Compensation is the remuneration received by an employee in return for his/her
contribution to the organization. It is an organized practice that involves
balancing the work-employee relation by providing monetary and non-monetary
benefits to employees. Compensation is an integral part of human resource
management which helps in motivating the employees and improving organizational
effectiveness.
Components of Compensation System
Compensation systems are designed
keeping in minds the strategic goals and business objectives. Compensation
system is designed on the basis of certain factors after analyzing the job work
and responsibilities. Components of a compensation system are as follows:
• Job analysis
• Job analysis
• Salary structures
• Pay structure
Need of Compensation Management
A good compensation package is important to
motivate the employees to increase the organizational productivity. Unless
compensation is provided no one will come and work for the organization. Thus,
compensation helps in running an organization effectively and accomplishing its
goals. Salary is just a part of the compensation system, the employees have
other psychological and self-actualization needs to fulfill. Thus, compensation
serves the purpose. The most competitive compensation will help the
organization to attract and sustain the best talent. The compensation package
should be as per industry standards.
7 Factors affecting Compensation
Factors
affecting wages or compensation or determinants of wages or compensation:
1)
Productivity of workers: to get
the best results from the employees and to increase the productivity
compensation has to be productivity based.
2)
Ability to pay: it depends upon the employer’s
ability to pay wages to the workers. This depends upon the profitability of the
firm. If the firm is marginal and can’t afford to pay higher than the
competitors then the employees will go to other firms while if the company is
successful then they can easily pay their employees as they wish.
3)
Government: government has also fixed the rules
for protecting the interest of the employees. The organizations are liable to
pay as per the government instructions. Wages can not be fixed below the level
prescribed by the government.
4)
Labor union: labor union also helps in paying
better wages to the workers. Higher wages have to be paid by the firm to its
workers under the pressure of the trade unions.
5)
Cost of living: wages depends upon the cost of
living if it is high wages will also hike.
6)
Demand and supply of labor: it is one
of the important factors affecting wages. If the demand of labor is more they
will be paid high wages otherwise vice versa. If the supply of the employees is
more than they will be paid less and vice versa.
7)
Prevailing wage rate: wages also depends upon the
prevailing wage rate as the organizations have to pay accordingly to keep the
employees with them.
Compensation and its types
Concept
of compensation:
Compensation
is a wide range of financial and non financial rewards to employees for their
services rendered to the organization. It is paid in form of wages, salary,
other benefits such as vacations, maternity leave, medical facilities etc.
compensation helps in motivating the employees and reduce labor turnover.
Types
of compensation:
1)
Base compensation
2)
Supplementary compensation
Base
compensation: it involves monetary benefit to the
employees in the form of wages and salaries. It is giving the remuneration to
the workers for doing the work. Wages are generally given to the workers based
on hourly, daily, weekly or monthly basis. But salary is the compensation given
to the office employees. Wages may be based on the number of units produced
i.e. piece wage system or the time wage system i.e. the time spent on the job.
But salary is always based on the time spent on the job. When it is difficult
to judge the production of the company then the compensation is paid in form of
salary.
Supplementary
compensation: now days the organizations use
supplementary compensation over and above the base compensation. It helps in
satisfying the employees as well as retaining them for long time. It can be
given in form of various services like housing, medical, educational facility.
Supplementary compensation is also called fringe benefit as well as hidden
payroll. The basic purpose of fringe benefit is to maintain efficient human
resources in the organization and to motivate the employees.
These
are the two main types of compensation.
Supplementary
compensation is again divided into following types:
1)
Protection against hazards:
supplementary compensation helps in protecting against the hazards of illness,
injury, old age, death, permanent disability.
2)
Employee services: some big organizations provide
housing, low-cost loan, food, medical, and day care centre for children,
educational facilities to their employees for their services.
3)
Payment for time not worked: the
employees are also paid for the time they are not working like wash up time,
lunch period, vacations, holidays, sick leave etc.
4)
Legal payments: payment under this category
involves unemployment; layoff compensation, old age benefits etc.
Thus,
there are various kinds of supplementary compensation which are given to the
employees.
Importance of Compensation Management
A good
compensation is must for every business organization and helps in the following
way:
- It tries to give proper return to the workers for their contributions to the organization.
- It imparts a positive control on the efficiency of employees and encourages them to perform better and achieve the specific standards.
- It forms a basis of happiness and satisfaction for the workforce that minimizes the labour turnover and confers a stable organization.
- It augments the job evaluation process which in turn helps in setting up the more realistic and achievable standards.
- It is designed to comply with the various labour acts and therefore does not result in disputes between the employee union and the management. This builds up a peaceful relationship between the employer and the employees.
- It arouses an environment of morale, efficiency and cooperation among the workers and provides satisfaction to the workers.
- It stimulates the employees to perform better and show their excellence.
- It provides growth and advancement opportunities to the deserving employees.
Components of Compensation
- Wages and Salary: Wages represent hourly rates of pay, and salary refers to the monthly rate of pay, irrespective of the number of hours put in by an employee. These are subject to annual increments.
- Allowances: Several allowances are paid in addition to basic pay. Some of these allowance are given below:
1.
Dearness Allowance: This allowance
is given to protect real income against inflation. Generally, dearness
allowance (DA) is paid as a percentage of basic pay.
2.
House Rent Allowance: Employers who
do not provide living accommodation pay house rent allowance (HRA) to
employees. This allowance is calculated as a percentage of basic pay.
3.
City Compensatory Allowance: This allowance
is paid generally to employees in metros and other big cities where cost of
living is comparatively high. City compensatory allowance (CCA) is generally a
fixed amount per month (30 per cent of basic pay in case of government
employees).
4.
Transport Allowance/Conveyance Allowance: Some employers
pay transport allowance (TA) to their employees. A fixed sum is paid every
month to cover a part of traveling charges
- Incentives: Incentive compensation is performance-linked remuneration paid with a view to inspire employees to work hard and do better. Both individual incentives and group incentives are used. Bonus, profit-sharing, commissions on sales are some examples of incentive compensation
- Fringe Benefits/Perquisites: These include employee benefits such as provident fund, gratuity, medical care, hospitalization, accident relief, health and group insurance, canteen, uniform, recreation and the likes.