Compensation

 

Compensation: Meaning, Concept, Objectives-

compensation – Introduction

Generally the term compensation refers to compensating any damage, loss or mental harassment, wages or salaries as reward for physical and/or mental efforts to perform any agreed task or job. But the concept of equity in remunerating any work or task has forced us to perceive wages and salaries as compensation, because people work efficiently only when they are paid according to their worth or feel satisfied with the remunerations.

Besides basic salaries or wages, companies are forced to view the benefits and services to justify the positional and esteem needs of employees and to provide adequate cushion for inflation. Though the cost of human resources is estimated at between 2% to 20% of the operating cost (depending upon the type of industry), to retain the employees or to avoid job-hopping, some of the industries are even forced to adopt varying scales and benefits.

The most common questions that arise in the minds of employees are:

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i. Is this compensation justifying my worth?

ii. How does my package compare with others who are working in a similar industry?

iii. Can I have a better growth plan in this industry?

iv. How important is my pay scale compared to other factors being offered by the industry?

v. Why are others offering better compensation for the same post and job?

These questions arise in the minds of every employee whether he/she is at the executive or the manager levels. At the top and middle level positions, though they recognize the limitations of the organizations, they still feel that some equitable and reasonable relationships should exist. Similarly, the pay increments are also debated as unfair compensation at various levels.

There could be several other questions regarding the perception about compensation as today the industries are designing more and more attractive packages to attract the talents in this competitive era.

But their package designs vary according to the performance desired and the employee’s attitude to keep on improving their personality and offering continuous improvement in organizational growth. What is most important to know is whether the employer and the employee think alike or have divergent views?

Today, the pay being competitive, it is logical for employers to look for employees with attributes other than knowledge and skill, attributes which can enrich their experience at work. They can find out the potential in the employee and provide opportunities for learning and career growth. Thus compensation designs and compensation programmes are being so designed so as to attract the winning horses.

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Therefore, the study of compensation is of outmost importance from both an academic as well as practical point of view as wages and salaries are the major factors in socio-economic analysis. From an economic point of view, compensation refers to the payments to the efforts made by an individual.

In a society it is an occupational category and reflects the individual’s status, while psychologically, compensation relates to the satisfaction of an individual’s needs and aspirations.

It is compensation which directly affects one’s standard of life, meets the needs of his/ her family, enables him/her to save for future liabilities and justifying his/her worth for a job. Wages/salaries, on the other hand, add to the cost of production and are a vulnerable part of a company’s overhead, which affects the profit to the employers.

Both employers and the employees are concerned about the adequacy of the compensation. Employers are interested to hire competent employees by offering attractive and bearable cost to the company, while employees try to get maximum return on their skills, knowledge, expertise or payment to justify their worth.

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Compensation – Meaning and Concept

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Compensation is the reward that the employees receive in return for the work performed and services rendered by them to the organization. Compensation includes monetary payments like bonuses, profit sharing, overtime pay, recognition rewards and sales commission, etc., as well as non­monetary perks like a company-paid car, company-paid housing and stock opportunities and so on.

Apart from the basic financial pay the employees receive paid vacations, sick leave, holidays and medical insurance, maternity leave, free travel facility, retirement benefits, etc., and these are called benefits.

Compensation is a vital part of human resource management decision making as it helps in encouraging the employees and improves the organizational effectiveness.

Compensation packages with good pay and benefits help to attract and retain the best employees. Employees consider pay package to be fair when the amount of wage covers basic living expenses, keep up with inflation, leave some money for savings (perhaps for retirement) and leisure and there is increment over time.

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HRM is concerned with the determination of adequate and equitable remuneration of the employees in the organization. HRM use techniques like job evaluation and performance appraisal for determining remuneration.

Factors that are considered for determining the remuneration of personnel are their basic needs, requirements of jobs, legal provisions regarding minimum wages, capacity of the organization to pay, wage level afforded by competitors, nature of job, skills required, risk involved nature of working conditioning, bargaining power of the trade union, etc.

Wages and salaries form a substantial part of total costs in most of the organization. Hence a systematic approach must be followed for determining wage and salary structure so as to ensure logical, equitable and fair pay to the employees.

The term equity in pay means – pay corresponding to difficulty level of the job assigned to an employee meaning more difficult the job more should be the pay (called internal equity); compensating an employee equally in comparison to similar jobs in the labour market(called external equity ) and equal pay for equal jobs(called individual equity)

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Compensation may be defined as money received in performance of work and many kinds of services and benefits that an organization provides to their employees.

Compensation is a systematic approach of providing monetary value to employees in exchange for work performed. It may help to achieve several purposes, such as recruitment, job performance and job satisfaction. It is also defined as the package of quantifiable rewards an employee receives for her or his labour.

It represents both, the intrinsic (psychological mind-sets resulting from job performance) and extrinsic (including both monetary and non-monetary) rewards. The term, compensation refers to all forms of financial returns and tangible benefits that an employee receives as a part of employment relationship. In the globalization era, where the business environment has become increasingly complex and challenging, designing an effective compensation program to attract and retain talent is an important function of organizational effectiveness.

Concept of Compensation:

Compensation is a systematic approach to providing monetary value to employees in exchange for work performed. It is a tool used by management for a variety of purposes to further the existence of the company. It may be adjusted according to the business needs, goals and available resources.

i. Individual worth – The value of a job is related to similar jobs of the company or the competitors but the value of an individual to perform that job may vary according to his/her skill/knowledge, expertise and more so his behaviour on the job and with associating persons. The combinations of these attributes decide the worth of individual. This definition is a perception of the employees.

ii. Cost to Company – Human resource is considered as an asset to the organisation. The investment on this asset by the company with respect to skill, competence or expertise is a cost to the company and the employer’s intention is to make aware the employees that he/she has to ensure return on this investment through his/her consistent and continuous performance.

iii. Flexible Compensation Package – Employees are being offered compensation structure with numbers of benefits to choose to plan tax plan and provide freedom to choose to get maximum benefit.

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Compensation – 2 Main Objectives: Primary and Secondary Objectives

Objective # 1. Primary Compensation:

The primary objectives of compensation or wages are classified under four broad categories:

i. Equity,

ii. Efficiency,

iii. Macro-economic stability, and

iv. Optimum allocation of labour.

i. Equity:

The first category is equity, and may take several forms. Equity includes income distribution through narrowing down of inequalities, increasing the wages of the lowest paid employees, protecting real wages, and the concept of equal pay for work of equal value. Compensation management strives for internal and external equity. Internal equity requires that pay should be related to the relative worth of a job such that similar pay is assured for similar jobs.

External equity refers to making comparable payments, that is, paying workers what other firms in the labour market pay comparable workers. Compensation differentials, based on differences in skills or contribution, are all related to the concept of equity. Internal equity actually means employees and their contribution are treated fairly with a pay programme in relation to other jobs in the organization.

ii. Efficiency:

Efficiency is often closely related to equity. These two concepts are not adverse. The objectives of effi­ciency are evidenced in attempts to link a part of wages to productivity or profit, group or individual performance, acquisition and application of skills, and so on. Preparations to achieve efficiency are also seen as being equitable, provided they fairly reward performance. The preparations are treated as inequitable if the reward is viewed as unfair.

iii. Macro-Economic Stability:

Companies try to achieve macro-economic stability through high employment levels. Low inflation helps to achieve macro-economic stability. For instance, an inordinately minimum wage would have an adverse impact on the levels of employment, though at what level this consequence would occur is a matter of debate. Although compensation and compensation policies are two of the many factors which influence macro-economic stability, they do contribute to or hinder balanced and sustainable economic development.

iv. Efficient Allocation of Labour:

Employees consider the net gain. Efficient allocation of labour refers to the concept of labour/employee moving out of a situation to another for a net gain. Such movement may be from one geographical location to another, from one job to another, and within or outside an enterprise. The provision or availability of financial incentives causes such movement.

For example, workers are likely to move from a labour surplus or low-wage area to a high-wage area. On acquiring new skills, they may be tempted to derive benefit from moving to jobs with higher wages. Employee attrition is more when an employer’s wages are below market rates. Again, an employer attracts job applicants when his wages are above market rates. When employees move from declining to growth industries, an efficient allocation of labour due to structural changes takes place.

Objective # 2. Secondary Compensation:

From the standpoint of human resource management, a well-designed compensation package helps an organization to achieve additional objectives which are the secondary objectives of compensation. The secondary objectives include acquiring competent personnel, complying with regulations, controlling costs, enhancing administrative efficiency, facilitating understanding, retaining employees, and reward­ing desired behaviour.

i. Acquiring competent personnel – Good compensation helps an organization attract competent applicants. As everyone has become aware of their value in the market, it is only wise for the management to provide suitable compensation packages to the employees for their retention.

ii. Complying with regulations – A sound wage and salary system considers the legal challenges imposed by the government and ensures the employers compliance.

iii. Controlling costs – A rational compensa­tion system helps the organization obtain and retain workers at a reasonable cost. Without effective compensation man­agement, workers might be over-paid (when product costs go up) or under-paid (which reduces employee motivation).

iv. Enhancing administrative efficiency – Any organization desires and attempts to optimally use the human resource information systems (HRIS). A well-designed sound wage and salary programme helps to manage HRIS efficiently.

v. Facilitating understanding – The compensation management system should have a high level of clarity. In addition to the human resource specialists and operating managers, the employees also should understand the compensation management system easily.

vi. Retaining employees – Attrition may increase when compensation levels do not fulfil employees’ expectations. They quit due to the feeling that compensation is not competitive.

vii. Rewarding desired behaviour – Companies expect certain types of behaviour from the employees. Pay is likely to reinforce desired behaviours and acts as an incentive for the behavioural modi­fication, and for the behaviour to occur in the future. Effective compensation plans reward per­formance, loyalty, experience, responsibility, and other behaviours.

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