Compensation - Definition, Objectives, Principles, Components, Factors in HRM


Compensation - Definition, Objectives, Principles, Components, Factors in HRM

What is Compensation

Compensation refers to as a wide range of financial and non financial reward given to employees for their service rendered to the organisation.

It is the paid in the form of wages, salaries, and employee benefits such as paid vacation, insurance, maternity leave, free travelling facility, retirement benefits etc.

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Compensation Management Meaning Compensation is what employees get for the contribution of their work in organization . The Term Compensation Management comprises of 3 types of rewards 

  • Pay ( Basic Wage and Salary ) 
  • Incentives ( Bonus , Commission , Profit Sharing ) 
  • Benefits ( Insurance , Recreational , Medical Benefits ) by

Objectives of compensation in HRM

The objective of compensation in HRM are as follows
  • Attracting High Skilled Employee
  • Improve Efficiency
  • Establishe Equity
  • Increase workers efficiency
  • Avoid Conflict
  • Legal Compliance
  • Encourage Healthy Competition
  • Retaining Employee
  • Maintaining and controlling costs

Principles of compensation in HRM

Compensation management is a sensitive and crucial aspect of human resource management as its adequacy or inadequacy can affect , either positively or negatively , the competitiveness of the organization due to higher attrition rates , low commitment etc.
  • Ability to pay
  • Internal and external equity
  • Performance Orientation
  • Non Discriminatory
  • Be legal
  • Simplicity and Flexibility
  • Foster Employee Development

Components of compensation in HRM

1. Wages and Salaries 

Wages and Salaries are the basic pay given to the Workers and Employees for their exchange of work contribution to the organization . 
  • Minimum Wages 
  • Fair Wages 
  • Living Wages

2. Incentives 

Incentives are the monetary benefits paid to the Employees for their Outstanding work performance . It is variable in nature because it depends upon the achievement of specific Target . 
For Example- Giving Extra Money , Raise in the Salary etc. 

3. Bonus 

Bonus means to give the extra pay to the employees than the Basic Salary . The main purpose of giving Bonus is to build the difference between Basic Wage and the Need Based Wage . 

4. Fringe Benefits and Services 

Fringe Benefits and Services are the benefits added with the Salary of the Employee which is also known as the Extra Benefits . 

It is divided into following Categories 

  • Treats - Free Lunches , Coffee Breaks , Picnics , Birthday Treats , Dinner with Boss etc. 
  • Knick Knacks- Desk Accessories , Company Watches , Diaries , Calenders , Wallets , T- Shirts etc. 
  • Awards- Trophies , Certificates , Letter of Appreciation etc.
  • Office Environment- Flexible Hours , Redecoration customized Features , Office with Windows etc. 
  • Social Acknowledgement- Company Accessories use for Personal Work , Get together of Office etc. 
  • Token - Redeemable Store Coupons , Birthday Gifts , Movie Tickets etc. 
  • On the Job- Job Rotation , More Authority- Responsibility , Training etc. 

5. Perquisites 

Perquisites are benefits given to the employees for achieving one position in a firm . Examples- Club Membership , Paid Holidays , Company Car , Big House etc. 

6. Non - Monetary Benefits 

It includes Comfortable Job Working Conditions , Work Sharing , Appreciation etc.

Factors Affecting Compensation in HRM

  • Demand and Supply of Labour & Employee
  • Cost of Living
  • Ability to Pay
  • Productivity of Employee
  • Government
  • Employee Capacity
  • Education Qualification
  • Work Experience
  • Employee Union
  • Hazards Involves in Work
  • Promotion Ability
  • Demand for Special Skills
  • Stability of Employment

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