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
• 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.
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