1. Direct compensation and
2. Indirect compensation.
Money is included under direct compensation (popularly known as basic salary or wage, i.e. gross pay) where the individual is entitled to for his job, overtime-work and holiday premium, bonuses based on performance, profit sharing and opportunities to purchase stock options. While benefits come under indirect compensation, and may consist of life, accident, and health insurance, the employer’s contribution to retirement (pensions), pay for vacation or illness, and employer’s required payments for employee welfare as social security.
While French says, the term “ Incentive system” has a limited meaning that excludes many kinds of inducements offered to people to perform work, or to work up to or beyond acceptable standards. It does not include:
1. Wage and salary payments and merit pay;
2. Over-time payments, pay for holiday work or differential according to shift, i.e. all payments which could be considered incentives to perform work at undesirable times; and
3. Premium pay for performing danger tasks.
It is related with wage payment plans which tie wages directly or indirectly to standards of productivity or to the profitability of the organization or to both criteria. Compensation represents by far the most important and contentious element in the employment relationship, and is of equal interest to the employer, employee and government.
1. To the employer because it represents a significant part of his costs, is increasingly important to his employee’s performance and to competitiveness, and affects his ability to recruit and retain a labor force of quality.
2. To the employee because it is fundamental to his standard of living and is a measure of the value of his services or performance.
3. To the government because it affects aspects of macroeconomic stability such as employment, inflation, purchasing power and socio – economic development in general.
While the basic wage or pay is the main component of compensation, fringe benefits and cash and non-cash benefits influence the level of wages or pay because the employer is concerned more about labor costs than wage rates per se. The tendency now is towards an increasing mix of pay element of executive compensation has substantially increased in recent years.