Employee Compensation Plan
Learning outcomes
› What is Employee compensation.
› Objectives of Compensation.
› Components of Compensation.
› Factors determining Compensation.
› What are the characteristic of an ideal Compensation.
› What is Reward.
› Types of Reward.
› Compensation VS Reward.
› Factors/Criteria on which Reward can be distributed.
What is Employee Compensation
› Employee compensation refers to the benefits (cash, vacation, etc.) that an
employee receives in exchange for the service they provide to their
employer.
› According to Benham
Compensation is the value of work of the employees according to
the agreement between employer and employee.
Compensation has main two components
› Direct financial payment consisting of pay received in the form of
wages, salaries, Incentives, dearness allowance, cash allowance,
bonuses, commissions.
› Indirect Payment including all financial rewards that are not
included in direct compensation and understood as a social contract
between the employer and employee such as legal requirement,
provident fund, pension, insurance etc.
Objectives of Compensation
› To achieve internal and external equity.
› To motivate the employees toward increasing productivity.
› To recruit or maintain morale/satisfaction.
› To reward and encourage peak performance.
› To reduce turnover and encourage company loyalty.
› To modify practices of unions.
› To enhance general goodwill of the company.
Components of Compensation
1. Basic salary is regarded as a “fixed” element of pay and it does not normally vary
relation to employees or company performance.
2. Allowance such as house rent allowance, utility allowance, entertainment
allowance, travelling allowance etc.
3. Bonus is an additional compensation given to employee above his/her normal wage.
Example festival bonus production bonus.
4. Benefits are generally provided as security such as insurance, health coverage etc.
Factors Determining Compensation
› Position and seniority naturally senior employees demands for
more salary than fresher because of their hold on positions and its
function. Today many companies are demanding senior employee
for key position by offering higher pay
› Skill/Knowledge most job come with baseline knowledge and skill
requirements, but those who exceed them can expect to be
compensated more than those who don’t
Factors Determining Compensation (cont.)
› Location certain areas, where the cost of living is higher, have
historically paid higher wages.
› Inflation rate during inflation compensation will be higher.
› Productivity of workers to get the best results from the
employees and to increase the productivity compensation
sometimes has to be productivity based
Method of determining major compensation
Time based compensation
Under this method employees are paid compensations for the
amount of time they spend at work in some organizations. The
compensation plan is based on per hour working.
Advantages Disadvantage
Time rates are simple for a business to calculate Does little to encourage greater productivity-
and administer. there is no incentive to achieve greater output.
It easy to understand from an employees
perspective
The employee can budget personal finance with
some certainty
Method of determining major compensation (cont.)
Output Based Compensation
Under this method, Employees are paid compensations according
to the quantity of output during a given time. The compensation is
calculated as
compensation = Units of output × rate per unit
Advantage Disadvantage
1. Encourage employees to work more. 1. Adversely affect health and safety of
2. Increase in production. employees.
3. Efficient utilization of time 2. Results in poor quality of output.
What are the characteristics of an ideal Compensation.
Adequate minimal governmental, union, and managerial levels should be met.
Equitable each person should be paid fairly, in line with his or her effort, abilities
and training.
Balanced pay, benefits and other rewards should provide a reasonable total reward
package.
Cost-effective pay should not be excessive, considering what the organization can
afford to pay.
Incentive-providing pay should motivate effective and productive work
What is Reward ?
› Rewards are positive outcomes that are earned as are earned as
result of an employee’s performance. When an employee helps
an organization in the achievement of one of its goals, a reward
often follows.
Types of Rewards
Intrinsic rewards Extrinsic rewards
An intrinsic reward is an intangible An extrinsic reward is an award that is
award of recognition, a sense of tangible or physically given to
achievement, or a conscious employees for accomplishing
satisfaction. In other words, the something.
satisfaction one gets from the job
itself are its intrinsic reward.
Compensation vs Reward
Compensation Reward
Compensation can be defined as Reward is one part of
the adequate and equitable compensation, payoff for
remuneration of personnel for efficient and effective
their contributions to the performance may be regarded as
organizational objectives. reward.
Compensation provide to all Reward may be provides based
employees according to the on performance.
agreement between employer
and employee.
Factors/Criteria on which Reward can be distributed.
› Performance the one who can perform the job well can get high
reward in comparison to the poor performer. Hence under this
criteria of reward distribution, an individual’s performance is
evaluated before assigning any reward.
› Effort where the question of employee performance is a low
caliber. The only one way of rewarding employees is the basis of
effort. Though this criterion one can exert the input of individual
organizational activities.
Factors/Criteria on which Reward can be distributed (cont.)
› Skill Held individuals having special skills are rewarded, regardless
of whether the skills are used.
› Job Difficulty it assumes that the complex and difficult jobs require
higher attention and concentration at work so these types of job
holders should be rewarded.
Thank you
