organizations provide their employees.”
• “Compensation includes direct cash payments, indirect payments in the
form of employee benefits and incentives to motivate employees to strive
for higher levels of productivity”
• – Cascio
• “Compensation is the remuneration received by an employee in return of
hisher contribution to the organization. It involves balancing the work
employee relation by providing financial and non- financial benefits or
incentives to employees.”
•
 TYPES OF COMPENSATION OR BESIC
CONCEPTS OF COMPENSATION:
Compensation can be classified into:
• (1) Financial compensation and
• (2) Non- Financial compensation.
• Financial compensation includes Direct compensation and Indirect
compensation.
• The direct compensation is used to describe financial remuneration
usually cash and includes such elements as basic pay, dearness allowance,
overtime pay, shift allowance, incentive, bonus, profit sharing bonus and
commissions, etc.
• Indirect compensation or wage supplements or fringe benefits refer to
such benefits as provident fund, pension scheme, medical and health
insurance and sick leave and various other benefits and perks.
• Non- financial compensation includes praise and recognition and
satisfaction of employees.
•
Types of Compensation Management
 Pay System Policies
• Internal alignment
– Focus - Comparisons among jobs or skill levels inside a
single organization
• External competitiveness
– Focus - Compensation relationships external to the
organization: comparison with competitors
• Employee contributions
– Focus - Relation emphasis placed on employee
performance
• Management
– Focus - Policies related to managing the pay system
 Pay System Techniques
• Include methods used to operationalize policy decisions
and link decisions to overall compensation objectives
• Examples of techniques
– Internal consistency
• Job analysis
• Job evaluation
– External competitiveness
• Pay surveys
– Employee contributions
• Incentive plans
• Performance-based pay increases
Strategic Pay Decisions