Compensation and Benefits as a Significant Part of Human Resource Management

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Compensation and benefits refer to the benefits a firm provides to its employees in exchange for their labor. Compensation and benefits are thus a key part of human resource management. Compensation and Benefits is two different concepts. Compensation is the crucial part of every job. When every person receives a job offer, the first thing they look at is the salary. Whether the recruiter lists the wage as an hourly, weekly, monthly, or hourly rate, candidates see it as the most critical part of any job offer. Compensation is not only related to regular pay check. Benefits cover indirect pay. This can be health insurance, stock options, or any myriad of things offered to employees.

Definition of Compensation and Benefits

According to Cascio (1995) the “Compensation includes direct cash payments and indirect payments in form of employees benefits and incentives to motivate employees to strive for higher levels of productivity”.

According to Milkovitch and Newman (2005) the “Compensation is all forms of financial returns, tangible services and benefits employees receive as part of an employment relationship”. The phrase “financial returns” refers to an individual's base salary, as well as short- and long-term incentives. “Tangible services and benefits” are such things as insurance, paid vacation and sick days, pension plans, and employee discounts.

According to the Bureau of Labor Statistics depicts definition as “nonwage compensation is provided to employees” (BLS, 2008).

According to Dictionary of Cultural Literacy (2005) presents the definition as “any of various benefits, as free life or health insurance, paid holidays, a pension, etc., received by an employee in addition to regular pay”. The use of the term ‘regular compensation’.

According to the Business Dictionary (n.d.), employee benefits are a form of “indirect and non-cash compensation paid to an employee: paid leave, supplementary pay, retirement”.

According to the National Compensation Survey insurance and legally required benefits such as Social Security, Medicare, federal and state unemployment insurance taxes, and workers.

History of Compensation and Benefits

Over the course of the 20th century, American workers have witnessed an evolution in compensation. Through the century, the changes in the methods of pay have usually been stimulated by some form of imbalance caused by a crisis or demographic shift. For the 20th century American worker, no greater crisis was experienced than the Great Depression, a watershed in how employers paid their workers. But growth in unionization and the increase in the number of working women, among other shifts, have also contributed to changes in pay practices. Payment for labor services has evolved from simple piecework pay to sophisticated contractual compensation packages. At the turn of the 20th century in America, few workers would have received anything more than wages as compensation for their labor services. But by the close of the century, a typical worker received more than 25% compensation in the form of benefits. These benefits, which were termed fringe benefits for most of the century, consisted of employer-paid items such as health, life and unemployment insurance; retirement and savings plans; and holiday and vacation leave. Today, benefit components making up the compensation package continue to evolve, with variable pay plans--such as profit-sharing and stock options-growing in importance. Additionally, emerging benefits, such as family care, are becoming widely available.

Compensation and Benefit Policies

Companies provide a variety of compensation and benefits to employees for performing their jobs. These compensation and benefit strategies should be clearly defined and communicated to employees within the employee handbook or company policies and procedure manual.

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Assume you are the compensation and benefits manager at Synergy Corporation. You are responsible for researching, developing, communicating, and continuously evaluating the company compensation and benefit policies. These policies should provide employees with clearly defined and equitable strategies.

They should also define company compensation and benefit opportunities. The policies should comply with legal and tax requirements for compensation and benefits. Additionally, they should communicate the value of the benefits to current employees as well as in recruiting future employees.

You decide to update Synergy Corporation's employee handbook to highlight details on compensation and benefits available for employees. You explore direct financial monetary wages, indirect financial compensation, and benefits for use in developing effective company policies.

Principle of Compensation and Benefits

There are following seven principles of compensation formulation (Jain, 2014):

  1. The organization should have an unambiguous plan to determine differential pay levels in terms of different job requirements involving varied skills, exertion, responsibility and working conditions.
  2. An attempt should be made to keep the common level of wages and salaries of the organization in line with that obtained in the labor market.
  3. Adequate attention should be taken to distinguish people from the jobs. Although people are paid in terms of rate embodied in specific jobs, some exceptions should be allowed in the cases of professional and executive personnel by paying them in terms of their abilities and contributions.
  4. The care should be taken irrespective of individual considerations to ensure that equal pay for equal work.
  5. There should be a plan to adapt an unbiased measure for identifying individual differences in capacity and contribution in the form of rate ranges with in the grade increments, wages incentive schemes and a system of job promotion.
  6. There should be proper procedure for handling the wage grievances in organization.
  7. Adequate care should be taken to inform the employees and the union, if any, about the procedure followed in determining wage rates. There were no confidential wages and the employees should have a clear understanding of their wage or salary structure. This will enhance employee satisfaction with wages.

Objectives of Compensation and Benefits

  • Acquire qualified personnel. Compensation needs to be high enough to attract applicants. Pay levels must respond to the supply and demand of workers in the labor market since employees compare for workers. Premium wages are sometimes needed to attract applicants working for others.
  • Retain current employees. Employees may quit when compensation levels are not competitive, resulting in higher turnover. Employees serve organizations in exchange for a reward. If pay levels are not competitive, some employees quit the firm. To retain these employees, pay levels must be competitive with that of other employers.
  • Ensure equity. To retain and motivate employees, employee compensation must be fair. Fairness requires wage and salary administration to be directed to achieving equity. Compensation management strives for internal and external equity. Internal equity requires that pay be related to the relative worth of a job so that similar jobs get similar pay. External equity means paying workers what comparable workers are paid by other firms in the labor market.
  • Reward desired behavior. Pay should reinforce desired behaviors and act as an incentive for those behaviors to occur in the future. Effective compensation plans reward performance, loyalty, experience, responsibility, and other behaviors. Good performance, experience, loyalty, new responsibilities, and other behaviors can be rewarded through an effective compensation plan.
  • Control costs. A rational compensation system helps the organization obtain and retain workers’ reasonable costs. Without effective compensation management, workers could be overpaid or underpaid.
  • Comply with legal regulations. A sound wage and salary system consider the legal challenges imposed by the government and ensures employers comply.
  • Facilitate understanding. The compensation management system should be easily understood by human resource specialists, operating managers, and employees.
  • Further administrative efficiency. Wage and salary programs should be designed to be managed efficiently, making optimal use of the HRIS, although this objective should be a secondary consideration with other objectives.
  • Motivating personnel. Compensation management aims at motivating personnel for higher productivity. Monetary compensation has its own limitations in motivating people for superior performance. Besides money, people also want praise, promotion, recognition, acceptance, status, etc. for motivation.
  • Consistency in compensation. Compensation management tries to achieve consistency-both internal and external in compensating employees. Internal consistency involves payment on the basis of the criticality of jobs and employees’ performance on jobs. Thus, higher compensation is attached to higher-level jobs. Similarly, higher compensation is attached to higher performers in the same job.
  • To be adequate. Compensation must be sufficient so that the needs of the employee are fulfilled substantially.

Importance of Compensation and Benefits

Attracting Top Talent

People are always looking to put themselves in the best possible position financially. Those who are worth a specific salary amount often know their value and will seek a position that pays accordingly.

Increased Employee Motivation

Properly compensating employees shows you value them as workers and as human beings. When people feel valued, they feel better about coming in to work. Overall company morale increases and people are motivated to come to work and do a good job. Additionally, when employees know there are bonuses or commissions, they are increasingly motivated to deliver grander results.

Boost Employee Loyalty

When employees are being paid well and are happy, they're likely to stay with the company. Proper compensation is one factor why employees remain with employers. Loyalty means that business owners don't need to continue to spend time, money and energy on recruiting new candidates.

Increased Productivity and Profitability

Happy employees are productive employees. Productivity in relation to compensation starts with employees feeling valued which increases motivation and loyalty. Not only are employees more motivated to do a good job, but also, the longer people are with the company, the more they know and the more efficient they become. All of this leads to increased productivity.

Job Satisfaction So People Stay

Creating the right compensation plan leads to stronger job satisfaction. The right compensation plan includes benefits, along with all the other bonuses available. Employees often boast about holiday bonuses or they keenly watch how the company stock performs because they have stock options. The right compensation program invests employees into the work being done, which gives them a stronger sense of satisfaction when the company succeeds. They know they will be rewarded for their efforts; everyone likes to be appreciated.


Compensation and benefits are significant part of every organization. Compensation and benefits are important for two reasons. First, people won’t work for you without pay and second it is a significant expense with a clear goal so it’s not something businesses can overlook. This is why paying careful attention to a fair compensation and benefits structure is so important.

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Compensation and Benefits as a Significant Part of Human Resource Management. (2022, September 01). Edubirdie. Retrieved May 20, 2024, from
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