Compensation: Outline and Definitions

Compensation is a systematic approach to providing monetary value to employees in exchange for work performed. Compensation may achieve several purposes assisting in recruitment, job performance, and job satisfaction.

Chapter Highlights

  1. How is compensation used?
  2. What are the components of a compensation system?
  3. What are different types of compensation?

How is compensation used?

Compensation is a tool used by management for a variety of purposes to further the existance of the company. Compensation may be adjusted according the the business needs, goals, and available resources.

Compensation may be used to:

Recruitment and retention of qualified employees is a common goal shared by many employers. To some extent, the availability and cost of qualified applicants for open positions is determined by market factors beyond the control of the employer. While an employer may set compensation levels for new hires and advertize those salary ranges, it does so in the context of other employers seeking to hire from the same applicant pool.

Morale and job satisfaction are affected by compensation. Often there is a balance (equity) that must be reached between the monetary value the employer is willing to pay and the sentiments of worth felt be the employee. In an attempt to save money, employers may opt to freeze salaries or salary levels at the expence of satisfaction and morale. Conversely, an employer wishing to reduce employee turnover may seek to increase salaries and salary levels.

Compensation may also be used as a reward for exceptional job performance. Examples of such plans include: bonuses, commissions, stock, profit sharing, gain sharing.

What are the components of a compensation system?

Compensation will be perceived by employees as fair if based on systematic components. Various compensation systems have developed to determine the value of positions. These systems utilize many similar components including job descriptions, salary ranges/structures, and written procedures.

The components of a compensation system include

Compensation will be perceived as fair if it is comprised of a system of components developed to maintain internal and external equity

What are different types of compensation?

Different types of compensation include:

What are regulations affecting compensation?

Compensation Plans

Develop a program outline.Designate an individual to oversee designing the compensation program. Develop a compensation philosophy.Conduct a job analysis of all positions.Evaluate jobs.Determine grades.Establish grade pricing and salary range. Determine an appropriate salary structure. Develop a salary administration policy. Obtain top executives' approval of the basic salary program. Communicate the final program to employees and managers. Monitor the program.