MBA - HRM Blog 1

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Compensation in HRM


Defining Compensation

Compensation refers to the financial and non-financial returns and other benefits provided by employees to employees instead of their effort for organizations. It includes all aspects of financial returns such as including basic pay, gratuity, insurance, bonus, etc. (Hassan, 2016). Compensation is a payment for individuals instead of the service they provided to employers (Patnaik & Padhi, 2012).


Significance of Compensation In HRM

Compensation is one of the key requirements in HRM to improve employee and organizational performance and efficiency. Compensations is key to human resource management in any organization as employees work for organizations to get monetary returns. Effective compensation management practices lead to ensure long-term retention of employees and motivate them to work hard (Hassan, 2016).                                                                                                              


                                      (Tutorial Point.com, 2021)                                             


Objectives of Compensation                                               

·         Compensation in HRM aims to achieve several objectives.

·         To enhance employee productivity and motivation.

·         Manage the excessive cost of organizations.

·         To comply with the laws and regulations such as labor laws.

·         To ensure employee retention

·         To acquire skilled individuals

·         To provide a competitive compensation package rather than competitors etc. (Gupta & Shaw, 2014; Patnaik & Padhi, 2012).


Forms of Compensation

Compensation can be categorized in to two main aspects such as direct (monetary) and indirect (non-monetary). 


Figure 1 – Types of Compensation (Source: Author developed, 2021)

 

Direct /Financial compensation refers to the direct returns including the salary received by an employee instead of the service he or she provided. These compensations directly motivate employees and such financial compensations comprise,

·         Basic salary

·         Bonus

·         Commissions

·         Profit sharing etc. (Sulleiman, et al., 2018).

 

Indirect compensation refers to the non-monetary benefits and returns received by employees that lead to indirectly stimulating employees. Such compensation comprises,

·         Providing free scholarships

·         Providing mobile phone recompense

·         Pay for accommodations

·         Rewards and recognition etc. (Ahmed & Ahmed, 2014).

 

Elements of Compensation

A compensation package includes several components such as basic salary, allowances, incentives, and other fringe benefits.

·         Salary and Wages – Wages are based on hourly pay and salary is based on monthly payment rates.

·         Allowances- Transportation, accommodation or rental pays, etc.

·         Inducements- pay for performance for individuals and teams

·         Fringe benefits- Medical facilities, health, and insurance, uniforms, foods, accident coverages, etc. (Idemobi, et al., 2011)


Conclusion

Compensation is one of the basic components related to HRM and it is essential to maintain an effective compensation management system within organizations to retain a skilled and inspired workforce for organizational goal achievements (Idemobi, et al., 2011). Accordingly, an effective compensation system is a necessity for every organization as that is the preliminary reason behind the employees’ attachment to the company.

 

References

Ahmed, M. & Ahmed, A. B., 2014. The impact of indirect compensation on employee performance: An overview. Public policy and administration research, 4(6), pp. 27-30.

Gupta, N. & Shaw, J. D., 2014. Employee compensation: The neglected area of HRM research. Human resource management review, 24(1), pp. 1-4.

Hassan, S., 2016. Impact of HRM practices on employee’s performance. International Journal of Academic Research in Accounting, Finance and Management Sciences, 6(1), pp. 15-22.

Idemobi, E. I., Onyeizugbe, C. U. & Akpunonu, E. O., 2011. Compensation management as tool for improving organizational performance in the Public Sectors: A study of the Civil Service of Anambra State of Nigeria. Sacha Journal of Policy and Strategic Studies, 1(1), pp. 109-120.

Patnaik, B. M. & Padhi, P. C., 2012. Patnaik, B.C.M. and Padhi, P.C., 2012. Compensation Management: A theoretical preview. TRANS Asian Journal of Marketing & Management Research, 1(1), pp. 39-48.

Sulleiman, O., Ochidi, Z. & Akinroluyo, B. I., 2018. Effect of direct and indirect compensation on employees’ job satisfaction of selected microfinance banks in Ilorin metropolis. Journal of Good Governance and Sustainable Development in Africa, pp. 115-130.

Tutorial Point.com, 2021. Tutorial Point.com. [Online]
Availableat:https://www.tutorialspoint.com/human_resource_management/human_resource_management_compensation.htm[Accessed 10 November 2021].

 

 


Comments

  1. M D S PereraNovember 10, 2021 at 7:42 PM

    Dear Thushara

    A very informative blog and immensely resourceful. Compensation in any form is the driving force behind employee performance. Fringe benefits such as vacations, dental, medical and insurance too plays an important role as the drivers for employee performance as you discussed here.
    Thank you once again for bringing up this topic.

    ReplyDelete
  2. Suranga SampathNovember 10, 2021 at 8:07 PM

    Clearly discuss the topic

    ReplyDelete
  3. N R Waduge. MBANovember 10, 2021 at 8:41 PM

    Compensation is one of the important aspect to retention employees in an organisation. It buildup reliability,self confidence and respect. The Article gives good reflection how it is important. Thanks for sharing.

    ReplyDelete
  4. Chenaka HettiarachchiNovember 10, 2021 at 11:24 PM

    It is a strong part of motivation.it helps the employees enjoy financial benefits other than the salary & leads to a long term retention so the both parties enjoy the advantages of it. Really valuable topic.

    ReplyDelete
  5. KAMAL C. DIVITOTAWELANovember 10, 2021 at 11:24 PM

    Valuable examples of Compensation in HRM.very good article.thanks for sharing.

    ReplyDelete
  6. Thushara WattegedaraNovember 10, 2021 at 11:35 PM

    Thanks for your Feedback.

    ReplyDelete
  7. Sanjaya BandaranayakeNovember 11, 2021 at 4:28 AM

    Good article. To attract skilled and qualified candidate's for job opportunities in an organisation defined compensation structure is very important.

    ReplyDelete
  8. Steffni_DNovember 11, 2021 at 9:25 AM

    Compensation is really important for organisations to achieve objectives as wel as to enhance employee productivity.. Clearly mentioned all these things in this article..

    ReplyDelete
  9. Nuwansiri RathnayakeNovember 12, 2021 at 3:40 AM

    Very good topic for the discussion. Compensation is one of the important point to inspired workforce for organizational goal achievements. You have given clear vision and well explained. good job.

    ReplyDelete
  10. Asitha DNovember 12, 2021 at 6:36 AM

    Compensation is a very important part in HRM. Because it’s belongs to what is in its for me. In this article shows about what the compositions & what are the benefits of compensations. As well as it shows the employees motivation through the compensation. Overall good learning article. Thank you very much for sharing for learning.

    ReplyDelete
  11. Vishwa GunarathnaNovember 12, 2021 at 3:28 PM

    This is very appropriate topic for any organization. Here you try to explain Benefits & importance of compensation as HR point of view. Really thanks to you again way of describe this topic.

    ReplyDelete
  12. UnknownNovember 13, 2021 at 2:25 AM

    Hi Thushara,
    Very nice and valuable blog. Appreciate your effort. Well done. Good luck bro.

    ReplyDelete
  13. Shanaka herathNovember 13, 2021 at 7:15 AM

    Compensation is valuable topic in HRM. You have mention clearly what is compensation and how Compensation effect to the organization as well as employees directly and indirectly point by point. Thanks for sharing important details in Article.

    ReplyDelete
  14. Steffni_DNovember 18, 2021 at 10:41 PM

    Instead of their effort for businesses, compensation refers to the financial and non-financial returns and other benefits supplied by employees to employees.

    ReplyDelete
  15. Asma NafazDecember 1, 2021 at 9:39 AM

    Compensation refers all types of monetary and non monetary benefits given by the organization to its employees. If the employees are satisfied with the compensation, it leads to job satisfaction and improve the performance of the organization. Your blog shows complete information about compensation in brief.

    ReplyDelete
  16. Lakshmi BandaraDecember 1, 2021 at 4:24 PM

    We all work to live. Not living to work. Every organization must support employees to have a good life with reasonable compensations which support employees with their personal life. This can help employees with a satisfying job experience. Also, this can help the organization to have proper employee engagement which will lead towards success. Well explained.

    ReplyDelete
  17. Sandya December 8, 2021 at 8:29 AM

    This comment has been removed by the author.

    ReplyDelete
  18. Sandya December 12, 2021 at 9:40 AM

    Compensation and benefits are important aspects of employee satisfaction in the workplace as they directly affect employee performance and work motivation. Therefore, it is imperative that the employers ensure that the compensation and benefits offered to employees are attractive. This allows employees to know that the company cares about them and wants to recognize their work. people are the company's most important capital.so it is really important to motivate them.

    ReplyDelete

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