There are 3 Basic Types of Compensation
1. Base Pay
2. Variable Pay
3. Benefits
1. Base Pay – It is the basic pay given to the employee for the actual work rendered usually in the form of
salary or wage. It is the pay that was negotiated and agreed upon by the employee and the employer during
the hiring process.
Salary refers to a fixed amount of pay which is given usually twice a month, while the term wage is used to
mean on hourly or daily base pay for any work rendered for a particular day.
2. Variable Pay – It’s is the pay linked to actual accomplishments in performance such as bonuses or
incentives based on a target sales quota or target productivity.
Incentives can be payed on individual, group, or team basis such wider scope, incentives can be provided for
all employees regardless of rank.
3. Benefits – These is one indirect rewards which may either be government mandated or voluntarily given
by the employer. Benefits help employees to further cope with the demands of the job and their personal life.
Some companies make their benefits attractive entice job seekers who would like to work for companies that
will take care for them for a long time.
Objectives of Compensation
1. To retain and attract high-performing employees in the organization.
A good compensation package can easily attract high caliber job seekers and are employable while it can
also help in retaining employees who would not anymore think of leaving the organization and work for
another company.
2. To maintain high productivity and efficiency in the organization.
Employees should feel that they are treated justly according their contribution to the organization. They
should not receive what they feel is less than what they deserve in comparison to others.
3. To pay employees in accordance with the law.
Companies have to abide by the implementing rules and regulations on salaries, wages, benefits that they
should provide to their employees.
Classifications of Compensation
(a) Direct Compensation – It refers on actual monetary value that entitles than employee it can be the form
of “ salary or wage, it can also be in the formed variable pay, such as bonuses, incentives, commissions and
other performance.
(b) Indirect Compensation – Refers to non-monetary aspects of compensation, such as benefits packages
that include hospitalizations, and life insurance planned, seek vacation leaves car plans and educational
grants among others.
Policies Affecting Compensation
1. Internal Alignment
2. External Alignment
3. Employee Contribution
4. Management of the Paid System
1. Internal Alignment
One of the challenges of managers is to make employees happy with their pay. They should see to it that
there is internal alignment for employees having related or similar task and those who have unrelated or
dissimilar jobs. If managers are able to align pay with the contribution of employees in achieving
organizational objectives, then there is lesser discontentment in the organization. Most of the time,
employees to tend to make comparison when it comes to their pay and others doing similar task.
2. External Competitiveness
Another policy is ensuring competitiveness by aligning pay competitors. This can attract more applicants
because the salaries are competitive so to speak. Some companies pay more than what their competitors give
especially on basic pay to retain employees and to ensure that their salaries are not far behind the companies
competitors.
3. Employee contribution
Another policy to took at is the employee contribution. A major dilemma among managers is to consider
employee contribution to performance as a factor of pay.The meaning of employee contribution is relative
and each organization attaches a different combinations of pay. Some companies have minimum basic salary
but have high variable pay. Others put more emphasis on basic pay but minimum on variable pay.
4. Management of the Pay System
Managers in the organization should be capable of putting a system to the giving of compensation.
Employees should be worthy of the pay that they receive. There should be fairness in providing
compensation for every one in the organization. No one should be discriminated and each employee should
be justly paid.
Components of Compensation
1. Job Analysis - it is defined the process of determining all information specific for a particular job. The
different task or activities, such as drafting, drawing, writing, teaching and encoding are obtained. Job
Analysis can also provide the required behavior needed to perform a task and job performance standards
needed to evaluate job performance. Job Analysis is necessary for the development of Job Descriptions
which are essential in determining pay rates.
2. Job Description - it is referred to as a written summary of all the duties and responsibilities of a
particular job position. It also includes Job Specification which describes educational backgrounds,
experiences, skills, and personal skills that are needed to perform a particular job.
3. Job Evaluation - while Job Analysis provides all information for each job, Job Evaluation is the process
of determining the work of a job. The worth or value of the job in the organization forms a big part in
determining pay rates especially basic pay. It also organizes jobs into a hierarchy as pay levels are
developed.
4. Pay Structure - many organization standardize their pay and use grades or levels. Pay Structures help in
determining entry pay and incremental increases during performance evaluation or promotion.
5. Salary Surveys - some organizations participate in salary surveys and purchase market data on
prevailing rates for different positions in the industry where they belong. These help in determining
appropriate rates and at the same time remaining competitive among competitors.
6. Policies and Regulations - each organization has its policies in administering and implementing its
payment system.
