Compensation As An Element Of Hr Business Essay

Published: Last Edited:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Stone (2006) state that "Compensation is one of the most important HRM activities which it can help to reinforce the organization's culture and key values and facilitate the achievement of its strategic business objectives" (Stone, 2006, pp406).

McNamara explained that employee benefits in the company is refers to retirement plans of the employee, the insurance that covered to the employee such as health life insurance, life insurance, disability insurance, holiday package, stock ownership etc. A benefit of the company to the employee is just the formality of the value rather than the payment that are provided to the employee in return of their contribution to the organization that is doing their job scope or responsibilities (McNamara, n.d).

Most of the employee benefits in the company are the life insurance of the employee such as the medical, dental, unemployment and worker's compensation, vacation pay, holiday pay, and maternity leave, contribution to retirement of the employees such as pension pay, profit sharing, stock options, and bonus. Several employees in the company rather consider on the profit sharing or stock options and bonuses as forms of compensation which would more benefit to the employees.

Benefits can be seen as the tangible and intangible. The examples that are listed can be considered as the tangible benefits whereas the intangible benefits of the employee such as the valuation of their boss in the company, promotion to the higher position, the environment office condition. (McNamara, n.d).

Employee benefits once viewed by employers as a gratuity to employees are now viewed by employee as an earned component of total compensation. As a result, it is difficult for employers to modify benefits or to control the cost. Flexible benefit programs help control the costs and enhance the benefits provided by the company. The most valuable strategy open to management is increased communication with employees regarding benefits and increased employee participation in the allocation of benefit expenditures (Walker, 1992, pp307).

Compensation of the employee include wage or salary programs and structures of the company, for example, salary ranges for job descriptions, merit-based programs, bonus-based programs, commission-based programs, etc. Standard forms of compensation offered from the company to their employees are salary, additional payment because of the good performance.

Compensation is generally refers to the base pay and variable pay. Base pay is derived from the role in the organization and the market for the expertise that required the employees to conduct that role and also as the standard pay that an employee receives in doing their job. It's used as the basis for calculating other allowances and benefits. Therefore, variable pay is paid according to the performance of the person in that role such as how well the employees achieved his or her goals annually (Authenticity Consulting, n.d).

The formal compensation of a company should reflect the organization's strategic business objectives and culture, be communicated to all employees and be perceived as fair and equitable to all of the employees (Stone, 2006, pp408).

The various components of a systematic compensation program needs to be considered in the company which included of:

Job analysis accurately identifies the job duties and responsibilities or can be called as job description and the employee characteristics needed to perform the job successfully.

Job evaluation takes to the accountability for each job's relative value to the organization.

Pay survey which establishes the competitiveness of pay levels compared with another organization.

Performance evaluation determines the level performance of each employee

Pay for performance related to the pay increases to the performance and desired employee behaviors.

Stone (2006) stated that there are relating compensation to the performance of the employees which called as "at-risk compensation" where the rewards that are payable to the employees only when a performance target is met.

Compensation and benefits strategy in the company show the position of the organization on the job market and identify the items in the entire notes in the organization and the performance in the company. The responsibility of different mechanism of the compensation in the company is the most important aspect as the position of the compensation components can be differentiates. For instance, the role of bonuses can be primarily in performance reward or the retention of the employees and the organization decision (HRM Advice, 2008).

According to Walker (1992), rewards can motivate employees to generate the best performance results for an organization. Rewards are only as good as the effects they have on attracting, retaining and motivating employees. Most rewards seems to be financial where it's include pay, incentive or bonuses, cash awards, profit sharing, stock ownership and benefits.

Therefore, the other rewards is a non-financial where the employees can be motivated by challenging work, opportunities for personal growth and new responsibilities, recognitions for accomplishments and a sense of security and belonging.

Rewards need to be designed so that employees understand why they are being given. Rewards can help sustain a shared mind-set in an organization, as through a single incentive pay or profit-sharing system.

Reward design should be equally as employees are increasingly willing to accept differences in pay as long as the differences are reasonable and based on a fairly administered system. The most important aspect of compensation is the behavioral and motivational where it's become the tough part and the aspect that is ignored (Walker, 1992).

1.2 Objectives

The objectives in this research as follows:

To examine the compensation performance in improving employee performance

To determine the benefits performance on enhancing employee performance

To find the relationship between the combined effect of benefits and compensation in developing employee performance.


The scope under this research is the researcher will analyze and examine the compensation and benefits that have been offered under the company program in Indonesia to their employees in order to improve their performance in their job responsibilities and find how the compensation and benefits relate to each other in order to support them. Therefore, the researcher will analyze the factor of the compensation and benefits that can improve their performance.

Chapter II

Literature Review

2.1 Part of compensation and benefits

Figure 2.1 Financial and Non-Financial Compensation and Benefits

Adopted: Walker.1992

Compensation and benefits in the company is closely related to the performance appraisal of the employee. Several factors will be affected to the performance payment to employee such as pay level and the influences in the company as how the companies decide to pay workers salaries. It becomes the important concern to the company which they have to concern about the salaries paid by the competitors because if the payment is higher, the firm surely will lose the best employees in their companies (Gitman, 2008, pp214).

There are two types of payment of incentive which employee will be more profitable is the income allocation and additional benefit. Additional benefit to the employee will be paid when the employee reaching up to the certain monthly or annual performance goals of the objectives set up by the company (McDaniel, 2008, pp215).

Some firms are providing the numerous benefits to employee for combine and equal benefit items or selecting the items derived from the individual needs. This is called with the "cafeteria-style benefit plan" where this happen to a younger employee with a family would like to gain the medical, disability, life insurance which the older employee intend to put their benefits into the savings retirement plan (Gitman, 2008, pp215).

Milkovich and Newman (2008) believe that employee compensation design in the company is derived from the four different key factors such as institutional, economic, organizational and individual. Fallon (2007) stated that the most preferred benefits that the majority employees like to take it are health insurance, pension plan and paid vacation. Deferred compensation plan may be tied up to corporate profits of the company or simply specified the amounts of stock or sum of money to be paid to an important employee for example signing bonus paid to key management which will be paid and taxed in installment (Mancuso, 2009, pp109).

Compensation philosophies fall under two types in the companies such as entitlement philosophy and performance philosophy. Entitlement philosophy with the assumption of employee who have worked another years are entitled to pay increases with little regard for the performance differences whereas the performance philosophy requires that compensation changes reflect performance differences of the employees. Employees who perform satisfactory maintain or advance their compensation levels more than marginal performers (Mathis, 2008, pp362).

Employees are considering base pay or variable pay to the extent of which the employee reach or perceived their compensation to be fair often affects their performance and how they view about the job and their employers. Compensation equity referred to the perceived fairness between what a person does as the inputs and what the person receives as the outputs (Jackson, 2008, pp362).

Mathis (2008) stated of the external equity happened when the employer doesn't provide the compensation that employee view equitable in relation to the compensation provided to other employees performing similar jobs in other organizations that employer is likely to experience higher turnover and internal equity which refers to the employee receive the compensation in relation to knowledge, skills and the abilities of the employee that they use in doing their jobs as well as their responsibilities and accomplishments that they reach of the target set up in company.

New forms of compensation need to be developed to reward flexibility (Klaas, 2000). Base pay refers to the amount of wages or salaries provided to the employees for their services. Base pay is determined on the basis of job evaluation and market survey (Milkovich and Newman, 1999). Equal pay for equal work and pay-for-performance philosophies are promoted by many organizations. However, the fact is that many of the benefits program in the company are in direct conflict with these principles. Examples, employee with families are frequently provided with extra coverage benefits under medical and health benefit programs and the allocation of company cars and so on are linked to status, not performance. Most employee benefits are determined by membership of the organization and have nothing to do with the individual's contribution towards the organization's strategic business objectives (Stone, 2009, pp356).

Employee benefits in companies viewed of the employer as a gratuity to the employees which now viewed by employee as an earned component of total compensation. As a result, it is difficult for employers to modify the benefits or control the costs. Flexible benefit programs help control the costs and enhance the benefits provided by the company (Walker, 1992, pp307).

Employee benefits are not performance-based, they are membership-based. Workers receive benefits regardless of their performances. Employee benefits as a whole have no direct affect on employee performance, however, inadequate benefits do contribute to low satisfaction level and increase absenteeism and turnover in employees (DeCenzo and Robbins; 2007). Roseman (1981) stated that people do leave companies for "more money" and "there is no question that pay rates can influence turnover however, managers generally over estimate the significance of pay".

Base Pay

Salary and wages- for being at work

Increases for Demonstrating New Skills

Competency pay

Job progression

Increases for Results




Merit increase

Pay For Working More Hours


Premium pay

Increase Based on the Organizations Financial Success

Profit sharing


Other Forms of Increases

Promotional increase

Market adjustment

Source: Keeping Your Valuable Employees (Dibble, 1999)

Short term incentives

Retention bonus

Signing bonus

Referral bonus

Guaranteed annual bonus

Gain sharing

Cash incentive programs

Vacation awards

Long term incentives

Stock options

Employee stock ownership

Manager bonus plan

Retirement plan

Source: Compensation and Benefits Review (Ermel & Bohl, 1997)

The emergence of new compensation practices has been reported in surveys conducted by several consulting companies, industrial associations, and educational institutions (Heneman, Ledford, & Gresham, 2000).

Cable and Judge (1994) found that compensation attributes affected job candidates' decisions to join companies. The results of Cable and Judge's study (1994) demonstrated that job applicants generally preferred an individually oriented pay system, a flexible benefit plan, and a fixed and job-based payment form.

The traditional form of the pay-for-performance program extrinsically motivates workers to focus on immediate short-term outcomes and leads them to overlook the developmental aspects of performance. Moreover, the traditional pay-for-performance program may inhibit workers from cooperating with their team and organizational members because it triggers workers to achieve individual outcomes and objectives that are linked to their reward (Heneman, Ledford, & Gresham, 2000).

Compensation system in the company should be outlined, organized, and implemented to address how firms will respond to business turbulence and the rapid speed of change by increasing knowledge, adaptability, and organizational behavior. The compensation system should be aligned with human resource characteristics and strategic activities which in turn enhance firm competitiveness.

In a skill-based pay system, the reward is contingent upon the extent to which employees acquire and learn skills and knowledge that are required to perform their job responsibilities and duties (Gupta & Shaw, 2001). Skill-based pay may motivate workers to learn, acquire, and develop their skill levels because the skill and knowledge levels of workers determine reward. Skill-based pay rewards employees based on the extent to which they acquire and learn skills and knowledge from training and development programs (Gupta & Shaw, 2001).

Group-based pay plans intend to encourage inter-group interaction, cooperation, and communication, through which group members share the reward. Because a group confronts significant challenges from group work liabilities (e.g., conflict, free-riding), group-based pay is a method that can moderate the trouble of group work, the use of group-based pay can provide the extrinsic motivation for group members to focus on group tasks and related goals by sharing the reward based on the group's performance (Gross & Leffler, 2001).

Compensation and the benefit plan in the company should have the following elements as follow:

Salary Structure refers to the standard pay based on the position of the employee in the organization where it offered with fixed ranges of payment salary with the maximum and minimum levels established to take into account varying the levels of their experience and expertise.

Variable pay is based on the employee performance levels in the company as how competent and hardworking of the employees in reaching the set targets for the year.

Incentive plans are a reward based form of the variable pay in the context of the compensation and benefits program such as bonuses. Different types of bonus are specified as the part of the benefits program in company such as:

Commission is one method that company common use for their employee which is based on determining the compensation as a percentage of net sales when the companies achieve some profit in a year. Therefore, this kind of benefits usually becomes a good motivator for their employees as it provides a direct relation between the outcome and rewards.

Bonus is a sum of money paid to an employee over and above his standard payment and the compensation and the payment is based on the employee performance.

Stock Options plans offer employees of a company the right to buy an assured number of shares of the company's stock at a particular price on a specified date where this is an attractive tool for retaining manpower, since employees benefit directly when the company's stock goes up.

Nowadays, the most popular of compensation programs concept in the company which is quire easier to understand is the compensation based on the employee performance. The programs usually referred as variable pay programs and normally present compensation incentives based on employee performance or on the performance of a team. Pay for performance rewards high performance and does not reward low performance (Advameg, 2010).

The compensation and benefits program mostly depend on how the firm set up the salary to their employee where in small company; the salary payment is mainly on the sense and ideas of the director of the company and the financial possibilities of the company. Different perspective in the larger companies which the system for setting salaries must be put in place to keep the organization in shape and to allow employees to trust and feel fairness in the system when they see their own salary and comparison with the rest of the organization (HR Advice, n.d.)

The compensation package may include a number of other benefits, including insurance, employee discounts, extended leaves, and retirement programs. A retirement package in company may also be based on the issuance of stock options through money market or the accumulation of shares of company stock over the years, by which stock options are involved, the employer often bases the number of shares issued annually on several factors including the salary classification of the employee (Malcolm, 2010).

Worker compensation package in a company such as vocational rehabilitation may also be included as one of the compensation programs. This happened in a company if a person becomes disabled on the job, he or she may qualify to receive vocational rehabilitation to learn a new skill and find a new job despite his or her condition. But to the extent of circumstances, the original employer will offer or even create a position that makes allowances for the employee's challenges (Holetzky, 2010).

Pauly (1996) in his article of total compensation stated that: "Estimating the costs of benefit helps the employer to know what benefits is to offer, but judging whether the compensation package is adequate for competitive labor market also requires information on what benefits are worth to the potential employees of the company.

The recruitment of the potential employees in a company 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 employees, it will be in the context of other employers seeking to hire from the same applicant group. To some extent, compensation may also be used as a reward for exceptional job performance of the employee which the plan included on it is the additional benefit, commission, stock, profit sharing and gain sharing (HR Guide, 2000). Different types of compensation include base pay, commissions, overtime pay, bonuses, profit sharing, merit pay, stock options, employee allowance such as travel, meal or even housing allowance. Apart from it, the benefits of the company such as dental, insurance, medical, vacation, leaves, retirement, taxes.

Figure 2.2: Guaranteed and At-Risk Incentives and Base Pay of Company

Source: Asia Pacific Management Co. Ltd, 2004.

2.2 Merit Pay

The merit pay concept requires making distinctions among those who perform and then adjusting pay to recognize these distinctions. Therefore, adjustments are made within the limits of "ranges" which in turn reflect job worth and external labor market rates. Merit pay reflects the results of performance appraisal which can affect the degree to which managers or employees demonstrate organizational behavior in performing their jobs.

Employees are generally more concerned with perceived equity of pay compared with others within the organization than with the external comparability of pay or even the recognition of outstanding performance. Rewards are differentiated only for the few outstanding performers and for those who are clearly marginal or inadequate (Walker, 1992, pp298).

2.3 Lump - Sum Awards

Lump-Sum awards which are essentially performance bonuses are most useful when salary levels are considered high and management is seeking to avoid locking in annual increases in salaries. Some companies have actually reduced employee salary levels, filling the gap with bonus programs that offer higher reward potential. The risk introduced for employees helps build awareness of business performance and treats employees as stakeholders (Walker, 1992, pp299).

2.4 Incentive Awards

Incentive reinforces the efforts of employees to improve performance while also containing fixed costs of pay programs. The advantage of a cash award as an incentive performance bonus is that it is held out as a promise or possible reward in return for some specified level of performance or service of the employee achieved. The purpose of company incentive pay plans is to encourage employees to perform or produce at extraordinary levels. Incentives are supplements to base pay based on performance and are not permanent additions to compensation (Walker, 1992)

2.5 Different types of incentive in the company

2.5.1 Individual Incentives

Individual incentives are also a factor in sales compensation plans in the company. The plans may provide salary plus a bonus, commission with or without a "draw" (payments in advance of actual sales). The design of such plans needs to consider the mix of these elements and the amount of pay "at risk", the timing of incentive payments and the performance measures on which they are based (Walker, 1992, pp300).

2.5.2 Team Incentives

Rewards are needed to encourage cooperation, group focus and shared achievement of objectives. All gains are commonly shared with all employees in the unit according to a predetermined formula and the payoff depends on productivity improvement.

2.5.3 Management Incentives

Management incentive programs are often used to reward contributions to the profitability of individual units as opposed to the overall company. These incentives include bonuses such as cash payments and long term incentives such as stock options, stock awards and performance shares. Performance-based bonus plans have been widely implemented and are believed to be effective.

2.6 Research Framework

Compensation Programs

Employee Performance

Benefits Program

Independent Variables (IV) Dependent Variable (DV)

Figure 2.3: Research Framework

Source: The researcher