Compensation refers to all forms of financial returns and tangible benefits that employees receive as part of an employment relationship. Beyond this pure economic exchange model, compensation may also be viewed as (a) a system of rewards that motivates employees to perform; (b) a critical communication device through which organisations convey and reinforce the values, culture, and the behaviours they require; and (c) an important mechanism that enables organisations to achieve their business objectives.

Compensation may be defined as money received in lieu of the performance of work, plus the many kinds of benefits and services that organisations provide to their employees. ‘Money’ is included under direct compensation, while benefits come under indirect compensation, and may consist of life, accident, and health insurance, the employer’s contribution to retirement, pay for vacation and illness and employer’s required payment for employee welfare as social security.

Compensation may be given in the form of monetary or non-monetary terms. Wage or Salary, Dearness Allowance (DA), bonus and all other allowances which are paid in the form of money or cash are termed as monetary compensation. Compensation paid in kind like rent free accommodation, free vehicle facility, free education to the children of employees, subsidized food etc., and from non-monetary compensation. A good compensation package should include monetary and non- monetary components in order to attract and retain good human resources.

Learn about:- 1. Introduction to Compensation 2. What is Compensation? 3. History 4. Concept 5. Objectives 6. Purpose 7. Factors Affecting 8. Components 9. Designing Process 10. Types 11. Role of Motivation 12. Traditional Approach 13. Programme 14. Problems Associated and 15. Recent Trends.

Compensation: Introduction, Meaning, Concept, Objectives, Factors Affecting, Components, Types, Programmes and More…



  1. Introduction to Compensation
  2. What is Compensation?
  3. History of Compensation
  4. Concept of Compensation
  5. Objectives of Compensation
  6. Purpose of Compensation
  7. Factors Affecting Compensation
  8. Components of Compensation
  9. Compensation Designing Process
  10. Types of Compensation
  11. Role of Motivation in Compensation
  12. Traditional Approach to Compensation
  13. Compensation Programme
  14. Problems Associated with Compensation
  15. Recent Trends in Compensation

Introduction to Compensation

Compensation refers to all forms of financial returns and tangible benefits that employees receive as part of an employment relationship. Beyond this pure economic exchange model, compensation may also be viewed as (a) a system of rewards that motivates employees to perform; (b) a critical communication device through which organisations convey and reinforce the values, culture, and the behaviours they require; and (c) an important mechanism that enables organisations to achieve their business objectives.

As the business environment becomes increasingly complex and global, the challenge to create and maintain effective compensation programmes, given cost constraints, also requires greater professional expertise, organisational understanding, creativity, and vision than ever before.

Compensation practices have important implications for organisations, for individuals, and for society as a whole. Harvard Professor Rosabeth Moss Kanter considers compensation a key to competitive advantage (or disadvantages). She asserts, “Innovations in compensation are necessary to succeed at the doing-more-with-less balancing act – simultaneously reducing obligations and stretching capacities, lowering fixed costs and encouraging new ideas. In the post entrepreneurial corporation, pay must more nearly match contribution.


From the organisation’s perspective, compensation represents a major investment. In labour-intensive organisations, labour costs typically constitute the single largest proportion of the organisation’s operating budget. In some organisations, employee remuneration costs may be 70 to 80 percent of operating budget.

Organisations that have higher labour costs than their main competitors; might have to charge higher prices to make up the difference, and price is a major source of competitive advantage (or disadvantage). But these organisations may also be competing against each other in the labour market for scarce skills. Microsoft has been able to recruit the very best computer engineers to some extent, because of its superior compensation packages.

Thus, while labour costs may be higher, at least for certain jobs, Microsoft takes the position that winning in the labour market is worth it. If higher labour costs translate into higher productivity, new products, and higher quality, the cost may be worth it. Effective compensation systems should constantly monitor the trade-off between labour costs and personnel requirements.

Many downsizing/reengineering efforts are directed at shrinking payrolls and reducing labour costs to stay competitive. Some experts maintain that this recent vigilance has paid off in the form of higher productivity, higher profits, and simultaneously the wages and benefits has declined as a percentage of output to their lowest level. The vigilance comes in many forms such as – outsourcing, the use of temporary and part time employees, and the expansion of labour markets into lower wage countries have all contributed to the control of employee wages.


With the increased globalisation of the world economy, fostered by improvements in technology, communications, logistics, and distribution even the service sector of the economy, fostered by improvements in technology, communications, logistics, and distribution even the service sector of the economy is taking advantage of labour wages in other countries to get work done. The high-tech industry, for example, now routinely contracts with operations in India for computer programming previously done by V. S. workers. This results in a substantial reduction in labour costs.

Other countries of the world now look outside their borders to produce products and services. Mercedes-Benz and BMW cars are now built in the United States instead of in Germany, partly because of reduced labour costs (German workers have the highest pay and the shortest working hours in the world). But why didn’t BMW build a plant in Mexico (instead of South Carolina) to reduce labour costs even further.

The cost of labour can be assessed only in the context of other variables such as access to markets, distribution, and workforce quality. Labour costs must always be assessed in context with a focus on corporate strategy, corporate performance, and the critical relationship between what a company pays and its ability to attract and retain valuable employees.

The influence of trade unions in Indian economy has been considerably decreasing and the Indian companies now have more flexibility to reduce their labour costs. For example, the Supreme Court in a landmark judgement has announced strike in industries as illegal and not as a right.


On the other hand, lots of PSU’s are facing the action of dis­investment and privatisation. Compensation practices are a key factor that influences the type and level of talent an organisation can attract and retain. They also represent an important opportunity to align, focus, and direct worker’s attention to critical projects and priorities. Thus, compensation practices can directly influence an organisation’s survival, profitability, and long-term growth potential and competitive advantage.

From the individual perspective, compensation plays a major role in influencing one’s lifestyle, status and self-esteem. Compensation affects where people live, how much disposable income they have, how they spend vacations and where their children will be educated. Compensation influences people’s choices of which jobs to accept, how long they will stay, and the degree of effort they will apply.

From a societal viewpoint, the general compensation practices of organisations have long been viewed as a platform for social change. Legislation like Industrial Disputes Act 1947, Trade union Act 1926, Payment of Wage Act, Minimum Wage Act, Equal Remuneration Act, Workmen Compensation Act, Maturity Act, Employees State Insurance Act, Provident Fund Act, Employees’ Pension Act, Gratuity Act directly regulate compensation practices within the employer-employees relationship in a direction that society believes to be desirable.

Some argue that excessive compensation practices are the principal reason the Indian Industries (PSUs) are incurring more in non-momentary incentives than monetary benefits. Some assert that industry setbacks can be traced to product price increases necessitated by the unreasonable wage and benefits demands of its workers.

What is Compensation? (With Meaning)

Compensation may be regarded as the money received in lieu of the performance of work, plus the many kinds of benefits and services that organisations provide to their employees. ‘Money’ is included under direct compensation, while benefits come under indirect compensation, and may consist of life, accident, and health insurance, the employer’s contribution to retirement, pay for vacation and illness and employer’s required payment for employee welfare as social security.


The meaning of word ‘compensation’ is to compensate i.e. to pay for. Compensation can be a payment made in exchange of efforts, services rendered or task done. It can be regarded as the fruit for efforts put in. In some other sense, it is also described as a return, refund, or payment made for damage done or destruction caused or injury caused.

Compensation means the return an employee expects from the business process since employee participates and puts his efforts to achieve the organisational goals. Thus, not only the wages/salary paid to the employee but direct as well as indirect benefits provided to the employee as his fair share in the prosperity of business is also regarded as compensation.

Compensation Management is one of the important jobs of human resource management. Because salary administration or employee remuneration plays very important role in determining the condition of employment.


Remuneration is the reward or compensation given in the form of wage or salary by the organisation to its employees in return for a work done or services rendered or a contribution made towards the achievement of organisational goals. No organisation can attract and retain the qualified and able persons unless it pays them fair compensation.

It is the compensation that directly and indirectly influences the growth and development of an organisation. The relationship between employer and employee depends on the type of compensation or system of remuneration offered to employees. A fair remuneration system provides a sense of recognition to employees and determines their social status. Standard of living of employees depends on the type of remuneration they get from their employer. Therefore, the system of remuneration should be fair, equitable and just.

Compensation may be given in the form of monetary or non-monetary terms. Wage or Salary, Dearness Allowance (DA), bonus and all other allowances which are paid in the form of money or cash are termed as monetary compensation. Compensation paid in kind like rent free accommodation, free vehicle facility, free education to the children of employees, subsidized food etc., and from non-monetary compensation. A good compensation package should include monetary and non- monetary components in order to attract and retain good human resources.

History of Compensation over the Years from 19th Century to Present

The low of workmen’s compensation was introduced in India in 1923, twenty-six years after it has been introduced in England. To England it had come from Germany where it had been introduced in 1884 by the Iron Chancellor, Bismark, who was the first among the European statesmen to understand fully the implications of the Marxist challenge and to take some steps towards forestalling the threatened revolution of workers by providing for their security in various forms.


One of the benefits secured to the workers by anew law was a right to receive compensation from their employer for injuries suffered in the course of employment, irrespectively of any fault or breach of duty on the part of the employers.

It has been rightly remarked by Hon’ble Mr. Justice Phanibhushan Chakravarty, Ex. Chief Justice Calcutta High Court that in England, however, the movement towards a law of workmen’s compensation sums to have been caused by broad consideration of justice and humanity rather than a motive of neutralising the revolutionary potentialities of the working class by seeking actively to their contentment.

In its scope too, the British Act of 1897 fell short of the German precedent in one respect while the German Act required employers to indemnify injured workmen, or in the case of fatal accidents, their families and it also set up an increase system under which the employers were obliged to insure the risk, the British Act only made indemnification at prescribed rates obligatory, but left insurance of the risk to remain optional.

What the Indian Act was enacted, the law in force in England, on which it is modelled was the Act of 1906, at last amended by the Act of 1923 in order to understand what exactly that law amounted to, towards the middle of the 19th Century, it began to be felt that there was too much of government which was destroying individual initiative and affecting the prosperity of the nation.

The feeling led to the evolution of the doctrine of the Laissez faire which means let things alone. After it had been formulated the doctrine of laissez faire found a rapid and wide acceptance particularly in England, and it ushered in a period during which the agencies of production operated under condition, of complete economic freedom. The experiment with a policy of complete economic freedom was carried on for a considerable period but in the end, laissez faire, in its turn, began to reveal its own defects.

Taking again the sphere of employment alone, it was found that not only were the employers imposing, in the name of freedom of contract, cruelty, harsh terms on the employee who had no equal for gaining power and forcing them to work for unconsciously long hours and under appalling conditions but the employees had even no adequate means of relief against the employers for injuries sustained in their service.


Although the workmen’s Compensation Act was enacted to make it easier and cheaper for the workmen to obtain at least some compensation, it did not rid his chance of getting compensation altogether of uncertainty and difficulty. He had still to prove that the accident, causing the injury had not only arisen in the course of his employment but had also arisen out of it and his claim could be defeated if it could be shown, except in cases of death or serious and permanent disablement, that he himself had been guilty of wilful misconduct which had led to the accident.

It will thus be seen that, in England, workmen’s compensation has ceased to be a matter of decree by the courts against the employer on proof of the necessary facts and has become an insured benefit obtainable from the state of special fund maintained for the purpose. This is the short story of the history and development of workmen’s compensation payable to the workers in England beautifully and critically traced by Hon’ble Mr. Justice Chakravarty.

Similar dissatisfaction in the United States with the operation of employer’s liability laws resulted investigations by various government commissions. In 1910, New York became the first state to enact a workmen’s compensation law sufficiently comprehensive to meet the problem effectively.

By the end of 19th century the coincidence of increasing industrial injuries and decreasing remedies had produced in the United States a situation ripe for radical change, and when, in 1893, a full account of the German system written by John Graham Brooks was published as the fourth special Report of the Commissioner of Labour, legislators all over the country seized up on it as a clue to the direction which efforts of reform might take. Another stimulus was provided by the enactment of the first British Compensation Act, in 1897, which later became the model of state Acts in many respects.

It would be desirable to mention the brief historical note as to how the workmen’s compensation law has been developed and enacted in our country. The question of granting compensation to workmen for fatal or serious accidents was first raised in India in 1884 and the need for proper legislation was emphasised by factory and mining inspectors.

But the question of framing legislation was taken up by the government of India only in the end of 1920 and in 1921 public opinion on the subject was invited. In order to examine the question in some detail it was referred to a small committee composed of Legislative Assembly members, Employer’s and worker’s representatives and medical and insurance experts, which met in 1922.


The committee’s detailed recommendations for framing legislation were accepted and a Workmen’s Compensation Act was passed in 1923. The measure followed the British Act in its main principles and in some of its details, but it contained a large number of provision designed to meet the special conditions in India. This act was the first step towards social security in India. This was followed by legislation enacted in several states for the protection of workers.

Under these enactments the responsibility for payment of compensation rested with employer, a system which led to certain hardships. The Royal commission on labour reviewed the subject and made a number of recommendations as regards workmen’s compensation. The commission’s recommendations involved the substantial extension and enlargement of the rights the Act conferred and its revision in number of matters of detail.

The general scheme of the Act is that the compensation should ordinarily be given to workmen who sustain personal injury by accidents arising out of and in the cause of their employment. Compensation is also given in certain cases for occupational diseases as listed in the IIIrd schedule. It may not be irrelevant to point it out that the International Labour Organisation has also influenced the codification of workmen’s compensation law as it has been remarked that the restrictions on import during the World War-I gave rise to a considerable expansion of industries in the countries.

The expansion was augmented by the victories, emergence of the allies as a result of which a good deal of capital was invested in the country. The treaty of Versailles emphasised the fact that the failure of any nation to adopt human conditions is an obstacle in the way of other nations, which desires to improve the conditions in their own countries.

It was felt that universal peace based on social justice was essential. In order to achieve this end, the International Labour Organisation was formed. The first session of the ILO met at Washington in 1919 and India as an original member of the League of Nations also participated. It was due to the influence of the International Labour Organisation that the Workmen’s Compensation Act was passed.

Prior to the passing of the Act, compensation was payable in case of fatal accident. The Indian Fatal Accidents Act, 1855 is based on the English Act and enables certain heirs of the deceased person to sue for damages when death is caused by an actionable wrong. This Act overrides the dictum that a personal action dies with the person injured “personalis motiureim persona”.


The defence under the doctrine of common employment, by which the employer is not normally liable to pay damage to a workman, or the doctrine of assumed risk, by which an employee is presumed to have accepted a risk if it is such that he ought to have known it to be the part of the risks of his occupation were, however, open to the employer. The Royal Commission on labour regarded both these doctrines as inequitable and recommended that measure should be enacted abrogating these defences.

The result was the enactment of the Employer’s Liability Act, 1938. The Act was amended by the Employers Liability (Amendment) Act, 1951, as it was found that the defence of common employment was still available to the employer due to the limited scope of section 3(d). The defect was removed by the Amending Act of 1951.

Freedom from want and security against economic fear is one of the fundamental needs of our country. The constitution affirms to all people of India, inter alia, social and economic justice, but this has yet to be secured by peaceful, social and legislative steps. It has been aptly said that, “it is the function of an ideal welfare state to give to every citizen the opportunity of earning his living and freedom from fear —fear specially of economic ruin which can involve physical and even moral ruin.”

In order to provide social security to the working people various legislative steps have been taken in our country like other countries of the world. It may not be incorrect to say that the Workmen’s Compensation Act, 1923 has been the first step towards social security in our country. The basic principle of this legislation is social justice. Under these circumstances, the Act was passed to provide social justice and security to the workers who are working under dangerous and risky conditions of work in the factories.

Compensation is typically divided into direct and indirect component. The term direct compensation is used to describe financial remuneration, usually cash, and includes such elements as basic pay, overtime pay, shift differentials, bonuses, sales commissions, and so on. Indirect compensation refers to the general category of employee benefits, including mandated general category of employee benefits, including mandated protection programmes, health, life, and other insurance, holiday, vacation, and medical leaves; executive perquisites, and so forth.

Direct compensation is further divided into two components – (1) The wage and salary programme/basic salary, overtime pay, shift differential, etc., and (2) Pay that is contingent on performance (merit promotion hikes) bonuses, gain sharing pay, commissions, etc.

3 Basic Concepts of Compensation – Concept of Equity, Concept of Compensation and Concepts of Environmental Elements Influencing Compensation

The basic concept of compensation is a means to earn livelihood and money to support a family. It is a return on the investment of the efforts one puts in to do any job, using his/her competence or knowledge.


However, to conceptualize compensation correctly, we need to study:

1. Concept of equity

2. Concept of compensation

3. Concepts of environmental elements influencing compensation.

1. Concept of Equity:

Rewards for efforts are compensation but equity is one crucial factor which influences the valence of rewards. Inequality or disparity in wage/salary may not only upset the industrial harmony but it may also affect the national economy by differentiated earnings and savings.


Equity in general is equal payment against equal work. But equity theories need to be studied to understand it properly.

2. Concept of Compensation:

The term compensation is of recent origin, which includes everything, an employee gets in return for efforts he/she makes to accomplished a given task, whether it daily, weekly or monthly. It includes wage/salary, allowances, perks and/or benefits and incentives. Basically it is an employee’s means of earning livelihood, for supporting his/her family and maintaining a standard of living. It is thus a part of the employee-employer relationship.

Compensation can also be viewed as:

i. A system of rewarding motivation and an employee’s worth to the organization

ii. It is a tool for an organization to foster the values, culture and the behaviour of the employees

iii. It is a management instrument that enables an organization to achieve business objectives, and human resource directs other resources toward effective utilization.

Though the basic concept of compensation is earning livelihood by doing some work, the employer, employees, economy and society have different views about compensation.

Compensation or the wage and salary policy is the main guideline in managing the compensation system. However, political, legal, social and economical influences do have their own impact on the compensation designs and system management. These influences are based on their concepts about compensations.

3. Concept Referring to Various Environmental Factors:

Compensation has social, economic, political, legal, psychological ramifications in social and organizational life. It refers to the monetary rewards to an individual for the efforts he/she puts into any organization or institution. It is defined in various ways but in a wider sense it relates to the remuneration paid to any individual in cash and kind at equal intervals together with annual compensation for the period worked.

i. Economic Concept:

In the economic context, compensation is related either to the source of generating employment or to the earning to the state or the nation.

It is therefore an economic element related to productivity; efficiency, and earning for his/her livelihood. An individual, therefore, considers the compensation as his/her worth.

It is therefore a factor of production, generation and consumption of income and employment.

ii. Employer’s Concept:

Employers have their own concept about compensation. Compensation to employers is either a cost to a company or an investment in human resource to meet the corporate objectives.

iii. Employee’s Concept:

Employees weigh compensation as a monetary award either to justify the worth of their competence or as a means of earning to support the self and the family. According to their perception, earning should be sufficient to maintain the standard of life and provide extra amounts to meet their future liabilities.

iv. Societal Concept:

In a sociological sense, it characterizes occupational satisfaction, and a means for welfare and career growth. Since the earning affects savings and purchasing, which is an instrument of economic development, it helps to improve the social and occupational position of a person in a society.

Society desires that an employee have a substantial wage/salary with fairness in compensation, which will meet their standard of living and provide sufficient employment opportunities. It therefore categorizes the occupational status and help to improve social development of the region.

v. Legislative Concept:

Legislation is concerned about the security and well-being of the persons of the state or the nation by enforcing laws to control the levels and amounts of wages to the workers. As such, the concept for legislation defines various wages to be paid to the workers.

Compensation concept in general can be defined as – Direct cash and indirect benefit & tangible services to the employees to justify their worth and the hiring cost to company in line with the job description.

Compensation is also a source of purchasing power and thus has a bearing on the level of socio-economic development. Compensation is, therefore, not only a factor of production, it is also a part of national income, by way of purchasing and savings considerations, a means of livelihood and enjoying social welfare, satisfaction of an individual’s worth and ultimately an element of socio-economic development of the state or the nation.

7 Main Objectives of Compensation

The main objectives of compensation are as under:

Objective # 1. Equity:

The primary objective of compensation is equity. It may take lot of forms. It includes the following — income distribution through narrowing of inequalities, increasing the wages of the lowest paid employees, protecting real wages (purchasing power) and the concept of equal pay for work of equal value. Compensation management strives for internal and external equity.

Objective # 2. Efficient Allocation of Labour:

It implies that employees will move to wherever they receive a net gain.

Such movement may be as under:

(i) When an employer’s wages are lower from market rates, employee turnover increases. When it is above market rates, then employer attracts job applicants.

(ii) From one geographical location to another or from one job to another (within or outside an enterprise). The provision or availability of financial incentives causes such movement. For example, workers may move from a labour surplus or low-wage area to a high-wage area. They may acquire new skills to get benefit from the higher wages paid for skills.

(iii) When employees move from declining to growth industries, an efficient allocation of labour due to structural changes take place.

Objective # 3. Control Costs:

A rational compensation system helps in obtaining and retaining workers at a very reasonable cost. With effective compensation management, workers might be overpaid or underpaid.

Objective # 4. Efficiency:

It has often a close relation with equity. The reason is the two concepts are not anti-theatrical. The objectives of efficiency are reflected in attempts to link a part of wages productivity or profit, group or individual performance acquisition and application of skills and so on.

Objective # 5. Macro-Economic Stability:

Such kind of stability can be obtained from high employment levels and low inflation. To illustrate, an inordinately high minimum wage would have an adverse impact on levels of employment.

Objective # 6. Determination of Wage Rates:

Wage rates are either the products of market forces (supply and demand). To illustrate, in the United States, market forces determine wage rates. But in Japan, seniority is still the dominant factor for wage determination. In several countries a statutory minimum wage rate enacted.

It ascertains the price of fixed kinds of labour. In most developed countries the market forces determine the wage rate workers often negotiate their wage rate through accumulative bargaining wherever unions exist.

Objective # 7. Comply with Legal Regulations:

A sound wage and salary system is considered the legal challenges imposed by the Government and ensures the employer’s compliance.

3 Main Purposes of Compensation

The main purpose of compensation is as follows:

1. To Attract Skillful, Talented and Knowledgeable Employees:

Every organization wants to select the most talented employees to keep a competitive edge over other competitors. It therefore designs a package which is most attractive for skillful employees.

2. To Retain the Talent:

Workforce today is highly mobile because of the entry of multinational organization’s entry into our country. If an organization does not keep its manpower happy, it loses them to other organizations. Multinational organizations in all parts of the world employ people at higher salaries for the same job. The existing workforce may be attracted by giant multinational orga­nizations with better compensation. To combat with the pressure of the market, which is now global, a company has to keep its compensation package high to retain employees.

3. To Motivate the Employees:

Employees may have talent but they will feel motivated only when they are certain about the fact that there present job provides them with the best rewards and it will keep doing so in future also. If compensation is not commensu­rate with the hard work which is expected out of them, they feel de-motivated a may give heavy turnover to the organization.

7 Major Factors Affecting Compensation – Demand for and Supply of Labour, Prevailing Wage Rate, High Cost of Living, Employee Union, Job Requirement and Many More…

Various factors will affect compensation which are explained below:

Factor # 1. Demand for and Supply of Labour:

Payment of wages and salary depend on demand for and supply of labour. If the labourers are in short supply and if there is a great demand for the workers’ wages tend to be high and vice-versa.

Factor # 2. Prevailing Wage Rate:

Prevailing wage rate in a particular locality also influences on compensation to be payable to employees. Therefore, while fixing wages, prevailing wages in the particular industry or location should be considered to avoid wage disparities.

Factor # 3. High Cost of Living:

Cost of living differs from region to region. Therefore, while fixing the wages for the workers, cost of living of workers should be considered and provision should be made to compensate the high cost of living by offering DA (Dearness Allowance), CCA (City Compensatory Allowance) etc.

Factor # 4. Employee Union:

Employee’s union also influences on wage and salary. If the union is strong and well organised their bargaining power will also be high who will in turn demand higher wages. Therefore wage administration should consider type of labour union prevailing in the organisation.

Factor # 5. Job Requirement:

If the job is difficult to do and requires high skill and expert knowledge, demand for wage will be automatically high. On the other hand if the job is simple and does not need expert knowledge for its operation, wages tend to be low.

Factor # 6. Ability to Pay:

Organizations with good financial back ground and enjoying a high rate of profit are in a position to pay high wages and salaries to its employees. Organisations enjoying irregular profits or incurring heavy loss may have to offer low wages.

Factor # 7. Government Regulations:

In order to protect the interest of workers working especially in un-organised sectors, government frames rules and regulations relating to the payment of minimum wage, dearness allowance, bonus etc., and organizations can not violate such rules. Therefore, government rules should also be considered while framing and adopting a wage plan.

4 Major Components of Compensation Base/Primary Compensation, Incentive Compensation, Fringe Benefits and Non-Monetary Benefits

Compensation refers to the whole range of financial and non-financial incentives/rewards received by an employee in return for his/her services/contribution to the organization.

Specifically, employee compensation is made up of the following components:

(1) Base/primary compensation

(2) Incentive compensation

(3) Fringe benefits/supplementary compensation

(4) Non-monetary benefits

(1) Base/Primary Compensation:

It refers to the basic pay in the form of wages, salaries, and allowances. Wage represents hourly rate of pay, while salary refers to monthly rate of pay. Wages may be based on the number of units produced or the time spent on the job. Salary is always based on the time spent on the job.

Wages/salaries differ from employee to employee and depend upon the nature of the job, type of industry, seniority, and merit. Allowances are paid to employees to compensate for expenditure which they have to incur in connection with performance of the job or duties connected with employment. These also form part of the base compensation.

(2) Incentive Compensation:

It refers to monetary compensation paid to employees for performance results—based either on indi­vidual performance or performance of the group as a whole. It is paid in addition to the wages and salaries and depends upon productivity, sales, profits, or cost-reduction efforts.

(3) Fringe Benefits:

Fringe benefits refer to those benefits and ser­vices that are extended to employees in the form of medical care, subsidized food, transportation, paid holidays, group insurance, retirement benefits, and the like. These benefits are offered to retain employees as well as attract promising job applicants in the organization.

Fringe benefits extended to managerial personnel are called perquisites or perks. In addition to benefits and services extended to other employees, these may also include chauffeur-driven car, furnished house, club membership, and the like for managerial cadre employees. Perquisites benefit the employees personally without costing them. These are associated with the office of employment.

(4) Non-Monetary Benefits:

These are benefits which provide psychological and emotional satisfaction to employees and relate to the content and context of job – e.g., challenging job responsibility, recognition of merit, comfortable working conditions, job sharing, flexible work schedules, etc. Positive reinforce­ment, motivation, and good behavioural treatment extended by superiors to their subordinates also constitute the non-financial benefits to employees.

Compensation Designing Process (With Elements)

Compensation design process can be understood from the modules below:

(a) Based on job analysis and evolution of job price

(b) Based on the factors influencing the design

(c) Understanding compensation system

(d) Performance measuring standards

(e) Compensation differentiation approach/policy

(f) Wage & salary survey analyses and Administration policy.

This is one way of determining the compensation worth based on the technical aspects of compensation considerations. This analysis provides the basic data for structure or compensation or the job worth.

It starts from an understanding of compensation systems, analyzing the job to design job description, evaluation of job worth and differentiation numbers, inclusion of legislative constraints and compensation policy considerations.

The elements of compensation designs are:

i. Understanding Compensation System

ii. General Forms of Wage/Salary Structures

iii. Compensation Designing

iv. Job Evaluation, Analysis and Job Description

v. Designing Compensation Structure

vi. Designing Compensation Differentials

vii. Designing Compensation Payment System.

Top 9 Types of Compensation

They are as follows:

1. Job evaluation based or traditional compensation

2. Performance-based compensation

3. Team-based compensation

4. Variable compensation

5. Variable bonus policy

6. Skill-based compensation

7. Seniority-based compensation

8. Deferred compensation

9. Paying employees by way of benefits

Type # 1. Job Evaluation or Traditional Compensation:

Job analysis arid job-based compensation is the oldest and most often practiced compensation poli­cies where employees are paid according to the economic value they create in the organization. However, since an employee’s activities and performances on a position are exchanged only in an internal market, the organization adopts an indirect method to get potential value of his/her contri­butions. The objective is to create a sense of equity among the employees.

By a thorough job analysis the company tries to identify the compensable factors, e.g., educational qualification, work experience, and requirements of training. Compensable factors are those character­istics that an incumbent must have for satisfactory performance in a position. The relative value of each job within the organization is estimated based on the degree of compensable factors for each of the main factors that are there in a position.

These degrees of compensable factors are usually assessed by internal managers who may be assisted by some external consultants. Then the market wage for a key job is found from a survey in other similar organizations. The key job is that job which is common across a number of organizations. As the key jobs are common across organizations, these positions experience rapid entry and exit of manpower.

Due to rapid exchange of workers with other organizations, the wage rates of these positions tend to reach an equilibrium representing the market supply and demand for the corresponding expertise. In a modern office, the job of data entry opera­tor can be considered as a key job. This is because the nature of the job is same across all organizations irrespective of whether it is a bank or a manufacturing company.

Through a market survey of a few other organizations in the same industry the actual compensation rate of this key job is found. The value of this key job and relative value estimated by the degree of compensable factors are then used to calculate the actual worth of various jobs present in the company.

From the way this job analysis-based compensation policies are described it is obvious that such policies are more suitable when different employees do very well defined jobs and they differ from each other only by the degree at which the compensable factors exist in different jobs. By paying the employees according to the presence of compensable factors in their jobs, it also tries to satisfy some of their concerns for equity and fairness in compensation.

Method wise this job evaluation-centric prescription sounds very logical and free from com­plaint or inconsistencies. However, there are a few technical and practical problems in using this method. According to this method, as long as a job has different proportion of compensable fac­tors from other jobs, its wage rate should be different. Firstly, as there is no scientific yard stick for defining and describing the degree of presence of compensable factors in a job, in practice there could be 100 different wage rates if there are 100 employees in a company.

What it means is that a small company of just 100 employees may have to engage couple of dozens of employees to work out the compensations rates of its employees. Secondly, in a fast-changing business envi­ronment, the company’s strategy for doing business and policy for using manpower may change quite often which may change the job profile of the employees.

And, if that happens then a line manager may get hard time selling the new job profile to the employees without doing a fresh job evaluation and compensation calculation. Any attempt to force a new job profile on employ­ees may invite employee grievance, union response, or employee turnover. In other words, im­plementation of conventional job evaluation-based compensation could be very expensive for in organization.

A third problem which may show up in an organization using the job evaluation route for setting employee compensation is that even if the jobs are stable and their mix of compensable factors are fairly stable yet the employees ability to execute those jobs may change with time. As an employee works longer in a position, he/she may find it easier to execute certain parts of the activities, e.g., a data entry operator may be able to print out more number of pages after working in the position a few months.

Under a job evaluation criterion such an employee cannot be paid more because his/her positional job profile has not changed since last year. But such cold shoulder to an efficient employee may demoralize a competent employee which in its extreme form could trigger a turnover intention.

In fact in this method there is no room for changing the compensation of a person as long as he/she continues working in the same position.

Broad Banding:

The problem of job proliferation and its consequent effect on salary administration cost are addressed by placing a number of closely placed jobs under a common category. By merging a number of closely spaced positions into a common category with wide range in salary, it reduces the number of positions substantially. Such wide range within a band will accommodate larger variability of employee skills and competencies.

This would allow placing an employee on an appropriate position within a range of salary without changing his/her actual position in the hierarchy. By adopting this method, the administrative cost of evaluating hundreds of jobs which differ from each other only marginally can be minimized considerably.

Further, by stretching the job profile of a position over a wide range of compensable factors, the organization will create more scope of creating varieties of activities within a position which could work as a good source of motivator to an incumbent. Such a variety creates scope for learning and higher income without placing the employee into too much high risk that may come when an employee is placed on a new position with a new job title.

Example – By stretching the job profile of a computer data entry operator over that of a data analyzer, the organization may encourage a data entry operator to learn the use of worksheet, data analysis, and computation which is less boring and financially more rewarding than a simple mechanical data entry job. One of the goals of early Pay Commissions Systems of Indian Central Government was to reduce this number of independent jobs from 1000 or so to a manageable number of about 100.

Type # 2. Performance-Based Compensation:

Employees are hired based on their potential to contribute towards achievement of organizational goals. Much of these pre-contract assessments are done by way of indirect performance indicators, e.g., past work experience, training, education, or how well an employee could do during interview. Since most of these indicators are acquired by an employee over a period of time, the employee knows better about the value and validity of these indicators than that of his/her new employer.

While hiring an employee, an employer often faces considerable asymmetry of information between what he/she knows about a candidate’s actual skills and what the candidate himself/herself knows about his/her own skills. As a result, while setting employee compensation many organizations adopt a defensive strategy.

Once a newly hired employee starts working in the organization, the organizational managers get to know more about his/her hidden and unknown qualities and deficiencies, and tries to reset his/her compensation.

And, many organizations follow it as a continuous process so that as more valuable and valid information about an employee is accumulated they reset the salaries of newly hired employees both upwards and downwards depending on whether his/her performance is above or below the earlier estimation. Though, in real practice downwards adjustment of salary is a rare phenomenon!

There are a number of advantages to such employee performance-based compensation policy. First, once such a policy is announced by an organization the employees would be more motivated to work hard and ask for bigger jobs and more responsibilities. They would take all initiatives includ­ing additional training and managerial guidance that are required for showing better performance.

Second, over a period of time such a policy may transform an organizational culture into a highly performance-oriented culture that will not only push everyone hard to run faster but would leave behind those who cannot conform in accordance with the high standard of the majority. In other words, natural attrition will take care of the selection error that has brought in the misfits.

Third, since higher compensation of an employee matches with his/her actual contribution to company profit, such a practice has less chance to add to the burden of the wage bill. On the other hand, since continued application of a performance-oriented compensation has the potential to trans­form an organizational internal environment into a performance-oriented culture, it has the poten­tial to provide a culture-based competitive advantage which its competitors would find very hard to beat.

In other words, one of the most significant outcomes or objectives of introduction of a pure performance-oriented compensation policy is to build a performance-oriented culture within a few years.

Having said so much about the virtues of a performance-oriented compensation, is there any unexpected and undesirable fallout from its application? The answer is a big yes. A very aggres­sive performance-oriented compensation policy may plant and nurture a culture where every in­dividual is shining well while their organizational ship is heading straight towards a rock!

What happens is that because everyone is rewarded for their performance and because this compen­sation comes from a common pool of limited resources, everyone goes for the kill in a zero-sum game. In other words, every one works for showing good results for self with no concern for the performance requirements of others. Employees’ time orientation could become highly short-run oriented and they would work for results irrespective of the means used to achieve them.

Over a period of time, an organization may find that though its performance-oriented reward practices have created good number of employees with high level of competencies, yet there is no area where it can claim to have developed any capability that the competitors cannot duplicate easily.

Type # 3. Team-Based Compensation:

When a company operates on a project mode, the employees are allocated to different projects, based on the demand of expertise from different projects and their availability within the organization. Different projects may have different schedules for completion and the company income from these projects could be quite different.

Given that a project has a fixed starting and ending time and all employees work for a common tradable outcome, all employees who work in such a common project or task could be paid according to the performance of the project, e.g., timely and within budget completion, revenue generated from the output of project.

Some of the advantages of such project-or team-based compensation are – (i) Increased cooperation among employees even on non-project areas (ii) Bonus payment could be linked directly with company income from project generated business (iii) Project team environment could be used as a training infrastructure to mould fresh recruits into the culture of the company.

Team-Based Pay and Process Issues:

While team-based pay has a lot of benefits to an organization, there are a few important process areas which must be handled very carefully. Firstly, while implementing a team-based pay, one must make sure that the entire compensation of an employee is not tied to team performance. Individuals should not be held hostage to collective folly or clash of the titans!

A project may fail because of faulty design or wrong choice of launch time. No individual member should be made to bear the full burden of such organizational loss. Secondly, decentralized decision style should be well in place before a team-based compensation is attempted. Unless people are empowered sufficiently well and are given sufficient autonomy on operational issues, a team-based compensation plan may not go well.

Thirdly, while inter-team competition may encourage people in different teams to work hard for beating their colleagues engaged in other teams, a senior member should oversee the activities of these teams lest compensation driven overheating leads to organizational meltdown. Lastly, not all organizations are suitable for a team-based pay.

Highly inter-dependent organizational functions with no clear cessation of activities may make it difficult to form project teams with well-defined roles, responsibilities, and reward. Sometimes the presence of significant number of members with attitude and orientation to take free-ride on the performance and contribution of other team members could affect the team performance.

Team performance is highly human relation driven and a team with highly competent people may fail to deliver if the relational part of their human capital is not given adequate attention in the early stage of a project.

Type # 4. Variable Compensation:

In the present context of volatile business environment, variable compensation is emerging as one of the most preferred methods of rewarding and compensating managerial employees. One of the main reasons for its growing popularity is that it allows an organization to share the business risks with the employees.

In most conventional compensation practices, the employee salary is either fixed irrespective of what happens to the company annual performance or linked with indicators that are not directly related with its financial performance.

When business environment becomes very competitive or when due to fast political change or technological change the overall business performance of a company becomes very unpredictable, such a fixed salary obligation irrespective of company income could worsen its financial health.

In order to save it from any such an eventuality, many organizations are now adopting the policy of variable compensation whereby a part of the employee salary is linked with either organizational or divisional performance.

By linking a part of employee salary with either organizational or divisional performance, which is fixed under normal employment practice, a company can effectively lower its break-even point so that even at a lower volume of business it could earn profit. It is particularly useful for start-up companies who struggle to reach break-even point so that they can generate some surplus to pay back the debt used to start the business.

Such companies try to keep a small portion of their employee compensations under ‘risk’ category. In practice this portion generally varies between 10% and 30%.

Forms of Variable Compensation Policy – ‘Add on’ Policy:

Under this policy an employee’s annual increment in basic salary is linked with company financial performance during the year. In conventional compensation practice, employees are hired on a pay scale with a starting pay somewhere within the range of the pay corresponding to the scale and an annual increment (about 3% of basic salary) every year until the employee reaches certain level of basic pay when such annual increment is subjected to passing a formal performance and skill assessment.

In other words, an annual increment in salary is assured until one reaches such points on the pay scale. Under an ‘add on’ policy, employee’s, particularly for a managerial employee, the annual increment is not a fixed percentage of salary but depending on the performance of the company could vary from a low of 3% to a high of about 20%.

The advantage of such policy is that it sends a signal to all the employees to work hard so that the company does well in the market which ensures high annual increment for all of them. A company’s willingness to share a part of the additional income with employees creates a feeling of ownership and pride among the employees.

The disadvantage is that it is not targeted towards performance or behaviour of any individual employee. It is also neither linked with any observable behaviour or performance output of any group of employees.

As a result, during hard times when a company does not do well and stops the annual increment of all the employees, the morale and motivation of some employees who were doing well may hit hard because they have to pay a price for no fault of theirs. The effect is that during long spell of recession such companies may lose a few of their bright stars.

This problem is sometimes addressed by tying annual increment of employees of selected divisions or departments with the achievement of certain performance targets.

At Risk Policy:

It prescribes reducing an employee base pay in the beginning of the year by a certain percentage and allowing him/her to collect a variable amount of that percentage depending upon how the company does during the year. This policy tries to share a part of the business risk with the employee directly.

The monthly base pay could be reduced by 5% to 10% which at the end of the year would be returned to the employee if the company does well during the year. The policy is mostly adopted when a company faces a turbulent time and employee turnover rates are pretty high.

Type # 5. Variable Bonus Policy:

In our country annual bonus payment is mandated by state regulation. Any commercial organization employing more than certain number of employees must pay 8.33% of annual salary of an employee as bonus to all employees. This law is applicable for all non-executive employees. However, there is no upper limit as to how much more over and above this statutory percentage a company could pay. As a result some companies pay quite hefty bonuses.

Sometimes these are as much as 40% to 50% of employee annual salary. These companies pay a high percentage of employee salary as bonus when the company does well but pays only the statutory amount when it does not do so well. And, these bonuses cover all employees irrespective of their ranks. The advantage is that such policies not only work as a good instrument to attract quality employees from other companies but also makes them work hard for the company.

Type # 6. Skill-Based Compensation:

With the business environment changing fast, organizations are looking for employees who can take up new types of jobs and undertake new set of responsibilities. Employee skill and learning capability are going on a premium. Skill-based compensation practices are catching up though it is still being practiced in a limited way in our country.

Under this scheme employees are paid more when they acquire new skill and expertise either on their own initiative or through company provided facilities and show mastery of acquired knowledge in the workplace. The objectives that the scheme serves are to create a pool of multi-skilled employees to be deployed in upcoming new positions at a later period.

Further, availability of such a multi-skilled employee pool increases one’s flexibility in manpower deployment and increases the company’s capability to respond to market demand at a short notice.

However, though conceptually the scheme appears quite attractive and strategically a powerful tool to create human capital-based competitive advantage. Yet in practice there are a few areas of serious concerns. First, under a skill-based compensation the inter-employee difference in compensa­tions between two employees could be very high though both are doing the same jobs and are carrying the same job-related risks and responsibilities.

This means a welder in a manufacturing shop who has proven expertise in say metal cutting will be paid more than another welder who has skill only in welding. Though, in their present positions, the company was utilizing only the welding expertise of both the workers.

As both the employees are doing the same job, having the same responsibilities and carrying the same workplace risk, paying them two different salaries could accentuate their feeling of inequity very seriously affecting their morale and motivations. Second, skills acquired in long past may have been lost due to obsolescence.

Sometimes an employee may have acquired a new skill by attending evening training and learning programmes but at current time the employer does not have any position where this additional skill could be utilized. In a skill-based compensation scheme such employees are paid more than another employee who did not go through similar kind of training programme.

Apart from the micro-effect of employee’s feelings of equity, the macro-effect of growing operating cost on account of employees acquiring new skills for which there is no immediate posi­tional demands could deter a company from adopting a pure skill-based compensation policy. Unless a company is experiencing high growth and expecting lot of new varieties of jobs and positions in the near future, such a policy may not be sustainable.

Type # 7. Seniority-Based Compensation:

An employee becomes more productive when he/she works longer in the same position. This growth in productivity comes from the scope of ‘learning by doing’. Doing the same work, facing the same level of technical and human challenges, and dealing with same types of environments repeatedly increases one’s confidence to meet the demands of the position. Lots of managerial jobs require high quality relational skill which generally grows with seniority and longer working with varieties of people.

Someone who worked with customers, suppliers, employees, or regulators for long is expected to know better how other people respond and react to his/her service demand and/or delivery and why they do so. In order to compensate an employee for his/her higher productivity on account of his/her longer experience in a position, a company may adopt a policy of seniority-based compensation.

Under such a policy an employee having more years of experience in a position would be paid more than another employee with fewer years of experience. There are a number of advantages to such a policy. First, salaries of all the employees doing similar types of jobs are based on very visible and non-controversial data of their seniority in position. As a result, there is less chance of any one complaining on account of data fudging or nepotism against any line manager assessing an employee contribution to the organization.

Second, the cost of administering employee salary would be minimal as the salary of all employees could be computerized and their administration could be done by fewer employees and if the situation permits one could outsource the complete salary administration job to an outside HR service provider. The third advantage of seniority-based compensation is that it helps the employees to remain less charged on one of the most visible transaction centric career outcomes, e.g., compensation.

Unequal salary of employees doing very similar jobs and working within a common organizational set up not only could make them overtly sensitive to internal equity issues but may divert a lot of managerial time and energy to addressing internal transaction matters which could otherwise be used in more productive business areas.

There are a few disadvantages to seniority-based compensation, though. First, it effectively neu­tralizes the power of income to motivate employees towards higher work effort. On the contrary, if the jobs are not very challenging then such a compensation practice may encourage creation and maintenance of a very unproductive work culture which may cut into an organization’s competitive position within a short time.

Lack of job challenge combined with predictable income opportunity may encourage employees to seek excitement through internal political process and hoarding of power resources. As a result a company may lose its competitive position in a short time. It can encourage a bureaucratic culture where all decision-making powers rest only with the head of the organization.

A few symptoms of such hoarding mentality could be seen from the speed at which important decisions are made by managers and the way they respond to customer complaints and grievances.

Type # 8. Deferred Compensation:

Many companies, faced with a drying pool of experienced and high quality employees and a market with a lot of new players with aggressive compensation policies, are now adopting the strategy of paying their key players by way of deferred compensation. Under such a scheme, an employee would be receiving a hefty amount either by way of bonus from the company or by way of income from the sale of company shares which were given to him/her in the past with a fixed lock-in period.

Type # 9. Paying Employees by Way of Benefits:

While working for a company, an employee may experience variety of hazards and risks to his/her or his/her family members’ life or lifestyles. An employee is a member of two organizations- employer and family. Just like the employer, a family as an organization is also affected by the environment where it is located. Though, nature of technology, regulation, societal, and market influence on a family organization are expected to be different than those that affect the performance of an industrial organization.

When the local technological environment is very well developed, a family organization may not place too much demand on an employee’s time. Example – In urban India, availability of modern cooking technology is freeing a lot of time and labour of family members. This is slowly changing the activity profiles of women in modern households.

But if the local societal or technological facilities are inadequate and the local markets for essential goods and services are ill developed, then the family organization would place heavy demand on the employee’s time and energy. Unless the employer provides those services, then some of the employees may fail to show good performance because much of their time and energy will be spent in generating essential services for their family organizations.

And, high performance demands by the employer could deter a good number of potential employees from joining the organization. This means if a company is located in a remote area of the country, then an employer may have to provide a whole range of services, e.g., housing for family living, transportation for family shopping, health care, educational allowance for children. On the other hand, if the organization is located in an urban setting, and then the employer need not have to provide all those facilities to its employees.

These problems and concerns for services from one’s family organization could become more serious for companies doing business in many different countries. In such multi-country-based com­panies even regulatory factors around an employee’s family organizations could pose heavy strain on satisfactory performance of family organization.

Example – Immigration regulation against spouse employment or children’s educational facility could be a matter of great stress to an employee who was about to be posted in another country.

Role of Motivation in Compensation

The motivation and compensation are closely related. Motivation is the act of inducing an individual to follow a desired course of action. This desired course of action may be for the good of the individual or for the one who is inducing the individual towards a desired course of action or both. In this article, the employee and the employer are involved.

The employee is motivated to perform a job which the employer offers for which employee will be paid salary and other incentives. Zedeck and Blood contend that motivation is a predisposition to act in a specific goal-directed way. Gellerman defines motivation as steering ones actions towards certain goals and committing a certain part of ones energies to reach them.

Atkinson proposed a model of motivation in which aroused motivation is a joint multiplicative function of the strength of basic motive, the expectancy of attaining the goal, and the perceived incentive value of the particular goal, are components.

Aroused Motivation = M x E X I

Atkinson’s model is based on a number of principles of motivation such as all individuals have a reservoir of potential energy; they have a number of basic “motives” or “needs” which channel their potential energy with relative strength; each motive leads to a different behavior pattern and so on.

To perform a job or given assignment, an individual besides his or her capability and skills, must have the desire (motivation) to accomplish the task willingly and with enthusiasm. Besides these things, the individual must be given some incentives to trigger his or her interests. If he or she either gets carrot (positive incentive) or stick (negative incentive). The carrot referred here is money, the salary, bonuses, and other positive incentives.

These incentives are known as motivators (satisfiers) and hygienic (dissatisfiers) factors. Both are important. One deals with the environment in which a job is performed and the other with the job itself. The environment eliminates dissatisfaction by dealing with the hygiene factors and satisfaction is provided by the factors in the job.

The wage and salary system gets great deal of input from motivational theories and suggestions. An organization may have to remove dissatisfaction from job environment by offering fair compensation and benefits and provide satisfaction by making jobs more meaningful with challenge, recognition, and opportunities for advancement.

The carrot and stick approach might have worked in the past but it may not be effective at present times. As the days go by, people are getting better educated, more mature, and expect self-respect in the work place, and that is, they like to be treated well.

In motivating people for higher productivity and better performance, an important step is determining what they want to get out of their jobs. Research studies conducted in this area show a variety of things people like to get by working besides money by way of salary and wages.

Some of the other things include security, meaning in whatever they perform, freedom to function, a voice in matters affecting them, congenial associates, better or satisfactory working conditions and alike. As a result of these findings, a number of steps have been taken in many organizations to fulfil these demands and expectations.

Traditional Approach to Compensation and its Salient Features

Companies have traditionally used a variety of approaches for managing the compensation function. Many continue to use relatively simplistic internally developed software tools, often based on generic desktop programmes. Some companies utilise broad HR and/or enterprise resource planning (ERP) software offerings, which include some compensation management capabilities but typically lack the specialised functionality to adequately address compensation management.

Newer approaches have emerged since keeping in mind the changing job profiles and organisational structures.

The traditional approach to compensation requires an in-depth analysis of the job at hand. The job is analysed on the basis of its rating and hierarchy. A market survey of similar jobs could also form a step in this direction. This analysis is then documented in detail.

The analysis is then followed by internal and external reconciliation of facts and considerations. Only after this careful consideration the pay structure is developed.

This traditional approach to compensation has the following salient features:

i. Compensation primarily base pay.

ii. Bonuses for executives only.

iii. Fixed benefits tied to seniority.

iv. Pay grade progression based on organisational promotions.

v. One organisation-wide pay plan for all employees.

The obvious drawback to this system is a tendency for long-standing employees to become comfortable with their guaranteed salary and become less motivated. Additionally, there was little incentive for younger – possibly more ambitious and energetic – employees to shine since all they would receive as a reward for their effort would be a pat on the back and the satisfaction of a job well done unless they shone brightly enough to be awarded a promotion.

Compensation Programmes – Meaning, Objectives and Effectiveness

Meaning of Compensation Programme:

Compensation programme refers to the compensation plan execution. Since its effectiveness and accomplishment in line with the company’s objectives depend on the employee’s satisfaction and the avoidance of possible disputes, the programme has a responsibility to ensure the following aspects clearly and effectively –

1. Policy for hiring people

2. Determination of more competitive compensation

3. Maintaining the rationality of the compensation structure

4. Covering appropriate motivational and inspiring programmes

5. Determination of wage/salary payments methods

6. Developing close communication channels with employees.

However in any sector of employment, the compensation programme should aim at:

1. Commitments of the employer and those of the employees

2. Competence attraction by offering attractive packages

3. Career progress to develop belongingness and employees’ loyalty and

4. Motivational aspects to inspire and encourage the employees to take up challenges for the benefit of both the company and the employees.

Objectives of Compensation Programmes:

Accordingly, the major objectives of compensation programmes are:

i. Establishing the criteria for the determination of compensation differentiations

ii. Establishing criteria for determining the wage or salary for different levels and positions

iii. Establishing job evaluation systems and appraisal criteria

iv. Ascertaining ongoing rates for jobs in similar industries

v. Aligning Government legislations appropriately.

Effective Compensation Programme:

An effective compensation programme thus will induce the employees to use and develop their competence, and provide opportunities and motivation to put in extra efforts or a better performance for the benefit of both the employer and the employees.

Since it also ensures minimum wage/salary, and includes Government legislation and other socio-economic considerations, it helps to design an effective compensation and provides guidelines to monitor and control it effectively.

The essential inclusions of an effective compensation programme should be:

i. Meeting basic needs according to the levels, grades, skills and experience of the employees to satisfy their worth and capacity

ii. Providing opportunity for extra earnings through over time work, incentive plans and productivity agreements

iii. Encouraging risk taking by providing challenging opportunities to grow in the cadre

iv. Helping develop career and career progression in the organization by way of designing incentives or motivational plans

v. Ensuring financial freedom after retirement by clarifying the adequate benefit schemes to save for the future to meet any future liability.

Problems Associated with Compensation

The main problem faced by any organization is the design­ing of a fair and equitable compensation system. The objective is simple, but the process is complex. For instance, the employer will be concerned primarily with productivity. The employee s emphasis may be on higher compensation to offset their increased cost of living. An employee may perhaps like to equate the price that his skill will fetch in a competitive job market.

Discussions on compensation issues are likely to continue in future that will centre on questions of compensation levels and compensation structures. Obviously, this will raise questions concerning the level of compensation rates in the plant or firm, industry, region, nation, or crossing the boundary of the country. The broad question of the determinants of compensation relationships is also related to this to this issue.

A decision about compensation rates in a given situation must be reconciled with a variety of con­siderations such as when pay rates should be revised and by how much, how they should be distributed among the different employees, and what departments should be covered. Many industrial disputes stem from wage and salary administration. Several conflicts between employers and unions are generated from disputes over wages and salaries than other diversified matters.

Quantum of take-home pay is a major consideration while formulating a pay package. Take-home pay is the net packet that an employee receives after all deductions. Some of these deductions are savings for post-retirement leisure life, general or contributory provident fund, pension schemes, etc.

The balance between what is received now and what he will get on retirement is something that varies from one organization to another. Employees generally require a higher pay in earlier years of employment. In the normal course, he/she needs to spend for children’s education, medical treatment, and recreation. However, at later years, an employee will need to provide for his old age, in terms of a house, and a steady income to maintain his habituated life style.

Another issue related to the context is salary and tax planning. In this context, organizations are seen to take recourse to fringe benefits, some of which are taxable. The incidence of tax, either on money incomes or on the total taxable income including perquisites, has to be worked out.

Top 12 Recent Trends in Compensation

Given the shifts occurring in attitudes and practices about salary and compensation, organisations are struggling to keep up with changes in salary and compensation thinking. Gone are the days when organisations gave equivalent increases to all organisation members.

These salary increases, in the one percent to five percent range, send the wrong message to the underperformers. They left organisations with too small a budget to adequately reward their top performers. While many companies still use this as their salary criteria, forward thinking organisations are thinking about salary and compensation in a very different way.

Some of the newer trends that organisations are looking to include is the total rewards approach. Here variable pay is used with the base pay for a job type. Annual/long-term incentives are provided to all employees and not to just a select few. Employees can look forward to flexible and portable benefits offered by organisations. Knowledge-based broad bands determine pay grades and replace traditional narrow salary ranges to fewer wider bands that are most appropriate for higher level positions.

Multiple pay plans consider job, family, location, and business units when structuring the compensation plan. Team based pay and skill-based pay are two more avenues that organisations are toying with.

Individual organisations may have differences in their compensation system based on factors best suited to their perceived needs; however, some recent trends are evident, as given below:

1. Salary, basic salary or consolidated salary continues to remain as the major component of compensation system.

2. Allowances may be linked to the salary as a percentage or by slabs, but preference is for flat amounts, which do not increase automatically.

3. Reimbursements of expenses incurred on company work will become limited, and in line to conform with the tax laws being actuals in most cases, they will not be considered as part of the compensation, unless it is provided towards personal benefits.

4. Annual payments such as bonus or commission, leave travel are common features – some tax reliefs apply for the latter.

5. Benefits will comprise mostly unfurnished company owned or leased accommodation, use of company owned or leased vehicle, medical coverage, retiral benefits covering provident fund, pension or superannuation or gratuity, post retire medical assistance, easy loan schemes at low or zero interest rates for house building, and so on.

6. Employee stock option schemes, which have been popular in IT industry, is not extensively used yet due to their lesser share values, especially in the well-established older companies.

7. The total cost to the company concept is used as basis by most companies, as against earlier visible costs. Cost of most benefits are averaged or computed on actual basis, and included in the above.

8. Retrial benefits are important to many, whilst the younger generation and specially IT professionals, do not consider it as an advantage, unless the benefit value is available to them on moving to a new job.

9. Against the past practice of modest gradual increases applicable to all, the differential in performance is now being recognised during the review of performance. Often a salary freeze is being used for poor performance and substantial and varying increases to the good performer.

10. Emphasis on variable performance pay or bonus as a reward is getting to be an important and growing component of the compensation system.

11. From the earlier grade oriented compensation system within reasonable boundaries, compensation is now somewhat tailor made for specialist or key contributors to retain them in the very volatile job market.

12. Compensation review periods have become annual generally and sometimes oftener, as compared to three to five years earlier, in the fast changing market situation.