What are the benefits of good compensation management to both the employee and the employer?

Human Resource Management (HRM) has never been as significant as it is today. Companies want to attract, retain and motivate brains to meet objectives. Today Humans are regarded as one of every company’s assets so they need to be efficiently and effectively managed. One of the tools companies use to attract, retain and motivate its people is Compensation Management. In this article, I shall define compensation and benefits along with their advantages for a company and its workers.

Suppose, you own a boutique. Let’s call it myWear - or you can give it any name of your liking. You have hired three salespersons and a receptionist. The salespeople are responsible to look after the sales affairs. The receptionist's duties are to handle the cash and manage the account books. I shall refer to this illustration throughout the article.

Compensation:
Would the three salespersons and the receptionist work for free? No. They would, like us all, expect something in return. You must have heard a common phrase: Give and Take. You always have to give things to people in return to what you take from them. Compensation refers to this exchange, but in monetary terms. Compensation is the employer's feedback for an employee's work. It simply is the monetary value you would give to your four employees in return of their services.

In the book Human Resource Management, Gary Dessler defines compensation in these words "Employee compensation refers to all forms of pay going to employees and arising from their employment." The phrase 'all forms of pay' in the definition does not include non-financial benefits, but all the direct and indirect financial compensations. I shall, Inshallah, explain the two terms in my next article 'Parts of Salary'.

Benefits:
Employees today are not willing to work only for the cash alone, they expect 'extra'. This extra is known as employee benefits. Also known as fringe benefits, Employee benefits are non-financial form of compensation offered in addition to cash salary to enrich workers’ lives.

What benefits would you offer to your employees at myWear? Off course, you would offer different benefits to the salespersons and the receptionist. Problem will arise when you begin to decide what benefit to give to whom and on which basis? Employee benefits are not performance-based, they are membership-based. Workers receive benefits regardless of their performances. Employee benefits as a whole have no direct affect on employee performance, however, inadequate benefits do contribute to low satisfaction level and increase absenteeism and turnover in employees (DeCenzo and Robbins; 2007). So you would have to carefully design your benefit package. Your package may include a cell phone to each worker, taking them to a training workshop or seminar, giving them a day or two off every month and so on. While deciding on the benefits package, do consider the associated costs.

ADVANTAGES OF COMPENSATION AND BENEFITS.
A well designed compensation and benefits plan helps to attract, motivate and retain talent in your firm (which is myWear). A well designed compensation & benefits plan will benefit your boutique in the following ways.

1. Job satisfaction: Your employees would be happy with their jobs and would love to work for you if they get fair rewards in exchange of their services.

2. Motivation: We all have different kinds of needs. Some of us want money so they work for the company which gives them higher pay. Some value achievement more than money, they would associate themselves with firms which offer greater chances of promotion, learning and development. A compensation plan that hits workers’ needs is more likely to motivate them to act in the desired way.

3. Low Absenteeism: Why would anyone want to skip the day and watch not-so-favorite TV program at home, if they enjoy the office environment and are happy with their salaries and get what they need and want?

4. Low Turnover: Would your employees want to work for any other boutique if you offer them fair rewards. Rewards which they thought they deserved?

ADVANTAGES TO YOUR EMPLOYEES
1. Peace of Mind: your offering of several types of insurances to your workers relieves them from certain fears. Your workers as a result now work with relaxed mind.

2. Increases self-confidence.
I shall, inshallah, explain types of rewards & parts of salary in my next article.

What is Compensation & Benefits?

Compensation and benefits refers to the compensation/salary and other monetary and non-monetary benefits passed on by a firm to its employees in return for their services. Compensation and benefits is an important aspect of HRM as it helps to keep the workforce motivated are the most important hygiene factors. It helps give benefits to employees based on their performance and actions and brings the best out the employees at workplace.

In this article:

• Importance of compensation and benefits
• Compensation and benefits components
• Types of Compensation
• Difference between compensation and benefits
• Compensation and Benefits Example

Importance of compensation and benefits

Companies hire people individual to achieve their organizational goals and people join companies to earn money & build their career. One of the biggest factors why people join companies in the compensation and benefits, salaries, perks, incentives etc. which is given to them. Apart from the company's reputation and job profile, the money offered as a salary is pivotal in attracting people to work for the organization. 

The more the compensation and benefits offered to employees, the more is their loyalty, motivation to work and do well. However, companies which offer lesser salaries see a high attrition rate and less productivity from employees. All these factors help in making compensation and benefits an important factor in managing workforce. Salaries of employees are defined by several parameters like experience, education background etc.

In senior management, skills like team management, communication management, leadership, time management etc. are also considered while finalizing the pay package.

Compensation and benefits components

There are several components in the overall compensation and benefits plan of an employee. There can be several ways where benefits can be given to employees.

Mostly it is given in terms of a CTC or gross salary.

Some of the various components of compensation and benefits are mentioned below:

1. Fixed pay

This is the basic salary plus other fixed components paid to the employee irrespective of any other factor. This is stated clearly in the employment contract. This is the compensation or salary or wage which an employee or a worker will definitely get as long as he or she is an employee of the company. 

Fixed pay is mostly the largest component of the compensation and benefits package offered by an organization to an employee.

2. Variable Pay

This is the additional compensation paid to employee based on employee’s performance, company performance etc. Since variable pay is based on the performance of an individual, it motivates the employees to perform even better.

3. Equity Pay

Employees are awarded shares of the company, often at a discounted price. Employees are expected to make money out of them by the appreciation of the stock price and the growth of the company.

This is mostly given to the senior management who have served the company for a long time.

4. Medical

Medical is part of the compensation package for most of the companies now. Medical includes the health insurance, free checkups, medical facilities on campus etc. which keeps the employees safe as well as motivated.

5. Insurance

As discussed in the previous point. Medical insurance is part of the package these days. Many companies also offer insurance for parents and siblings as well or at subsidized rates. Even other insurance can be included.

6. Accommodation

Many companies even offer accommodation to employees. This can be either be in the form of a company provided place or the employee can claim the rent and the lease amount as per the company rules and policies.

Many companies even provide car or taxi facilities to employees to reach office.

Types of Compensation

Based on the seniority, responsibility and position of an employee, there are various types of plans:

1. Executive compensation for CEOs, managing directors, chairman etc. Mostly salaries and perks are decided by the committee.

2. Workers compensation is the salary and wages provided to employees and workers.

Difference between compensation and benefits

Both the factors are important in motivating employees for doing their work and paying them for the services they are doing for the company. However, there is a slight difference between compensation and benefits.

Compensation is completely related to the money which is being paid to an employee i.e. salary. bonuses etc. On the other hand, benefits are the non-monetary incentives given to employees like health benefits for which the employee doesn't have to pay.

Compensation and Benefits Example

A company offers a salary package to an employee which has both compensation structure and benefits plans. The compensation plan would entail the components like fixed pay etc. and benefits would include medical insurance and work from home etc. 

Hence, this concludes the definition of Compensation & Benefits along with its overview.

This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.

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