The paper 'Definition of Compensation, Designing a Compensation System" is an outstanding example of business coursework. Inasmuch as the greatest asset, an organization could have is its human resource, the issue of attracting, retaining and motivating “ the brains and the brawns of the organization” is understandably very crucial. It is the workers that keep things up, running and working; and, it is the compensation package that the organization has for them that keeps them optimally functioning. Compensation defined Very broadly, compensation is any reward or payment for the performance of service. Usually, it is – but not limited to – direct or indirect financial rewards.
Operationally, however, compensation means different things for at least the employer and the employee. An employer normally understands compensation as the package of monetary rewards – e.g. , wages, salaries, commissions, bonuses, insurance and another sort of indirect financial benefits – than employees receive in exchange for their services. An employee, for his part, normally understands compensation more narrowly – i.e. , it is the wage or salary in exchange for their services (see Caruth & Handlogten 2001, pp.
1). For the purpose of this paper, a working definition of compensation is going to be had. From here on, it is going to refer to the total reward package an organization offers to its employees. By total reward package, it is meant to encompass tangible or intangible, monetary and non-monetary, physical and psychological rewards or payments that an organization provides its employees in exchange for the work or service that they do (Caruth & Handlogten 2001, pp. 1). Concretely, it includes all forms of monetary reward, perquisites, non-cash rewards, services and in-kind payment.
It should even incorporate job security, according to Gelinas (2005). More technically, the total reward package is known as total compensation. It has three basic elements: the base pay, which is also called salary; the incentive pay, which is in the form of either cash or non-cash award such as share(s) of stock; and benefits, or non-financial awards. These three elements are also the constitutive stuff of the pay philosophy of any organization (Ojimba). Designing a compensation system The compensation system is the payment set up for the jobs in an organization.
As it tells about everyone’ s role and status in the organization, its importance essentially lies in its being a strong determinant of the employees’ value in the organization. As a matter of principle, then, there is a requirement that compensation system is perceived to be fair – which would happen when it is made to comprise of components that maintain internal and external equity (Kusumo 2008). Internal equity is the standard requiring employers to set wages for jobs in their organization that correspond to the internal value of each job (see Pynes 2004, pp.
230). In the concrete, it is about the question of whether employees in the same job or job class feel that the organization has distributed the pay such that better performers and more senior employees make more than less senior and poorer performers (Jones, Steffy & Bray 1991, pp. 374). Typically, positions that are more valuable in the organization receive higher wages. For, the pay is proportionate to the individual employee’ s qualifications and contributions to the organization (see Lee 2007).
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Gelinas, P. (2005). Redefining total compensation to include the value of job security. Ivey Business Journal, November/December, pp. 1-7.
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