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Compensation And Benefits In An Organization

2983 words (12 pages) Essay in Management

15/05/17 Management Reference this

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In this essay, I review and analyze the relation between the direct compensation and benefits in an organization. This essay will demonstrate my understanding of direct compensation system, indirect compensation, benefits implementation processes and corporate performance in relation to practical direct compensation strategy examples from previous research articles. It presents a review of previous research findings on roles of management to improve organizational performance and cope with the current tough global business environment which can be harnessed to the managers to get advantages of strategic strength. It also looks at the development of human capital planning process to meet the extensive and continuing changes that have taken place in this frequently changing business environment, and strategy in an organization. The notion of the role of the compensation management of an organization is described with different strategic examples based on the given assessment criteria and various previous researches finding of human capital management.


Benefits and Compensation are the two vital parts of employees what they get in return by the service that they provide to their employers. It is necessary to know whether the employees undervalue the cost of benefits that they are provided as an employer. I am strictly agree if employee undervalues the cost of benefits as an employer we can cut their benefits and add direct compensation.


In each and every organization people work for to get something in return or they expect something after completion of their work form employers. We must have heard a common phrase: give and take. We must always things to people in exchange for what you give them. Compensation refers to this Exchange, but in monetary terms. Compensation from the employer an employee feedback for work. It’s just the monetary value that employers exchange for their employees with the services that employees provided.

Human Resource Management defines compensation in these words “employee compensation refers to all forms of remuneration to workers and arising from their employment.” The expression ‘ all forms of remuneration “in the definition does not include any non-financial benefits, but all the direct and indirect financial compensation. (Gary Dessler, 1976)


Workers today are not prepared to work just for the money apart from money they expect some other benefits. This is known as extra employee benefits. Also known as fringe benefits, employee benefits are non-financial form of compensation offered in addition to cash salary to employees to enrich life.

What benefits would the company offer to its employees? Problem arises when you begin to decide what to give to whom and on what basis? 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 influence on the performance of employee, however, insufficient benefits contribute to the satisfaction of the low level and absenteeism and turnover in workers increase. (DeCenzo and Robbins; 2007). So would you must carefully design your benefit package. Your package contains a cell phone to each employee, with them to a training workshop or seminar, giving them a day or two off every month and so on. While the decision on the package of benefits, the associated costs.

A well-designed compensation and benefits plan helps attract motivate and retain talent in the company. A well-designed compensation & benefits plan will benefit in the following ways.

1. Job satisfaction: your staff would be happy with their work and would like to work for you if they honestly rewards in exchange for their services.

2. Motivation: We all have different types of needs. Some of us want money, so they work for the company making them higher wages. Some value reach more than money, she would join companies that have greater chances of promotion, learning and development. A compensation plan that affects workers needs is more likely to give them the way you want to act to motivate.

3. Low absenteeism: why would anyone want to skip the day and watch favorite TV program at the home, if someone really enjoy the work at the office or company’s environment and satisfied with their salaries and get what they want and need?

4. Low turnover: would someone or any staff want to work for other organization if your company offers them fair rewards. The rewards which they thought they deserved.

Direct Compensation

Direct compensation persuade to financial benefits offered and provided to workers in return of the services that they provide to the Company. The financial benefits include Transportation, leave travel allowance, medical allowance, rent of the house allowance, basic salary. They are provided at an expected period at a definite time.

Basic Salary

Salary is that amount which is received by the employee after some task done by him/her for a certain period of time that can be a day, a week, a month, etc. It is the wealth employees receive from their company for which they are working by depiction their services.

Rent Allowance

Some of the Organizations either provide accommodations to its employees who are from different regions, state or country or they provide house rent allowances to its employees. This is done in order to maintain social security and to provide motivation in their work.


Employer provides some transportation facilities to its employees. Some of the organization also provides petrol allowance and other allowances also they provide their own transport services in order to pick and drop to their employees before and after completion of their day to day task. European Care Group England provides transportation allowance to its employees.

Leave Travel Allowance

These types of allowances can be provided to preserve the best aptitude in the company. Employees are provided allowances to visit the places that they want to visit with their family members. These allowances determined according to the position hold by the employees. For example Google has such compensation system in order to motivate their employees and to make them innovative.

Medical compensation

Most of the Organizations also provide medical reimbursement to their employees. The employees are provided with medical claims for them and also their family members. These types of claims include treatment bills compensation and health-insurances.


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 stands for the allowance such as mobile allowances, overtime, food/meals commissions, travel expenses, reduction in the interest loans; insurance etc are provided to employees to provide them social security and motivate them which improve the organizational productivity.

Indirect Compensation

Indirect compensation refers to non-cash benefits offered to employees in the exchange of the service provided by them to the organization. They include leave policy, overtime policy, car policy, hospitalization, insurance, travel assistance limits, retirement benefits, vacation rentals.

Leaving Policy

It is the right of any employees to satisfactory number of leave during working with the company. The companies provide for paid leaves, casual browse, medical leaves (sick leave), statutory wage and maternity leaves.

Overtime policy

Employees shall with the sufficient allowances and facilities during their overtime, as he/she is happened to do so, such as transport, overtime pay, etc.


The employees must be provided compensation to get their regular check-ups, let’s say at an interval even their dependents, should be eligible for medi-claims that makes the employees stimulated and more secure.


Organizations also offer for accidental insurance and life insurance for employees. This gives them the emotional security and they feel valued in the organization and it also make help them to make more innovative.

Let travel

The workers are equipped with leaves and travel expenses to go for holiday with their families. Some organizations settle for a tour of the employees of the organization. This is usually done to make the workers be stress free.

Retirement Benefits

Organizations can provide for their employees in favor of them after they retire from the organization on the prescribed age for retirement and other benefits.

Holiday Homes

Organizations offer for holiday homes and guest house for their employees in different locations. These houses are usually found in hill station and other most sought after vacation spots. The organizations ensure that employees are not facing any kind of difficulties during their stay at Guesthouse.

Flexible timings

Organizations offer flexible timings to workers who can’t come to work during normal shifts thanks to their personal problems and valid reasons.

Literature Review

Review of related literature deals with the review of some of the related studies to highlight the position of the present study. Some of the studies which are related to this study have become reviewed. When gone through some of the studies we can found employees undervalued the cost of benefits; nearly 25 percent of employers in India believe that their workers do not fully understand the value of the benefits which is provide to them. In a study by global consulting firm Watson Wyatt showed that there is a considerable gap between the value of employer-provided benefits and their perceived value by the employees.

The survey carried out in 12 countries in the Asia-Pacific region points out that more than 40 percent of employers in the covered region think that their employees are undertaking the value of benefits. India also boasts of the second highest number of companies (79 percent) who have entered a well-defined corporate benefits strategy. More than 55 percent of the employers in China think that their employees underestimated the benefits to them. In India 25% of the employees are positive about the cost of benefits but the employers think that only 25% of the employees they undervalue the reimbursement in the terms of cost of benefits. These findings have serious consequences for companies at various levels-costs, employee engagement and attract and retain talent. With benefits costs facing a double digit growth, cost control is a major challenge for organizations. “Especially since the cost of benefits in variety can be anywhere between 10 to 40 per cent of the total compensation package. This also indicates that it is time for companies that have a fixed benefits plan offer to explore alternatives such as a flexible benefits approach as a strong advantage in employers to help build a more workers concerned.

Critical Analysis

Direct compensation and benefits are the two parts of a coin. Every company has to provide enumeration after the end of day to day task performed by each employee. It depends on the policies and procedures of the company. However the company has to check sometimes whether their employees are undervaluing the benefits that they are provided in order to stop from being abuse their benefits system. So that sometimes it’s become necessary to cut such benefits and add some direct compensation. (Jesan, 1978)

Despite the fact that the literature is replete with studies involving pay equity and satisfaction, studies including the effects of perceived benefits equity and satisfaction are few and largely methodological deficit (see Dreher, Ash, & Bretz, 1988). Salary comparisons (both external and internal) are usually the only determinant of pay equity in the literature. (Carraher & Carraher, 2005)

Although the benefits usually not performance is bound, benefits are still a result associated with organizational membership and therefore personal inputs. A problem with much of the research on equity is that it tends to use as the only result will be charged. “But the theory claims that people recognize a variety of results if they can form mental images about how honest they are addressed, and many of these no pecuniary, as well as non-physical” results (Pindar,1976)

Insight into the implications of employee attitude towards their benefits is important for a number of reasons. First, while indirect remuneration (benefits) often accounts for about 5% of the total compensation packages 50 to 70 years ago, now mostly good for 30 to 50% of the total compensation packages with benefits growing at a pace faster than direct pay (Williams et al., 2008). The cost of benefits in kind to the employer have dramatically increased, there is solid evidence that workers disgustingly the cost of benefits that they are given underestimated. (Ferris, Carraher, 2008).

It seems that instead of perceiving benefits as an additional form of compensation, most of the employees wants benefits and extra enumeration not an additional form of compensation. If employees do not value equal to or greater than value then the employer might be wasting their money. When employees do not value their advantages to a value that is equal to or greater than their direct costs, then the money could be better used as a direct payment the attraction, retention, and satisfaction of these workers easier. Therefore, as a first step, is to determine the extent to which employees value their benefits important (Hart & Carraher, 1995).

Even if an employee undervalue the package of benefits it does not necessarily mean that workers will not be satisfied or injustice experience. Perhaps more important than the value that an employee benefits place is their perception of the advantages understand concept of supposed to be provided by other organizations. The absolute value of benefits packages can easily be calculated and communicated to employees to solve the problem of undervaluing; to the creation of own funds, however, is a more complex issue because it is a perceptual phenomenon. Assuming that workers no pecuniary results consider when determining equity, it is possible that perceptions of benefits and effect on perceptions of equity compensation, work satisfaction of the compensation, and countless other attitudes and behaviors (Carraher, Hart, & Carrier 2003).

Whether or not employees cognitive assess the value of their benefits and compare it with the packages that are offered by competing organizations believed is unknown. However, since the benefits are touted as having the ability to attract and retain employees perceived benefits injustice could lead to the opposite, namely dissatisfaction, higher levels of absenteeism, lower levels of performance. The extent to which this problem can occur is unknown (Carraher et al., 2003).

In spite of the fact that an attempt has been made to better understand the role of the benefits, most job and compensation satisfaction scales to assess satisfaction with items like benefits have failed. Heneman and Schwab (1985) were some of the first to take advantage of a subscale satisfaction as a compensation satisfaction questionnaire with their pay satisfaction questionnaire (PSQ). Although the PSQ contains the first scale of the established and readily available benefits, stability and would be the PSQ factor structure has not yet been clearly establish and there is still agreement on or satisfaction with benefits in general should be seen as an agricultural fuel construction. (Miller, & Lust, 1990).

Human Resource Management (HRM) never been as important as it is today. Companies want to attract, retain and motivate brains to achieve goals. People need to efficiently and effectively manage because they are regarded as one of the assets of each company. Compensation management can be one of the best tools to attract, retain and motivate people. In this focus I conclude compensation and benefits alongside with their benefits for an organization and its employees.

For example a company called Nepal water supply limited have more than 1000 staff all over the Nepal. They are hired for the different post and different task. As a company whoever working for it and whichever the position they hold they used to get some extra benefits. After the mid of 2005 company felt that the people working for it had been undervalued the benefits. Thus, at the end of 2005 company decided to cut the benefits and added direct compensation.


Each and every company must identify its mission, understand the perspective within which it has been operating and developing a policy and structure for meeting its’ objectives and goals. To retain, attract and motivate the employees required for high levels of performance the human capital plan it adopts must contribute to its success.

The direct compensation program and strategy utilization must be fitting the context and contributing to organizational effectiveness. The rate of the pay must be fair, perceived and competitive as appropriate by all companies. If the management of the any company believes pay rate above the market averages for some or all employment produce benefits it must paying above market averages for some or all occupations produce benefits it must influence those benefits resulting against the costs. There are a number of options open if the company believes paying for performance fits the organization’s context and provides more advantages than the disadvantages. The resources which are available in the organization for example; management skills, money, freedom from regulatory/citizen intervention etc should be a main concern, and one that should be measured early in negotiations. The effect on workforce is also a critical concern.

Before cutting down the benefits and to add direct compensation the company should be determining the direct compensation strategy and the programs that are best for them. What is vital is that the system of the pay used is appropriate and effective, provided the company’s mission, environment objectives, culture, strategy and structure.

However the direct compensation system is not always the best. We can find its bad influence in some of the organizations.

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