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.
