Compensation is the monetary benefit which is given to an employee or worker giving their services to an organization. Compensation includes components like salary, wages, bonuses etc. The compensation provided helps in motivating the employees, build their career and ensure that their are committed in achieving the company goals.
Compensation is something, most usually money, which is given to the employees of an organization or company as payment or reparation for their service towards the organization or because of their loss incurred due to any organizational activity.
Importance of compensation
Compensation is important for an organization to consider its mission and vision and its strategies and then devise the compensation system such that all these components are inter-linked and aligned with each other. Compensation comes under the parlance of human resource (HR) department of an organization. It is the tool that organizations use to manage and reward their employees, so that they perform efficiently. The compensation system that company follows should be an attracting one, and it should motivate its employees to work and justify the amenities provided to them by the company. The compensation system should also ensure that the turnover rate remains low and the employees remain motivated. Along with other non-monetary perks & incentives, the company offers compensation and benefits to its employees. Companies have to devise a compensation plan based on the position, responsibility and qualification of an employee.
Components of compensation
Compensation can be divided into the following components:
1. Completely fixed (per month or year)
2. Some fixed component, along with a variable component (which is decided based on the rating of the employee and his meeting of the targets)
3. Total variable component, where the total salary depends on the rating received during evaluation
The compensation system followed by a company should be regularly evaluated and updated as per its evolving strategies and also based on the moves of its competitors. Mostly compensation is paid at regular intervals like a monthly payment. However, in certain cases the payment of wages and salaries is delayed, which is known as deferred compensation.
Sometimes instead of giving money, companies do payments on behalf of employees, which is also referred as indirect compensation.
Types of compensation
Based on the seniority, responsibility and position of an employee, there are various types of compensation plans: