Compensation Systems

Compensation (remuneration) refers to any payment or reward that an individual receives in return for performing organizational tasks. The basic types of compensation include:

•    Direct financial compensation (salaries/wages).

•    Indirect financial compensation—other financial rewards other than wages and salaries e.g. medical cover, insurance cover, paid leave, etc.

•    Non-financial compensation—most are intangible and they relate to the satisfaction that an individual derives in performing his duties. They can be as a result of meaningful jobs, social environment.The remuneration system should be able to attract and retain the right calibre of people, and gives rewards that will increase the workers motivation.

 Factors Influencing Basic Compensation Policy And Practices

Demand and supply of labour & labour market conditions in determination of wages and salaries. The law of demand and supply must be considered. The higher the supply of labourers in the labour market in relation to demand the lower the salaries and wages paid. But when there’s scarcity of labour i.e. less supply of labour in relation to demand wages and salaries will go up. Hence to achieve external consistency of wages and salaries an organisation wages and salaries policy must take into account labour market conditions and prevailing wage rates.

•    Union Pressures

Labour union pressures exert considerable influence upon the wage an salary issues. Generally the more powerful a union is or the stronger its bargaining power as measured by its membership and leadership strengths the greater will be the possibility of higher wages and salaries.

•    Job requirements in terms of knowledge & skills

Various jobs in an organisation are graded in accordance with relative skills efforts, responsibility, job condition etc. The more difficult the jobs are the higher will be the wages or salaries paid to the employees.

•    The organisation size or ability to pay

The large the organisation is the higher the chances of good profits earned by it. Large companies or organisations thus tend to pay higher wages and salaries relative to smaller organisations because of their ability to pay.

•    Product competitiveness and prospects for higher profits.

If an organisation product (goods or services) are highly competitive and profits are good wage level in the organisation is likely to rise. Hence organisations which are market leaders in terms of products or services quality tends to make high profits and pay better than their competitors.

•    Psychological and Sociological/Ethical factors:

These factors exert a considerable influence on the company’s wage levels because if the employees are dissatisfied with wages and salaries paid to them a sizeable pressure for wage/salary increases would develop frequently which may at times not be justified on purely economic grounds.

Psychologically individuals perceive the level of wages and salary as a measure of satisfaction, security and status in life. Wage/salary differentials serve to depict social hierarchies and individuals perceive themselves in relation to others in relation to how much each of them earns. Ethically individuals feel that wages and salaries should be commensurate with their efforts.

•    Government policy and action in wage determination

Like pressures from trade unions there’s pressure from the government upon wage and salary practices. Acting in the public interest government may pass legislation, issue executive orders or establish commissions with a view to regulate compensation policies and practices for the purpose of attaining specific social and economic objectives such as elimination of exceptionally low wages.

•    Cost of living or consumer price index

This is often regarded as an automatic minimum pay criteria. Due to high cost of living resulting from rising prices various organisation do increase their wages and salaries. Increase in Productivity

(Other Forms Of Payment To Be Input)

•    Employees Profit sharing scheme

Under this compensation plan an organisation would share its profit through

•    Cash distribution

•    Contribution to trust funds

Under the cash arrangement benefits are distributed among employees in cash at least once in a year. The organisation may also establish a trust fund. The benefits from which are distributed in the event of death, retirement or disability.

•    Employee stock ownership

In this type of compensation plant the management allows employees to participate in stock ownership. The management may provide mechanisms through which eligible employees may purchase the stock of the company at reduced rate. Eligibility may be determined by wage level or years of service or both.

•    Supplementary compensation/fringe benefit

A supplementary form of compensation or a fringe benefit is a reward to an employee in addition to the basic wage or salary. It is usually provided at the expense of the employer. Examples of fringe benefits include:-

-Pension schemes e.g. gratuity
- Medical schemes
- Housing schemes (house rental allowances/house purchase allowance)
-Insurance schemes (e.g. life insurance benefit)
- Car loans allowances
- Subsidised meals at place of work.
-Company’s goods at discount rates
- Transport scheme e.g. company transport services
- Entertainment allowances given to senior managers of the organisation
-Travelling allowances provided on making official company visits
-Leave allowances
-Sabbatical leave etc.



Characteristics of fringe benefits

•    The following are the most important characteristics of fringe benefits:
•    They are not directly related to merit but they often improve with status and length of service.
•    Did not necessarily benefit all employees eg. a person who has good health will not benefit from medical schemes.
•    They are not universal. Large company’s usually have a wide range of fringe benefits while small company’s tend to have very few or none at all.
•    Once established they are difficult to abolish and become accepted by the employees as a normal condition of service rather than a benefit.
•    There’s no evidence that candidates are attracted to an organisation by fringe benefits but it is possible that fringe benefit discourage employees from leaving
•    They probably increase job satisfaction but will certainly bring dissatisfaction if they are inconsistently and carelessly administered.