Compensation is the remuneration received by an employee in return for his/her contribution to the organization. It is an organized practice that involves balancing the work-employee relation by providing monetary and non-monetary benefits to employees. Compensation is an integral part of human resource management which helps in motivating the employees and improving organizational effectiveness.
Components of Compensation System
Compensation systems are designed keeping in minds the strategic goals and business objectives. Compensation system is designed on the basis of certain factors after analyzing the job work and responsibilities. Components of a compensation system are as follows:
Job Anlaysis -> Pay Structures ->Salary Surverys.
Types of Compensation
Compensation provided to employees can direct in the form of monetary benefits and/or indirect in the form of non-monetary benefits known as perks, time off, etc. Compensation does not include only salary but it is the sum total of all rewards and allowances provided to the employees in return for their services. If the compensation offered is effectively managed, it contributes to high organizational productivity.
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.
IMPORTANCE OF COMPENSATION
Compensation and Reward system plays vital role in a business organization. Since, among four Ms, i.e. Men, Material, Machine and Money, Men has been most important factor, it is impossible to imagine a business process without Men. Every factor contributes to the process of production/business. It expects return from the business process such as rent is the return expected by the landlord, capitalist expects interest and organizer i.e. entrepreneur expects profits. Similarly the labour expects wages from the process.
Labour plays vital role in bringing about the process of production/business in motion. The other factors being human, has expectations, emotions, ambitions and egos.
Labour therefore expects to have fair share in the business/production process. Therefore a fair compensation system is a must for every business organization. The fair compensation system will help in the following:
An ideal compensation system will have positive impact on the efficiency and results produced by employees. It will encourage the employees to perform better and achieve the standards fixed.
It will enhance the process of job evaluation. It will also help in setting up an ideal job evaluation and the set standards would be more realistic and achievable.
Such a system should be well defined and uniform. It will be apply to all the levels of the organization as a general system.
The system should be simple and flexible so that every employee would be able to compute his own compensation receivable.
It should be easy to implement, should not result in exploitation of workers.
It will raise the morale, efficiency and cooperation among the workers. It, being just and fair would provide satisfaction to the workers.
Such system would help management in complying with the various labor acts.
Such system should also solve disputes between the employee union and management.
The system should follow the management principle of equal pay.
It should motivate and encouragement those who perform better and should provide opportunities for those who wish to excel.
Sound Compensation/Reward System brings peace in the relationship of employer and employees.
It aims at creating a healthy competition among them and encourages employees to work hard and efficiently.
The system provides growth and advancement opportunities to the deserving employees.
The perfect compensation system provides platform for happy and satisfied workforce. This minimizes the labour turnover. The organization enjoys the stability.
The organization is able to retain the best talent by providing them adequate compensation thereby stopping them from switching over to another job.
The business organization can think of expansion and growth if it has the support of skillful, talented and happy workforce.
The sound compensation system is hallmark of organization’s success and prosperity. The success and stability of organization is measured with pay-package it provides to its employees.
28th July 2011 From India, Hyderabad