Human Resource Management: 3 types of Compensation and Benefits Compensation and Benefits is rewarding the employee for the

services rendered by them for the benefit of the organization. It is a set of programs aimed at achieving the following objectives: Compensation aids in attracting capable employees to the organization. It also helps motivate employees towards superior performance. Compensation also helps in retaining the employees and their services over an extended period of time. Types of Compensation and Benefits There are three types of Compensation and Benefits namely; Base Compensation Variable Compensation Supplementary Compensation Base Compensation and Benefits Base Compensation is one type of Compensation. It refers to the basic salaries and wages given to he employees. It is normally constant at a given amount irrespective of the difference in work performance. Factors influencing Base Compensation and Benefits One factor that influences Base Compensation is demand and supply of labor in the market. Labor union pressure is also another factor influencing Base Compensation. This is because unions always try their best to fight for their members rights. Nature of job as determined by the job description, each employee deserves a different compensation package. Size of the organization and its ability to pay its employees. Product market compensation is yet another factor influencing Base Compensation. Psychological and social factors like employee satisfaction and security. Salaries paid by similar firms are also a factor affecting Base Compensation. Government policies on wage determination Cost of living of the employees. When the employees cost of living is very high then they need a higher compensation benefit. Increase in productivity of labor Firms in general; whether competing firms or not. Variable Compensation and Benefits This type of compensation as by its name is variable. It means that one gets compensation as per the work done. If one does a remarkable job then he or she deserves a higher compensation package than one whose work is of poor quality. Supplementary Compensation and Benefits Supplementary Compensation is compensation given by an employer when he or she wishes to. It is not compulsory or a routine once one is given the compensation that one will be awarded another time. In this type of Compensation the employer has a right to add, deduct or even withdraw the benefits when he or she wishes to. Conclusion on Compensation and Benefits As seen above Compensation comes in three different types that are base compensation, variable compensation and supplementary compensation and Benefits.

How is compensation used? Compensation is a tool used by management for a variety of purposes to further the existance of the company. Compensation may be adjusted according the the business needs, goals, and available resources. Compensation may be used to: recruit and retain qualified employees. increase or maintain morale/satisfaction. reward and encourage peak performance. achieve internal and external equity. reduce turnover and encourage company loyalty. modify (through negotiations) practices of unions. Recruitment and retention of qualified employees is a common goal shared by many employers. To some extent, the availability and cost of qualified applicants for open positions is determined by market factors beyond the control of the employer. While an employer may set compensation levels for new hires and advertize those salary ranges, it does so in the context of other employers seeking to hire from the same applicant pool. Morale and job satisfaction are affected by compensation. Often there is a balance (equity) that must be reached between the monetary value the employer is willing to pay and the sentiments of worth felt be the employee. In an attempt to save money, employers may opt to freeze salaries or salary levels at the expence of satisfaction and morale. Conversely, an employer wishing to reduce employee turnover may seek to increase salaries and salary levels. Compensation may also be used as a reward for exceptional job performance. Examples of such plans include: bonuses, commissions, stock, profit sharing, gain sharing. What are the components of a compensation system? Compensation will be perceived by employees as fair if based on systematic components. Various compensation systems have developed to determine the value of positions. These systems utilize many similar components including job descriptions, salary ranges/structures, and written procedures. The components of a compensation system include Job Descriptions A critical component of both compensation and selection systems, job descriptions define in writing the responsibilities, requirements, functions, duties, location, environment, conditions, and other aspects of jobs. Descriptions may be developed for jobs individually or for entire job families. Job Analysis The process of analyzing jobs from which job descriptions are developed. Job analysis techniques include the use of interviews, questionnaires, and observation. Job Evaluation A system for comparing jobs for the purpose of determining appropriate compensation levels for individual jobs or job elements. There are four main techniques: Ranking, Classification, Factor Comparison, and Point Method. Pay Structures Useful for standardizing compensation practices. Most pay structures include several grades with each grade containing a minimum salary/wage and either step increments or grade range. Step increments are common with union positions where the pay for each job is predetermined through collective bargaining. Salary Surveys Collections of salary and market data. May include average salaries, inflation indicators, cost of living indicators, salary budget averages. Companies may purchase results of surveys conducted by survey vendors or may conduct their own salary surveys. When purchasing the results of salary surveys conducted by other vendors, note that surveys may be conducted within a specific industry or

across industries as well as within one geographical region or across different geographical regions. Know which industry or geographic location the salary results pertain to before comparing the results to your company. Policies and Regulations Compensation will be perceived as fair if it is comprised of a system of components developed to maintain internal and external equity Different types of compensation include: Base Pay Commissions Overtime Pay Bonuses, Profit Sharing, Merit Pay Stock Options Travel/Meal/Housing Allowance Benefits including: dental, insurance, medical, vacation, leaves, retirement, taxes Forms of Employee Compensation Base Pay Base pay, hourly wages or salary are amounts paid according to your company's compensation structure. The amount depends on the level of responsibility, job duties and tasks, education, experience and credentials. The basic components of employee compensation and benefits Employee compensation and benefits are basically divided into four categories: 1. Guaranteed pay monetary (cash) reward paid by an employer to an employee based on employee/employer relations. The most common form of guaranteed pay is the basic salary. 2. Variable pay monetary (cash) reward paid by an employer to an employee that is contingent on discretion, performance or results achieved. The most common forms are bonuses and sales incentives. 3. Benefits programs an employer uses to supplement employees compensation, such as paid time off, medical insurance, company car, and more. 4. Equity-based compensation a plan using the employers share as compensation. The most common examples are stock options. Bonus plans are variable pay plans. They have three classic objectives: 1. Adjust labor cost to financial results the basic idea is to create a bonus plan where the company is paying more bonuses in good times and less (or no) bonuses in bad times. By having bonus plan budget adjusted according to financial results, the companys labor cost is automatically reduced when the company isnt doing so well, while good company performance drives higher bonuses to employees. 2. Drive employee performance the basic idea is that if an employee knows that his/her bonus depend on the occurrence of a specific event (or paid according to performance, or if a certain goal is achieved), then the employee will do whatever he/she can to secure this event (or improve their performance, or achieve the desired goal). In other words, the bonus is creating an incentive to improve business performance (as defined through the bonus plan). 3. Employee retention retention is not a primary objective of bonus plans, yet bonuses are thought to bring value with employee retention as well, for three reasons: a) a well designed bonus plan is paying more money to better performers; a competitor offering a competing job-offer to these top performers is likely to face a higher hurdle, given that these employees are already paid higher due to the bonus plan. b) if the bonus is paid annually, employee is less inclined to leave the company before bonus payout; often the reason for leaving (e.g. dispute with the manager, competing job offer) 'goes away' by the time the bonus is paid. the bonus plan 'buy' more time for the company to retain the employee. c) employees paid more are more satisfied with their job (all other things being equal) thus less inclined to leave their employer.