Compensation is the reward employees receive in exchange for performing organizational tasks. Compensation is direct and indirect wages.
Direct compensation includes wages, salaries and bonuses or commission.
Indirect compensation is paid as medical benefits, housing allowance and such others that are what part of direct compensation.
Design of a compensation program is significant in Personnel Management because of its direct influence on employees’ behavior and performance in the company. The components of an effective compensation system is, if salaries and perquisites are:
• Adequate :In line with what is paid in similar companies in the same geographical area. Salaries and perquisites should be similar to what is paid in the other companies for the similar work e.g. people working in the night shifts and doing similar hours and in the same geographical area should be paid equally otherwise they will shift for better salary or facilities.
• Equitable: Salaries and perquisites should commensurate with the effort put in not be less than the work and the ability used by the individual for hard work. Salaries should be equal to the work put in.
• Balanced: The compensation includes a reasonable combination of direct and indirect benefits.
• Cost Effective: Salaries and perquisites should be such that the company can afford to pay or should not exceed the benefits the company gets from the employees. The benefits should not be more than what they get, then only company will be able to make more profit.
• Secure: The salary should be such, as the employees do not feel that even their basic needs are not fulfilled. It should be sufficient to satisfy the employees basic need and make him full secure.
• Incentive providing: Both monetary and non-monetary incentives should be given to the employees as they motivate employees to work effectively and productivity.
Factors Affecting Compensation are:
• Supply and demand: The availability of people and the demand determine the “going wage rate” when the demand is high and the availability low, salaries are high, when the availability exceeds the demand, salaries are low.
• Ability to pay: In general if a company is doing well and has the ability to pay the tendency is to raise the compensation level. However if a company is highly successful there is little need to pay for more then the compensation rate to attract the best available in the industry.
• Cost of living: The cost of living index does not determine the base compensation. It indicates what the rate of increase in salary should be, to keep up with inflation so that employees real wages do not reduce.
A proper compensation (salaries and perquisites is very importance) if the company wants to survive or retain its present employee may:
_ Leave the company: He may switch over to another company; he may look for better opportunities where he is fully or not underpaid.
_ Absenteeism: Underpaid employees may increase the rate of turnover and absenteeism may increase and ultimately, it will affect the productivity of the company.
_ Low morale of the employee: If an employee is underpaid according to the job then his morale will come down.
_ Low motivation: A low motivated employee of the company will not be productive employee. He will not feel happy or will not be attached to the company.
_ Bad image for the company: Underpaid employees create bad image for the company.
_ Productivity suffers: Due to absenteeism, low motivation &morale, productivity automatically comes down etc.
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