Compensation Definition, Importance, Types, Components & Overview

Posted in Human Resources Terms, Total Reads: 23185

Definition: Compensation

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

4. Bonus is a component given monthly or yearly based on company's performance


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:

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

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

All these summarize an overall description about compensation in HRM.

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

Browse the definition and meaning of more terms similar to Compensation. The Management Dictionary covers over 7000 business concepts from 6 categories. This definition and concept has been researched & authored by our Business Concepts Team members.

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