COMPENSATION

Concept and Meaning of Compensation Management

INTRODUCTION

According to Barneat (1995), compensation is "equal in the opposite sense the effect of the thing with other" or” giving or make a profit in compensation for any damage caused", both definition can be found at the main element, the idea of exchange or return.

If move this idea to the organizational field appears, immediately, the relationship between person and organization, a resource sharing relationship in which the feeling is reciprocal, where both elements what are offering and what are getting in return. (Chiavenato, 2000). This relation is established when the people bring to the work in exchange for something that receive in return. It is here where appears the concept of compensation, which is far from playing an instrumental role, becomes a important factor that determined the existence of the organization (Fernandez, 2002).

The compensation is concerned when the gratification that employees are getting for the work, included all forms of payment or rewards that the employees receive (Dessler, 1996), and contributing to the satisfaction, in addition this help the organization to obtain, maintain and retain a productive workforce

Concept & Meaning

Compensation means the basic returns that an employee obtains from his/her work. Every organization offers a good compensation to attract and retain the ablest employees in the actual work floor. It is because if the company does not offer an attractive package of compensation, compared to other competitive firms, the efficient employees may leave the firm. Hence, the employees should be compensated adequately. A well-designed job evaluation program helps to determine an appropriate compensation system.

Compensation may be defined as a package of financial and non-financial benefits that the employee receives for his/her contribution rendered to the organization. It consists of all forms of monetary and non-monetary rewards/pays provided by the employer to the employees for services contributed by them towards organizational objectives. It has two main components- direct financial payments and indirect payments. The direct payments consist of salaries, wages, incentives, commissions, bonuses, etc. Whereas, the indirect payments comprise financial benefits like paid leaves, employee aid insurance etc.

Compensation is a major component of reward which is basically given to the employees in return of their services. It is a package of quantifiable rewards provided to the employees. Hence, the assignment of appropriate/low cost compensation is known as compensation management. It will attract, motivate and retain competent employees at work, and this helps to minimize the turnover ratio.

Methods of Establishing Employee's Compensation

The main purpose of establishing employee compensation system is to value and price each job. The methods to be followed for the establishment of compensation are as follows:

1. Job Analysis

Job analysis is known as a process of collecting necessary information relating to job and its specifications. The required information can be collected through different methods such as surveys, observation, discussions, and so on. The information is collected for the preparation of job description and job specification statements.

2. Job Evaluation

Job evaluation is a systematic approach of evaluating or rating or valuing the job in terms of its worthiness, It puts jobs in a hierarchy and assign a relative worth of each job so that a pay structure can be determined. It means a systematic comparison of job is done in order to determine the worth of one job relative to another. Job evaluation provides an objective ranking of jobs so that an equitable and appropriate rate of pay can be determined for each job. This provides a basic ground for the determination of an efficient pay structure through the identification of compensation factors.

3. Compensation surveys

Compensation surveys refer to collecting information on prevailing market rates through different channels. The information can be collected through formal or informal surveys. Most employers in a small scale operation use informal telephone calls to collect data on a relatively small number of easily identified jobs. This informal telephone call is also a good technique for checking discrepancies in the wage rate. Under this method, the data and information relating to other's pay structure are obtained so that the collected data can serve a standard benchmark for formulating compensation plans and policies. The required data and information are collected through different sources such as published surveys, consultants and agencies, advertisements, informal communication etc.

4. Pricing Jobs

Under pricing jobs method, different pay levels are determined based on the grade of each job. Firstly the jobs are grouped into pay grades, than, the pay rates are assigned to each individual pay grade, rather than assigning rate to each individual job. A pay grade comprises of jobs of approximately equal difficulty or importance. It means, the jobs having similar nature can be grouped under a job grade as determined by job evaluation. If we use a point method in it, a particular grade falls within a range of certain points. For instance 0-50 points, 50-100 points, and so on.

Types of Compensation

Compensation is a package of salaries and wages, pay incentives and benefits that an employee receives as remuneration for rendering services to the organization. Depending upon the nature and mode of compensation, it can be categorized into two dimensions as follows:

1. Financial Benefits

The financial benefits consist such payments which are paid in terms of monetary gains. They enhance the economic well-being of the employees. Financial payments can either be direct or indirect.

Direct Payments

Direct payments consist of wages, salaries, bonuses, commissions, and other direct forms of payments.

Indirect Payments

Indirect payments consist of insurance, social benefits, allowances, employee services, holidays etc.

2. Non Financial Benefits

The non-financial benefits include everything in a work environment which is not expressed in monetary units. They help to enhance a worker's sense of self-respect and sense of being accomplished. The ideas under it are shown as:

Work Benefits

Work benefits consist of challenging job, responsibility, accountability, feeling of achievement and so forth.

Environment Benefits

Environment benefits consist of appropriate policy, adequate supervision, co-worker's status, interesting job, appropriate timing, and the like.

Need of Compensation Management

§ A good compensation package is important to motivate the employees to increase the organizational productivity.

§ Unless compensation is provided no one will come and work for the organization. Thus, compensation helps in running an organization effectively and accomplishing its goals.

§ Salary is just a part of the compensation system, the employees have other psychological and self-actualization needs to fulfill. Thus, compensation serves the purpose.

§ The most competitive compensation will help the organization to attract and sustain the best talent. The compensation package should be as per industry standards.

Elements of compensation

According to Villanueva and Gonzales (2005), total compensation consists of three main elements:

Base remuneration

It could be defined as the regular payment or the pay a person receives for the services when has contract for a company, which provides a structures and system of equal pay to employees, depending of the position, long term performance, skills and the market (Villanueva and Gonzalez, 2005). The base salary is the plataform of the total compensation and considers the legal aspects of the market

Incentives

Correspond to the variable component of total compensation because they are tied directly to the performance or productivity, in others words, there is a direct relationship between the what the employees does (results) and incentives to get of the company. The amount of the incentives depends of the results and it is not guaranteed. The incentives can be called: bonus, profit share, commissions and stock options, these depend of the performances over the long or short term, goals, results and reducing costs.

Benefits

These are commonly understood as non-monetary component of total compensation, including: vacations, life and health insurance, agreements, retirement plan. These elements depend mainly on the type of organization and the type of position in the company.

Functions of the compensation

Fernandez (2002) identifies four functions of compensation:

Strategic Alignment

The compensations are an excellent way to keep together the goals and values of an organization with the motivation and performance of workers (Fernandez, 2002), because the compensation is a communication way between employees and the organization

If the compensation has a designed properly, this indicated that the company wants as a result the employees adjust the performance and the work, but if the work is rewarded.

The relationship between the organization as goals, motivation and performance of individuals, linked by the compensations, it is the role of strategic alignment.

Internal Equity

Refers to pay as the impact of each work on the business results. This impact is pay by work evaluations techniques. The total compensation payment is the sum of the charge and payment by results, after this, it is not possible to do an equal salary to look the same positions, and then of course the income will be different according to the best or worst result for each employee (Fernandez, 2002)

External competitiveness

The compensations should facilitate the recruitment and maintenance staff that the organization requires. As a result, the company need looking at the market and establishes the level of pay, because if the company does not pay what the market offers comparative, the probability of not found good talents, rotation and inefficiency is very high. "Compensation always should be the result between the internal equity and external competitiveness"

Performance Management

The design of compensation must guarantee the performance of people is directed to what the company expects, because the idea is to link performance with overall business strategy. It is essential to have performance indicators to replace subjective assessments and uninspiring effects on the motivation of individuals (Fernandez, 2002).