Chapter Seven- Human Resource Management
Chapter Seven
Compensation
Definition:
given or received as payment for service. The word compensation may be defined as money
received in the performance of work, plus the many kinds of benefits and services that organization
provides their employee. It refers to wide range of financial and non-financial rewards to employee
for their service rendered to the organization.
It is paid in the form of wages, salaries, special allowance and employee benefits such as paid
vacation, insurance, maternity leaves, free travel facility, retirement benefits etc.
According to Wendell French,
salaries and all other allowance and benefit
7.1. Importance of Compensation
Compensation can include monetary and non-monetary components. Compensation often includes
performance bonuses. The compensation packages a business offers to employees affects the
the compensation that businesses offer. A business owner should understand the importance of
compensation and the prevailing laws to remain competitive in the market. Importance of
compensation in the workplace are:
1. Recruitment
The compensation packages that businesses offer to employees play an important role in the
op talent as job candidates. Top-performing employees greatly impact
the competitiveness and productivity of a business.
2. Motivation
only factor. According to an article written by Mae Lon Ding of Personnel Systems Associates,
compensation systems positively impact a large percentage of workers' performances. Many
employees feel motivated to help their companies succeed if the employer shares its profits with
employees, such as with bonuses or profit-sharing plans. The greatest impact of money on
productivity and performance is in jobs where performance is directly related to compensation.
For example, the knowledge of receiving a bonus after achieving a certain sales quota will likely
motivate a salesperson to increase productivity.
Page 1
, Chapter Seven- Human Resource Management
3. Retention
Retaining productive employees is critical to running a successful business. Retaining employees
saves companies money in training costs and helps maintain an efficient and knowledgeable
workforce. Health insurance and retirement packages are benefits that many employees desire
from their employers. Companies that offer these benefits have a much better chance of retaining
workers than businesses that fail to offer benefit packages. Other ways to retain employees is
through regular promotions, which not only provide an employee with a higher base salary, but
also the ability to take on more responsibility in the workplace.
Objectives of Compensation Planning
The basic purpose or objective of establishing sound compensation is to establish and maintain an
equitable rewards system. The other aim is the establishment and maintenance of an equitable
compensation structure i.e an optimal balancing of conflicting personnel interest so that the
satisfaction of employees and employers is maximized and conflicts minimized, the compensation
management is concerned with the financial aspect of employees need, motivation and rewards.
A sound compensation structure tries to achieve these objectives:
To attract manpower in a competitive market.
To control wages and salaries and labor costs by determining rate change and frequency of
increment.
To maintain satisfaction of employees by exhibiting that remuneration is fair adequate and
equitable.
To induce and improved performance, money is an effective motivator.
a) To Employees:
Employees are paid according to requirement of their jobs i.e highly skilled jobs are paid more
compensation than low skilled jobs. This eliminates inequalities.
The chances of favoritism are minimized.
Jobs sequence and lines of promotion are established wherever they are applicable.
b) To Employers:
They can systematically plan for and control the turnover in the organization.
A sound compensation structure reduces the likelihood of friction and grievance over
remunerations.
Page 2
Chapter Seven
Compensation
Definition:
given or received as payment for service. The word compensation may be defined as money
received in the performance of work, plus the many kinds of benefits and services that organization
provides their employee. It refers to wide range of financial and non-financial rewards to employee
for their service rendered to the organization.
It is paid in the form of wages, salaries, special allowance and employee benefits such as paid
vacation, insurance, maternity leaves, free travel facility, retirement benefits etc.
According to Wendell French,
salaries and all other allowance and benefit
7.1. Importance of Compensation
Compensation can include monetary and non-monetary components. Compensation often includes
performance bonuses. The compensation packages a business offers to employees affects the
the compensation that businesses offer. A business owner should understand the importance of
compensation and the prevailing laws to remain competitive in the market. Importance of
compensation in the workplace are:
1. Recruitment
The compensation packages that businesses offer to employees play an important role in the
op talent as job candidates. Top-performing employees greatly impact
the competitiveness and productivity of a business.
2. Motivation
only factor. According to an article written by Mae Lon Ding of Personnel Systems Associates,
compensation systems positively impact a large percentage of workers' performances. Many
employees feel motivated to help their companies succeed if the employer shares its profits with
employees, such as with bonuses or profit-sharing plans. The greatest impact of money on
productivity and performance is in jobs where performance is directly related to compensation.
For example, the knowledge of receiving a bonus after achieving a certain sales quota will likely
motivate a salesperson to increase productivity.
Page 1
, Chapter Seven- Human Resource Management
3. Retention
Retaining productive employees is critical to running a successful business. Retaining employees
saves companies money in training costs and helps maintain an efficient and knowledgeable
workforce. Health insurance and retirement packages are benefits that many employees desire
from their employers. Companies that offer these benefits have a much better chance of retaining
workers than businesses that fail to offer benefit packages. Other ways to retain employees is
through regular promotions, which not only provide an employee with a higher base salary, but
also the ability to take on more responsibility in the workplace.
Objectives of Compensation Planning
The basic purpose or objective of establishing sound compensation is to establish and maintain an
equitable rewards system. The other aim is the establishment and maintenance of an equitable
compensation structure i.e an optimal balancing of conflicting personnel interest so that the
satisfaction of employees and employers is maximized and conflicts minimized, the compensation
management is concerned with the financial aspect of employees need, motivation and rewards.
A sound compensation structure tries to achieve these objectives:
To attract manpower in a competitive market.
To control wages and salaries and labor costs by determining rate change and frequency of
increment.
To maintain satisfaction of employees by exhibiting that remuneration is fair adequate and
equitable.
To induce and improved performance, money is an effective motivator.
a) To Employees:
Employees are paid according to requirement of their jobs i.e highly skilled jobs are paid more
compensation than low skilled jobs. This eliminates inequalities.
The chances of favoritism are minimized.
Jobs sequence and lines of promotion are established wherever they are applicable.
b) To Employers:
They can systematically plan for and control the turnover in the organization.
A sound compensation structure reduces the likelihood of friction and grievance over
remunerations.
Page 2
