Compensations is what employees receive in exchange for their contribution to the organisation. Generally, employees offer their services for three types of rewards. Pay refers to the base wages and salaries employees normally receive. It forms such as bonuses, commissions and profit sharing plans are incentives designed to encourage employees to produce results beyond normal expectation. Benefits such as insurance, medical, recreational, retirement, etc., represent a more indirect type of compensation. So, the term compensation is a comprehensive one including pay, incentives, and benefits offered by employers for hiring the services of employees. In addition to these, managers have to observe legal formalities that offer physical as well as financial security to employees. All these issues play an important role in any HR department’s efforts to obtain, maintain and retain an effective workforce.
Nature of Compensation
It offered by an organisation can come both directly through base pay and variable pay and indirectly through benefits. 1. Base pay: It is the basic compensation an employee gets, usually as a wage or salary. 2. Variable pay: It is the compensation that is linked directly to performance accomplishments (bonuses, incentives, stock options). 3. Benefits: These are indirect rewards given to an employee or group of employees as a part of organisational membership (health insurance, vacation pay, retirement pension etc.).