Components of Compensation paid to Employees

A rigorous review of compensation and all its components

Compensation is what is paid to an employee, whether in the form of wages, salary or incentives by the employer for a specific amount of time, skill and effort made available by the employee in fulfilling specific job requirements (Biesheuval, 1984).

Compensation is important in organisations as it conveys information to an employee about their relative importance to the organisation and provides a scale to identify how much recognition they are receiving for their contribution (Harley and Stephenson, 1992). Compensation shows employees how much they are appreciated and worth. The most important differentiating element between jobs is the effort involved in performing a job (Biesheuval, 1985).

• Objectives of pay systems (Harzing and Van Ruysseveld, 1999):

Objective: How to achieve it.

To attract employees: Job salary

To keep qualified employees: Bonus or incentive to stay e.g. shares

To stimulate effective performance: Payment by results

To teach employees new behaviours at work: Multi-skill bonus

To compensate for inconvenient working conditions: A separate allowance

• Monetary and non-monetary compensation

Compensation is made up of many parts. Although money (extrinsic compensation) is the most recognised, other factors can be just as rewarding.

Employee benefits are one type of non-monetary compensation and are intended to improve the quality of work life of an organisations labour force (Sherman and Bohlander, 1992). These benefits make up a significant portion of the wage bill. Although benefits were initially introduced as a bonus to employees, they have since come to be expected in the workplace (ibid). Employee input is integral in determining the type of non-monetary compensation that is the most desired (ibid).

Benefits (Sherman and Bohlander, 1992):

• Medical aid funds including health and dental plans

• Pension funds where the employer also contributes a percentage.

• Employee assistance programs where counselling and assistance are provided with day-to-day issues such as career planning and emotional trauma.

• Education assistance plans where the employer pays a portion towards further study. This often benefits the employer as the employee becomes more multi-skilled and efficient at their job.

• Child and elder care ...

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...e company’s overall strategy before determining the compensation structure. The way an organisation uses compensation can drive an organisation in specific directions (Noe et al, 2003). Therefore, great thought should go into deciding what type of compensation structure to use in terms of the whole organisations strategy and the chosen method should contribute to furthering the overall objectives of the organisation (Sherman and Bohlander, 1992). E.g., individual incentives will not fit into an organisation that wants to further a team-based approach to work (ibid). Compensation sends a message about what an organisation feels is important and the types of activities it encourages (Sherman and Bohlander, 1992). Compensation tailoring is an integral method of maintaining the budget (ibid). For this reason, many companies resort to retrenchments in economic downturns (Venter, 2003). An organisations compensation program determines the type of employees that it will attract as well as either increase or decrease the applicant pool (Sherman and Bohlander, 1992).

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Works Cited

Work Motivation and Compensation By Simon Biesheuvel Published 1984 McGraw-Hill ISBN:0074507184