COMPENSATING

EMPLOYEES
What is Compensation
◦ Compensation includes payments like bonuses, profit sharing, overtime pay, recognition rewards and sales commission,
etc.
◦ Compensation can also include non-monetary perks like a company-paid car, company-paid housing and stock
opportunities. Compensation is a vital part of human resource management, which helps in encouraging the employees
and improving organizational effectiveness.
Objectives of Compensation
• Allure suitable staff.
• Keep qualified personnel.
• Develop reward structures that are equitable with logical and fair pay relationships between differently valued jobs.
• Manage pay structures to mirror inflationary effects.
• Assure that rewards and salary costs handle changes in market rates or organizational change.
• Appraise performance, duty, and loyalty, and provide for progression.
• Abide with legal requirements.
• Maintain compensation levels and differentials under review and control salary or wage costs.
Importance of Compensation Management

• It tries to give proper refund to the employees for their contributions to the organization.
• It discovers a positive control on the efficiency of employees and motivates them to perform better and achieve
the specific standards.
• It creates a base for happiness and satisfaction of the workforce that limits the labor turnover and confers a stable
organization.
• It enhances the job evaluation process, which in return helps in setting up more realistic and achievable
standards.
• It is designed to abide with the various labor acts and thus does not result in conflicts between the employee
union and the management. This creates a peaceful relationship between the employer and the employees.
• It excites an environment of morale, efficiency and cooperation among the workers and ensures satisfaction to the
workers.
• Compensation management is required as it encourages the employees to perform better and show their
excellence as well as provides growth and development options to the deserving employees
Types of Compensation
Direct Compensation
◦ It is naturally made up of salary payments and health benefits. The creation of salary ranges and pay scales for
different positions within an organization are the central responsibility of compensation management staff.
◦ Direct compensation that is in line with the industry standards facilitates employees with the assurance that they
are getting paid fairly. This helps the employer not to worry about the costly loss of trained staff to a competitor.
Indirect Compensation
◦ It focuses on the personal encouragements of each individual to work. Although salary is essential, people are
most productive in jobs where they share the company's values and priorities.
◦ These benefits can include things like free staff development courses, subsidized day care, the chances for
promotion or transfer within the company, public recognition, the ability to effect change or bring some changes in
the workplace, and service to others.
Components of Compensation
Wages and Salary
◦ Wages mark hourly rates of pay, and salary marks the monthly rate of pay of an employee. It is irrelevant of the
number of hours put in by an employee working in the firm. These are subject to annual increase.
Allowances
◦ Allowances can be defined as the amount of something that is allowed, especially within a set of rules and
regulations or for a specified purpose. Various allowances are paid in addition to basic pay.
Incentives and Performance Based Pay
◦ Incentive compensation is performance-related remuneration paid with a view to encourage employees to work
hard and do better.
◦ Both individual incentives and group incentives are applicable in most cases. Bonus, gain-sharing, commissions
on sales are some examples of incentive compensation.
Four Basic Factors Determining Pay Rates
◦ Legal Factor
◦ Laws that determine the pay rates within the country. Pay rates such as minimum wage, overtime pay and benefits

◦ Unions
◦ Trade Unions have some level of influence on both monetary and non-monetary pay.

◦ Policy
◦ Plans that are aligned to creating a competitive reward strategy that grades an employee behavior in an organization.

◦ Equity Factors
◦ Internal and external factors such as equitable pay rates in the organization and favorable pay rate offered by other organization.
Factors in Compensation Rates
• Research: Conduct market research inside and outside your industry to gauge what's normal and on trend.
• Competitive strategy: You should offer enough to not just stay on par, but attract top talent away from your competitors.
• Collective company salaries: You'll want to consider your company (and each job level within it) as a whole in your salary
strategy. 
• Marketplace drivers: If you're recruiting for employees with hard-to-hire skills, you might need to pay more to get them on
your team.
Types of Pay Plans
◦ Piece Work Plan
◦ Paid a certain amount per unit produced. This is a type of wage system where the wages are paid to the workers after the completion of work.
High piece rate is offered to workers who completed the work within the given time and low piece rate for those who exceeded the given time
for the task

◦ Merit Pay Plan

◦ Time Rate
◦ Based on the amount / hours worked during the period.

◦ Bonus Scheme
◦ An incentive provided after base rate pay as a reward for achievement.
Supplemental Pay
◦ Vacation
◦ Pay issued to an employee while on vacation

◦ Unemployment Insurance
◦ Payment received for being unemployed through no fault of theirs.

◦ Severance Payment
◦ Payment received after being dismissed from a job through unfair dismissal, redundancy etc.

◦ Sick Leave
◦ Payment received whilst on sick leave

◦ Retirement Plan
◦ Payment received after retirement.
◦ 2 types Contributory and non-contributory retirement plan