COMPENSATION
Meaning and Definition of Compensation
Compensation is an indispensable and most desirable part in every worker's life . It can be defined as the sum of money that an employer pays to an employee for providing his services to the organisation . Compensation determines the lifestyle of employee in the society , his dedication towards the organisation , and his level of motivation . Compensation is important for the employer also as it determines the production cost in the organisation . One of the major reasons for the incidents of strikes and lockouts in an organisation compensation . Therefore , the responsibility of determining compensation is not a very easy task for the HR personnel . A typical compensation of an employee comprises of financial as well as non - financial aspects .
According to Gary Dessler , " Compensation means all forms of pay or rewards going to employees and arising from their employment " .
According to Terry Leap , " Compensation is a broad term pertaining to financial rewards received by persons through their employment relationship with an organisation " .
According to R. Wayne Mondy , " Compensation is the total of all rewards provided to employees in return for their services . The overall purposes of providing compensation are to attract , retain and motivate employees " .
Compensation Plans
Compensation plan is the complete plan to award individuals for their efforts and to ensure that the employees stay with company and are satisfied over a longer period of time , Compensation plan completes the entire process of deciding the compensation package for the employee , giving it and revising the salaries , wages and incentive with time.compensation plan in India are as follows
1 ) Basic Salary : Basic salary is the fundamental component of pay structure . It is the major portion of the employee's compensation . Different components of the wages such as bonuses , premiums , allowances , etc. are determined with the help of basic salary . Seniority and rank are the two factors , which are considered for determining the basic salary . Basic salary is a major issue of discussion during negotiations between management and labour unions . Labour unions demand for increasing basic salary as it affects other benefits of the employees also .
2 ) Incentives : An incentive is a very important component of pay structure . It is given in addition to the regular wages . Incentives attract the employees and motivate them to perform better . It also motivates the employees to improve their efficiency and productivity of the organisation .
3 ) Bonus : Bonus is the payment which is given to workers as a share of the organisation's profits in a particular year . The profit is expected to be made due to contribution of employer and hard work of the workers . Bonus is paid according to the performance of employees based on certain criteria , which may include their eligibility , performance standards , time span , etc. Earlier , payment of bonus was just confined for the manual workers , but now they are applicable in almost all types of organisations . Profit - related bonus , attendance bonus , work study related bonus are some examples of bonuses .
4 ) Employee Benefits : Employee benefits are also known as fringe benefits or fringes . They are given to the employees in addition to their wages and salaries , e.g. , health care benefits , retirement benefits , etc.
5 ) Provident Fund : Provident fund is the payment which an employee receives after his retirement or when he resigns from the organisation . Both employee and employer contribute equally in the provident fund . The provident fund is mainly given with the objective to secure the future of employees after retirement .
6 ) Overtime Pay : It is the amount of compensation that an employee receives if he works for extra hours beyond his normal working hours . For example , if the working hours for an employee are 42 hours in aweek but if he is working for 48 hours in a week then he has to be paid extra amount for the extra 6 hours he has worked . In case , the employee is working for more than 48 hours in a week , he should be paid at double rate .
7) Allowances : Allowances can be defined as the payment given to an employee by an employer in monetary terms . It may be fixed , predetermined or it may be provided regularly in lieu of services given by the employee . Taxable , partially taxable , and fully taxable are the three types of allowances given to the employees . Some important allowances are given below :
i ) Dearness Allowance ( DA ) : Dearness allowance is that allowance which is given by an employer to his employees to compensate them for the increased level of price in the economy . It is a fully taxable allowance .
ii ) House Rent Allowance ( HRA ) : HRA is given to employees by his employer for his accommodation expenses .
iii ) Conveyance Allowance : It is an allowance which is given to employees to compensate the expenses incurred on the conveyance to perform their duties .
iv ) Leave Travel Allowance ( LTA ) : This allowance is given to employees for spending holidays with their families . The amount of allowance depends on the designation of the employees .
v ) Fixed Medical Allowance : This allowance is paid to employees at fixed time period at a fixed rate regardless of the actual amount of expenditure done on the medical treatment .
vi ) City Compensatory Allowance : This allowance is given to the employees who live in big cities . The aim of this allowance compensate the high cost of living in big cities .
vii ) Tiffin Allowance : It is paid to the employees by the employer in lieu of tiffin expenses .
viii ) Telephone / Mobile Allowance : This allowance is given to employees by the employer in order to help employees in maintaining a telephone or cell phone .
ix ) Children Education Allowance : This allowance is given to employees by the employer so that employees can meet the expenses of their children's education .
x ) Hostel Allowance : This allowance is given to the employees by the employer to meet the expenses that have incurred when their children are staying in hostel while studying away from their hometown .
Objectives of Compensation
Objectives of compensation are as follows :
1) Establish Equity : One of the most important reasons for making compensation plans is to establish equity . It refers to increasing the wages of the employees who are paid low and eliminating inequalities in the organisation . For this , concept of equal work for equal pay should be followed .
2) Increase Worker's Efficiency : One of the most important reasons for compensation is to increase the efficiency of the employees . It plays vital role in the motivation of the employees .
3) Macroeconomic Stabilization : Compensation is aimed at achieving macroeconomic stability . This can be attained by high employment rate and low inflation rate .
4) Effective Distribution of Labour : Compensation is designed to distribute labour effectively in labour market which means that employees can move wherever they find a profitable job . Such a movement can be : i ) From one place to other either in terms of location or within or outside the organisation . Movement can be at the same location but from one organisation to other . Major cause of such a movement is the money . For example , workers may move from a place where too much manpower is available and wages are lower to a place where high ages are available to the workers . ii ) When an employer offers below average wages to the employee , employee turnover rates are high . On the other hand , if the employer offers good wages then more applicants are applying for the job . iii ) When employee switches from an organisation which is collapsing to rising one efficient allocation of labour takes place on its own .
5) Maintain Income - Expenditure Ratio : If there is a proper compensation plan , then the employees will get the amount of wages they deserve . They will neither be under - paid nor over - paid . In that case , employees will not switch the job and organisation will remain in a healthy financial condition
6) Avoid Conflicts : If the compensation system is well planned , the workers will be satisfied and the workers ' union will have nothing to be unhappy and this will create harmony and peace in the organisation .
7) Legal Compliance : An effective compensation always complies with the laws . In this way , employer is also saved from the legal problems .
