Compensation is the reward an employee receives in exchange for performing the organisational

tasks. Compensation is Direct and Indirect.

Direct compensations are Wages, Salaries, Bonuses or Commission.
Indirect Compensation is aid !eave, Insurance, "edical Benefits, #ousing $llowance,
etc that are not a part of the direct compensation.
Components of effective compensation system:
%rganisations have to have effective compensation policy to&
$c'uire 'ualified personnel&
Compensation should (e on par, if not (etter than prevailing industry rates in order to attract
'ualified persons.
)etain present employees&
*mployees 'uit if compensation levels are not competitive.
*nsure e'uity&
Compensation should ensure internal e'uity, i.e. compensation should (e related to relative worth
of +o(s. *xternal e'uity should (e maintained (y paying wages similar to those paid to persons
performing similar tasks in other companies. Internal e'uity should (e maintained (y paying the
employees with similar responsi(ilities, 'ualifications and experience similar salaries.
)eward desired (ehavior&
Compensation should reinforce desired (ehavior through increments and rewards and act as an
incentive for the (ehavior to occur again. Similarly withholding increments for poor performance
will ensure that the employee puts in more efforts.
,or example& "any organisations appreciate the employee effort though -hank you cards for the
effort they have put in for the month. -his invokes a sense of healthy competition among
employees and a positive work spirit. $lso the methods of .Star of the month/ which rate the
productivity and efficiency ena(le measuring the employee efficiency.
Control Costs&
$ rational compensation plan helps attract and retain employees at a reasona(le cost. Without
proper structure the organisation may overpay or underpay the employees.
A compensation policy is effective if salaries and perquisites are:
A de'uate& In line with what is paid in similar companies in the same geographical area.
B alanced& $ reasona(le com(ination of direct and indirect (enefits
C ost effective& What the organisation can afford to pay.
E 'uita(le& Commensurate with the effort put in and the a(ility used.
I ncentive& Sufficient incentives are needed to motivate the employees to work effectively.
S ecure& Sufficient to satisfy the employee0s (asic need and make him feel secure
Factors affecting Compensation:
Supply and Demand&
-he availa(ility of people and the demand determine the .1oing2Wage2)ate/. When the demand
is high and the availa(ility low, salaries are high. When the availa(ility exceeds the demand,
salaries are low.
$(ility to pay&
If a company is doing well and has the a(ility to pay, the tendency is to raise the compensation
level. #owever if a company is highly successful, there is little need to pay far more than the
competitive rates to o(tain good personnel. -he company may choose to pay a(ove competitive
rate to attract the (est availa(ility in the industry.
Cost of living&
-he cost of living index does not determine the (ase compensation. It indicates what the rate of
increase in salary should (e to keep up with the inflation so that employees0 real wages do not
reduce.
Benefits:
Indirect (enefits are employer provided rewards and services other than wages and salaries. -hese
(enefits are provided for various reasons&
3. 4eep wages and salaries low and hence o(tain tax (enefits
5. "ake the salary package competitive to recruit and retain talent.
6. $ct as motivators
7. *nsure long 8 term employment as some (enefits are linked to time spent in an
organisation.
Some other indirect (enefits that companies offer are&
Insurance& employees are insured (y the company for accident, disa(ility9death.
"edical (enefits& medical (enefits are provided to the employees (y the company through
insurance.
)etirement (enefits& retirement (enefits like provident fund, gratuity, pension are provided for
retiring employees who have served for a long term.
aid leave& *mployees are given certain special leave like casual leave, privileged leave, medical
leave during which they receive their salary and full (enefits. Certain num(er of days in a year
only is allotted for such (enefits. )eim(ursement for travel is also allotted in certain companies.
%ther (enefits& Benefits like assistance for housing, children education, marriage loans at low
interest are also provided. %ther perks0 like telephone reim(ursement etc are also some of the
(enefits that certain organisation avails to the employees.
How is an underpaid employee likely to e!ave"
Compensation package is the (iggest criteria for any employee to choose an organisation. If this
main factor is looked down, then there are many chances of losing a good employee.
%rganisations must ensure that employees with certain 'ualifications and experience must (e
given certain level of salaries, failing which: its repercussions will (e noticed in his work. Certain
dominating (ehaviors of such employees are&
oor performance& If correct level of compensation is not ensured, the first impact goes on the +o(
performed (y the employee. -he level of delivery reduces his interest in the +o( gets distracted.
)esignations& ;nderpaid employees start seeking +o( opportunities outside the organisation. If a
profita(le offer is found then he resorts to resign from the current +o( and +umps to a (etter
organisation with (etter payment packages.
%ther (ehaviors noticed in a unsatisfied9underpaid employee&
Dissentful attitude& -he employee starts to dissent the work he performs and starts to withdraw
from all responsi(ilities.
Complaining& -his is a very common (ehavior in such employees. -he underpaid employee starts
complaining to his fellow colleagues and superiors a(out his dissatisfaction levels in pay scales.
1roup influencing& -he underpaid employee may start to form his set of groups and influence
them against effective production and affect the growth in the organisation.
roductivity& -he highest affecting factor to the organisations will (e the productivity which
would drop. -his in2turn would affect organisations goals to (e delivered per person.
Concentration& -he employee loses his concentration in his +o(, (ecomes distracted and loses the
responsi(ility given to him and also the seriousness of is +o(.
;nprofessional& Common attitude noted in such employees are an unprofessional attitude. -hey
start fights within the organisation, create misunderstandings and very distur(ed environment.
Conclusion:
-hus an organisation whose outlook is an employee friendly environment, then the a(ove factors
must (e taken into account while deciding a compensation and (enefit system and avoid the
attrition in the organisation.
,actors to ensure (etter compensation system&
3. Better wage Scale
5. 1ood appraisal system
6. )egularised promotion system
7. 1ood Bonus and er'uisites.
<. Better Direct and Indirect compensation packages.