The total of all rewards given to employees as a result of their services refer as compensation. Following are the different types of compensation.
- Financial Compensation
- Executive Compensation
- Compensation for Professionals
Different Types of Compensation
Financial Compensation
The Compensation which is given to its employees in the shape of cash, cheque and any other mode of money is known as financial compensation. Financial Compensation has further more three types.
See Also: Methods of Performance Appraisal
Direct Financial Compensation: it is made up of pay that an individual receives in the shape of salaries, wages, commissions and bonuses.
Indirect Financial Compensation: All financial rewards that are not contained in direct compensation refer as indirect financial compensation.
Non-financial Compensation: Non-financial compensation is composed of satisfaction that an individual gets from the job itself or from the physical and/or psychological surroundings in which an individual works. All such rewards consist of an entire compensation program.
Equity in Financial Compensation
Competent employees must be attracted, motivated and retained by the business organizations. Organization must struggle for compensation equity because accomplishment of these objectives is largely achieved through compensation system of business organization.
- Equity
It is the perceptions of employees that they are fairly treated. Compensation must be perceived as fair and must be fair to all parties concerned.
- External Equity
It exists when employees of a business organization are paid comparably to employees who do same jobs in other business organizations.
- Internal Equity
It exists when workers are paid according to the relative worth of their jobs inside the business organization.
- Employee Equity
It exists when persons doing same jobs for the same business organization are paid according to factors unique to the employee like seniority or performance level.
- Team Equity
It accomplished when more effective teams are rewarded more than less effective teams.
Determinants of Individual Financial Compensations
A satisfactory answer can never be provided by the compensation theory about what a person is worth for performing jobs.
- The Organization
- The Labor Market
- The Job
- The Employee
The above all have an influence on job pricing and final ascertaining of a person’s financial compensation.
- The Organization as a Determinant of Financial Compensation
Compensation Policies: Compensation policies are developed mostly by the organization formally or informally in order to ascertain whether it will be a pay follower, a pay leader or strive for an average position in the labor market.
See Also: What is Job Performance
Organizational Policies: Political considerations may also be comes into action. Organizational policies can destroy a sound objective compensation system. This possibility should be kept in mind by managers and they should take appropriate actions.
Ability to Pay: In ascertaining pay levels, an organization’s assessment of its ability to pay is also a significant component. A higher than average compensation is tends to be provided by financially successful organizations. However, the upper limit of what organization will pay is established by an organization financial strength.
- The Labor Market as Determinant of Financial Compensation
Compensation Surveys: The prevailing pay rates within labor markets are determined by compensation surveys routinely conducted by large organizations.
Cost of Livings: If a person is to keep a previous level of real wages then a pay increase must be roughly equivalent to the cost of living increase.
Labor Unions: The employer must obtain accurate labor market data when a union uses comparable pay as a standard for making compensation demands. Management may be pressured to contain cost-of-living allowance (COLA) when a union emphasizes cost of living.
Society: The pricing of goods and/or services of business organization is mostly influence by compensation paid to employees. In compensation decisions, consumers may also be interested.
Economy: In most situations, in an expanding economy, the cost of living will rise. Hence pay decisions are potentially affected by the economy’s health.
Legislation: The amount of compensation an individual gets can also be influenced by certain state and federal legislation.
- The Job as a Determinant of Financial Compensation
Job Analysis and Job Descriptions: In order to ascertain the value or relative difficulty of its jobs by organization, it must first specify their content, which it generally performed by examining jobs.
The systematic process of ascertaining the knowledge and skills needed for doing jobs is refer to as job analysis.
The main by-product of job analysis is job description, composed of written document that specifies job responsibilities & duties. Job descriptions are used for several various purposes, especially job evaluation.
Job Evaluation: The ascertaining of relative value of one job compared with that of another by the business organization is the part of compensation system known as job evaluation.
- The Employee as the Determinant of Financial Compensation
Performance Based Pay: The input for the approaches like variable pay, merit pay, skill-based pay and competency-based pay is provided from performance appraisal data.
Seniority: The length of time a worker has been linked with division, company, department or job refers as seniority.
Experience: Very few components have a more important influence on the performance than experience, regardless of the nature of the task.
Membership in the Organization: Some elements of personal financial compensation are provided to employees without regard to their level of productivity or particular job they perform.
Potential: On the basis of potential of individuals, organizations do pay them.
Executive Compensation
Executive skill largely ascertains whether a business organization will fail, survive or prosper. Therefore, it is vital to give these managers an adequate compensation.
A business organization’s program for compensating executives is a critical factor in attracting & retaining best managers.
- Determining Executive Compensation
The salary growth for highest level managers is preferably related by the business organizations to the overall corporate performance in order to determine executive compensation.
Usually as the level of managerial position is enhanced, the flexibility the managers have in designing their jobs is also enhanced.
- Kinds of Executive Compensation
Mostly five basic elements are included in executive compensation.
- Basic Salary
- Short-Term Incentives or Bonuses
- Long-Term Incentives and Capital Appreciation Plans
- Executive Benefits
- Perquisites
On the ever changing tax legislation, the manners of an executive compensation package is designed is partially dependent.
See Also: What is Job Evaluation
Compensation for Professionals
Persons in professional jobs are firstly compensated for mainly for the knowledge they take to the business organization.
Due to this reason, the administration for compensation programs for professionals is not same as for managers.
Several professional workers eventually become managers. Some organizations have created a dual track of compensation for those who do not desire this form of career progression.
A separate pay structure for professionals is given by dual track, which may overlap a part of pay structure of managers.
