Compensation Structure Various Perspectives Business Essay


Compensation may be defined as money received in the performance of work, plus the many kinds of benefits and services that organizations provide their employees. Money' is included under direct compensation (popularly known as wages, i.e., gross pay); while benefits come under indirect compensation, and may consist of life, accident, and health insurance, the employer's contribution to retirement, pay for vacation or illness, and employer's required payments for employee welfare as social security.

A 'wage' (or pay) is the remuneration paid, for the service of labour in production, periodically to an employee/worker.

"Wages" usually refer to the hourly rate or daily rate paid to such groups as production and maintenance employees ("blue-collar workers"),or it may be defined as labour class .

On the other hand, 'Salary' normally refers to the weekly or monthly rates paid to clerical, administrative and professional employees ("white-collar workers").For example Professionals.

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Generally, compensation payable to an employee includes the following three components:

Basic compensation for the job (wage/salary)

Incentive compensation for the employee on job

Supplementary compensation paid to employees (fringe benefit and employee services)


Compensation policy may be discussed at two levels:


Macro level: Factors of macro level of compensation policy are discussed as under. It includes the following:

End Exploitation: Wages which are given to the labour class for their services or work for removing the exploitation with workers is known as the End exploitation policy of compensation, which affect the Compensation policy of any organization.

Minimum Wages: Minimum wages is a compensation to be paid by an employer to his worker irrespective of his ability to pay. The committee of fair wages decide the minimum wage as "the minimum wage must be provide the basic requirements of the employee", according to which organization have to prepare their compensation policy.

Living Wages: Living wages are the tool for measure the comfort in the life of any worker. Living wages represents the standard of living. It is more than the minimum wages which helps to fulfill more than the basic requirements like, Education of children's, Medical requirements and insurance. If the organizations maintain the standard of living of worker than they have to prepare compensation policy as per the fix standards.

Fair Wages: Fair wage is that which is above the minimum wage and below to the living wage. Its upper limit depends upon the capacity of the industry to pay and its lower limit is equal to minimum wages .So compensation policy must be like that, every worker gets fair wages in the organization.

Equally pay for equal work: All the firms should make the compensation policy for pay equally to all the workers (male and female) for their equal work.

Compensation for rise in cost of living: According to this, firms make their compensation policy for give the specific dearness allowance of a particular living standard of a city.

Micro level: Factors of micro level of compensation policy are discussed as under. It includes the following:

Attraction and Retention: Quality and Quantity of employees of any organization determined by the compensation policy of any organization. If the company wants to retain and attract the qualified workers they give better compensation, and for this they have to make this policy according to employee's performance.

Ability to pay: This is based upon the proverb "Cut your coat according to your cloth". Every organization fixes the employees compensation as per what the organization can afford to pay. If the wage cost increases and the ability to pay is less company can't survive in long run.

Productivity: Productivity is another criterion and is measured in terms of output man-hour. It is not due to labour efforts alone. Technological improvements, greater ingenuity and skill by the labour are all responsible for the increase in productivity. Increase in productivity increase in compensation and vice versa

Supply and demand of labour :If the demand of certain skills is high and the supply is low, the result is rise in the price to be paid for these skills i.e. an organization has to pay higher wages if the labour supply is scarce and lower wages when it is excessive.

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Skill levels available in the market: With the rapid growth of industries, business trade there is shortage of skilled resources. The technological development, automation has been affecting the skilled levels at a faster rate.



As discussed in first chapter, Compensation or rewards (incentives) can be classified into:

(1) Financial compensation and

(2) Non- Financial compensation.

The financial compensation includes direct compensation and indirect compensation. The non- financial compensation includes praise and recognition and satisfaction of employees.

(a) Direct compensation: Direct Compensation refers to monetary benefits offered and provided to employees in return of the services they provide to the organization. The monetary benefits include basic salary, house rent allowance, conveyance, leave travel allowance, medical reimbursements, special allowances, bonus, PF/Gratuity, etc. They are given at a regular interval at a definite time. This is shown diagrammatically as follows:-


The above components of the direct compensation are briefly described as follows:

Basic Salary

Salary is the amount received by the employee in lieu of the work done by him/her for a certain period say a day, a week, a month, etc. It is the money an employee receives from his/her employer by rendering his/her services.

House Rent Allowance

Organizations either provide accommodations to its employees who are from different state or country or they provide house rent allowances to its employees. This is done to provide them social security and motivate them to work.


Organizations provide for cab facilities to their employees. Few organizations also provide vehicles and petrol allowances to their employees to motivate them.

Leave Travel Allowance

These allowances are provided to retain the best talent in the organization. The employees are given allowances to visit any place they wish with their families. The allowances are scaled as per the position of employee in the organization.

Medical Reimbursement

Organizations also look after the health conditions of their employees. The employees are provided with medi-claims for them and their family members. These medi-claims include health-insurances and treatment bills reimbursements.


Bonus is paid to the employees during festive seasons to motivate them and provide them the social security. The bonus amount usually amounts to one month's salary of the employee.

Special Allowance

Special allowance such as overtime, mobile allowances, meals, commissions, travel expenses, reduced interest loans; insurance, club memberships, etc. are provided to employees to provide them social security and motivate them which improve the organizational productivity.

(b) Indirect compensation: Indirect compensation or wage supplements or fringe benefits refer to such benefits which are non- monetary in nature. It means that they are non-monetary benefits offered and provided to employees in lieu of the services provided by them to the organization. They include Leave Policy, Overtime Policy, Car policy, Hospitalization, Insurance, Leave travel Assistance Limits, Retirement Benefits, Holiday Homes.


The components of the indirect compensation are briefly described as follows:

Leave Policy

It is the right of employee to get adequate number of leave while working with the organization. The organizations provide for paid leaves such as, casual leaves, medical leaves (sick leave), and maternity leaves, statutory pay, etc.

Overtime Policy

Employees should be provided with the adequate allowances and facilities during their overtime, if they happened to do so, such as transport facilities, overtime pay, etc.


The employees should be provided allowances to get their regular check-ups, say at an interval of one year. Even their dependents should be eligible for the medi-claims that provide them emotional and social security.


Organizations also provide for accidental insurance and life insurance for employees. This gives them the emotional security and they feel themselves valued in the organization.

Leave Travel

The employees are provided with leaves and travel allowances to go for holiday with their families. Some organizations arrange for a tour for the employees of the organization. This is usually done to make the employees stress free.

Retirement Benefits

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Organizations provide for pension plans and other benefits for their employees which benefits them after they retire from the organization at the prescribed age.

Holiday Homes

Organizations provide for holiday homes and guest house for their employees at different locations. These holiday homes are usually located in hill station and other most wanted holiday spots. The organizations make sure that the employees do not face any kind of difficulties during their stay in the guest house.

Flexible Timings

Organizations provide for flexible timings to the employees who cannot come to work during normal shifts due to their personal problems and valid reasons.

Non- Financial Compensation: - As the name indicates, non-financial means non- monetary i.e. which is not related to cash. The non- financial compensation includes praise and recognition and satisfaction of employees.


Q1. What do you understand by compensation or wage payment? Analyze the factors which influence the salary structure?

Q2. Describe the components of compensation package briefly with the help of diagram.

Q3. Explain diagrammatically the benefits under direct compensation?

Q4. Explain the benefits under indirect compensation with the help of diagram?