Compensation: Concept and Components of Employees Compensation


Compensation is a wide range of financial and non financial rewards to employees for their services rendered to the organization. It is paid in form of wages, salary, other benefits such as vacations, maternity leave, medical facilities etc. compensation helps in motivating the employees and reduce labor turnover.

Components of compensation

  1. Base compensation
  2. Supplementary compensation

Base compensation: It involves monetary benefit to the employees in the form of wages and salaries. It is giving the remuneration to the workers for doing the work. Wages are generally given to the workers based on hourly, daily, weekly or monthly basis. But salary is the compensation given to the office employees. Wages may be based on the number of units produced i.e. piece wage system or the time wage system i.e. the time spent on the job. But salary is always based on the time spent on the job. When it is difficult to judge the production of the company then the compensation is paid in form of salary.

Supplementary compensation: now days the organizations use supplementary compensation over and above the base compensation. It helps in satisfying the employees as well as retaining them for long time. It can be given in form of various services like housing, medical, educational facility. Supplementary compensation is also called fringe benefit as well as hidden payroll. The basic purpose of fringe benefit is to maintain efficient human resources in the organization and to motivate the employees.

Supplementary compensation is again divided into following types

(i) Protection against hazards: supplementary compensation helps in protecting against the hazards of illness, injury, old age, death, permanent disability.

(ii) Employee services: some big organizations provide housing, low-cost loan, food, medical, and day care centre for children, educational facilities to their employees for their services.

(iii) Payment for time not worked: the employees are also paid for the time they are not working like wash up time, lunch period, vacations, holidays, sick leave etc.

(iv) Legal payments: payment under this category involves unemployment; layoff compensation, old age benefits etc.

Thus, there are various kinds of supplementary compensation which are given to the employees.

Significance of Employee Compensation (Or Personnel Remuneration)

The issue of personnel remuneration, whether in the form of wages or salaries, is highly significant from the viewpoint of industrial relations, social peace and economic implications. In fact, it is the centre from which the circle of industrial relations is drawn; it being the crux of industrial conflicts.

Following are some of the points which highlight the significance of personnel remuneration:

(i) Wages/ salaries constitute the primary source of income to employees. Their adequacy or otherwise would very much determine their standard of living.

(ii) Adequate remuneration is a source of motivation to employees. It makes them committed and loyal to the organization; and paves way for excellent industrial relations.

(iii) Through making adequate and timely payment of employee remuneration, an employer can attract and retain good personnel to and in the organization. This helps to ensure a stability of labour force – bringing several valuable advantages in the wake for the organization.

(iv) Specially, in labour-intensive industries, wages constitute a substantial part of the cost of production. As such wage payments affects the cost and price-structures of an industrial enterprise. Prices of goods and services, in turn, have social implications; as these directly affect the purchasing power of money held by the society.

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