Compensation and rewards

Introduction
 Meaning of Compensation

• Employees work to earn money (wages or

salary). This money is broadly termed as
compensation. It is the reward they want from
management in return for services rendered
to the organisation.
• The purpose of compensation is, thus, to
attract and retain the employees.
• Compensation is a comprehensive term which
includes wages, salaries, all other allowances and
benefits.
• Paying compensation evolves a system of wages
or salaries, their timely payment, job evaluation,
individual pay determination, incentive plans etc.
The personnel manager should determine
compensation in exchange for employees’
services as unbalanced compensation policy can
lead to industrial disputes, thus, affecting
industrial productivity and profits.
 Compensation relates to both
financial and non-financial rewards
• 1. Extrinsic rewards:
It relates to monetary rewards and incentives
such as wages, salaries, bonus, commission,
profit sharing etc.
• 2. Intrinsic rewards:
It is concerned with non-financial rewards that
satisfy employees’ psychological needs. These
rewards relate to job variety, achievement,
recognition, opportunities for career
development etc.
 Objectives of Paying Compensation

1. Attract qualified personnel:

In the competitive business environment,
managers pay high compensation to attract
qualified personnel. Professionally qualified
people do not join organisations that pay low
compensation.
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2. Retain personnel:

• If competing firms offer higher compensation,

employees will leave the organisations
resulting in high labour turnover. This is costly
for organisations in terms of appointing new
employees and training them. Compensation
should not only attract employees, it must
also retain them.
• 3. Equity in pay:
Compensation must be according to the
qualification of employees and with what similar
employees are getting in competing jobs.

• 4. Cost control:
Compensation adds to company’s cost. Proper
compensation policies help to maintain control
over costs.
• 5. Follow legal regulation:
Minimum wages are determined by the
Government. A sound wage system should
comply with legal regulations for paying wages.

• 6. Easy to understand:

The wage system should not be complicated. It

should be easily understood by employers and
employees.
 Nature of Compensation
1. Job Evaluation
2. Surveys of wages and salaries
3. Development and maintenance of compensation structure
4. Establishing rules for administering wages and salaries
5. Incentives and profit sharing
6. Control of compensation cost
7. Supplementary payments-fringe benefits and welfare facilities
8. Other related items like promotions, relations with supervisor
9. Wages and salary changes and adjustments
 Types of Compensation
1.Direct Compensation
2.Indirect Compensation

Direct compensation
• Direct Compensation consisting of pay
received in the form of wages, salaries,
bonuses and commissions provided as regular
and consistent intervals
 Indirect Compensation
• Indirect Compensation including all financial
rewards that are not included in direct
compensation and can be understood to form
part of the social contract between the
employer and employee such as benefits,
leaves, retirement plans, education, and
employee services.
 Financial and non Financial benefits

• Financial benefits are the monitory benefits

given to employee.
• Non-Financial compensation referring to
topics such as career development and
advancement opportunities, opportunities for
recognition, as well as work environment and
conditions.
 Compensation responsibilities
1.HR Manager is responsible for
• Developing compensation policies and structures
• Conducting job evaluation and pay survey
2. Managers are responsible for
• Matching performance and rewards
• Recommending pay rates and pay increases based on
guidelines of HR Department
 References
• Reference books-

Chhabra T.N., Compensation Management, Sun

India Publication, New Delhi,2010
Milkovich T.G, Newman M.J. and Venkata Ratam,
Compensation, Tata McGraw Hill Education Pvt.
Ltd. New Delhi, 2018
• Reference Website: http://www.hrmatters21.net
• Reference Journal for advance study:
https://www.tandfonline.com/toc/rijh20/current