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COMPENSATION
Compensation

is a systematic
approach to providing monetary & non
monetary value to employees in
exchange for work performed.

Compensation is the process of

providing adequate, equitable and fair
remuneration to the employees. It is
what employees receive in exchange
for
their
contribution
to
the
organization. It is a comprehensive
term which includes pay, incentives

MEANING OF SALARY, WAGES AND

COMPENSATION

Wages: Payment for labor or services to a

worker, especially remuneration on an hourly,
daily, or weekly basis. The term is used for blue
collar jobs.
Salary: Regular wages received by an employee
from an employer on a weekly, biweekly, or
monthly period on the basis on contract signed
between employer and employee. It includes
employee benefits such as health and life
insurance, savings plans, and Social Security.
Generally used incase of white collar jobs

Compensation: Compensation" refers to money

received for work, and may be in the form of
wages, salaries and tips.
It includes all direct and indirect, monetary and
non-monetary rewards given to employees on the
basis of the value of the job, their personal
contributions, and their performance. While
making these payments one should be alive to the
governing legal regulations.

HISTORY OF COMPENSATION

Started with
Barter System
and was later on
shifted to
monetary terms.

To recruit & retain qualified

employees.

To increase or maintain
morale.

To determine basic wage &

salary.

To reward for job

performance or peak
performances

Reduce turnover and

encourage companys
loyalty.

OBJECTIVES

COMPENSATION COMPONENT

compensation

monetary

direct

Non monetary

indirect

COMPONETS OF FINANCIAL COMPENSATION

COMPONENT
Direct
compensation

Basic Pay

Bonus

Perks or perquisites (car, private dining,

spacious office) (with little or no cash value)

CONT
Indirect compensation

Insurance (health, eye).

Leaves (sick, holiday/personal)

Clothes

Company parties

Phones/laptop

BENEFITS OF NON
MONETARY PAYMENTS
Enhance

dignity & satisfaction from

work performed.
Allocate sufficient resources to
perform work assignments.
Offer supportive leadership &
management.
Enhance physiological health,
intellectual growth.

DETERMINANTS OF COMPENSATION

INTERNAL DETERMINANTS
Employers Compensation Strategy
Setting organization compensation policy to lead, lag, or match
competitors pay.
Worth of a Job
Establishing the internal wage relationship among jobs and skill
levels.
Employees Relative Worth
Rewarding individual employee performance
Employers Ability-to-Pay
Having the resources and profits to pay employees.

EXTERNAL DETERMINANTS
Labor Market Conditions
Availability and quality of potential employees is affected by economic
conditions, government regulations and policies, and the presence of unions.
Area Wage Rates
A firms formal wage structure of rates is influenced by those being paid by
other area employers for comparable jobs.
Cost of Living
Local housing and environmental conditions can cause wide variations in the
cost of living for employees.
Inflation can require that compensation rates be adjusted upward periodically
to help employees maintain their purchasing power.
Collective Bargaining
The term extends to all negotiations that take place between an employer,
group of employers or one or more employers organizations on the one hand,
and
one or more workers organizations on the other to
(a) Determine the working conditions and terms of employment and / or
(b) Regulate relations between employer and employee/workers and / or
(c) regulate relations between employer organization or employee/workers
organization

NEW DEVELOPMENTS
Competency based pay
and reward programmes (also
skill-based pay or knowledgebased pay)
Where the company pays for
the employees range, depth,
and types of skills and
knowledge, rather than for
the job title he or she holds.
Competencies
Demonstrable
characteristics of a person,
including knowledge, skills,

WHY COMPETENCY BASED PAY ?

Pay plans that aim for
high-performance work
system.
Paying for skills,
knowledge, and
competencies is more
strategic.
Measurable skills,
knowledge, and
competencies are the
heart of any companys
performance
management process.

COMPETENCY BASED PAY PROS & CONS

Pros
Higher quality
Lower absenteeism and fewer accidents
Cons
implementation problems
Cost implications of paying for unused knowledge, skills and
behaviors
Complexity of program
Uncertainty that the program improves productivity (Broadbanding)

TRENDS OF EXECUTIVE COMPENSATION

The

Executive Pay
Package
Base salary
Short-term incentives or
bonuses
Long-term incentives or
stock plans
Perquisites (perks)

COMPENSATION STRATEGY

Compensation or reward strategy can be defined as all

that an organization wants to do in the long-term to
develop and implement reward policies, practices, and
processes that will further the achievement of its goals.
There are three dimensions of total compensation
strategy, the explanation of these dimensions are given
below:
Money -this is the what dimension
Mix - this is the how, who, when dimension.
Message- messages are the why dimension

AIMS OF COMPENSATION STRATEGY

To support the corporate and HR strategies
To support the long-term growth and development
of the organization
To
align reward policies and processes to
organization and individual needs
To provide a sense of purpose and direction and a
framework for reward planning
To elicit desirable actions for the future
To
become action vehicles integrating and
institutionalizing mechanisms for change

AIMS OF COMPENSATION STRATEGY CONT.

To know how to manage labor costs which constitute a

major portion of total expenditure;
To boost the relationship between rewards and
performance
To ensure more flexible and cost-effective use of
resource;
To provide clear prospects for performing staff;
To have an idea where the organization is going, how
to get there, and how to know that the organization
has reached where it wanted to go.

PROCESS OF DEVELOPING OF COMPENSATION STRATEGY

Step-I Define the companys compensation philosophy

to ensure that it is aligned with the overall strategic
direction.

Step-II Document past and current compensation

policies and practices within the company.

Step III Identify the current market data and trends for
compensation in comparable locations and industries.

Step IV Develop a clear compensation strategy.

Step V Implement the strategy.

CONCLUSION
We can say that good
compensation can increase the
productivity of an organization
because its provides various
rewards, bonus, schemes etc. and
its compulsory for every
organization.