Compensation: Outline and Definitions

Compensation is a systematic approach to providing monetary value to employees in exchange for

work performed. Compensation may achieve several purposes assisting in recruitment, job
performance, and job satisfaction.

Chapter Highlights

1. How is compensation sfvbfvused?

2. What are the components of a compensation system?
3. What are different types of compensation?

How is compensation used?

Compensation is a tool used by management for a variety of purposes to further the existance of the
company. Compensation may be adjusted according the the business needs, goals, and available
resources.

Compensation may be used to:

 recruit and retain qualified employees.

 increase or maintain morale/satisfaction.
 reward and encourage peak performance.
 achieve internal and external equity.
 reduce turnover and encourage company loyalty.
 modify (through negotiations) practices of unions.
Recruitment and retention of qualified employees is a common goal shared by many employers. To
some extent, the availability and cost of qualified applicants for open positions is determined by
market factors beyond the control of the employer. While an employer may set compensation levels
for new hires and advertize those salary ranges, it does so in the context of other employers seeking
to hire from the same applicant pool.

Morale and job satisfaction are affected by compensation. Often there is a balance (equity) that must
be reached between the monetary value the employer is willing to pay and the sentiments of worth felt
be the employee. In an attempt to save money, employers may opt to freeze salaries or salary levels
at the expence of satisfaction and morale. Conversely, an employer wishing to reduce employee
turnover may seek to increase salaries and salary levels.

Compensation may also be used as a reward for exceptional job performance. Examples of such
plans include: bonuses, commissions, stock, profit sharing, gain sharing.

What are the components of a compensation system?

Compensation will be perceived by employees as fair if based on systematic components. Various
compensation systems have developed to determine the value of positions. These systems utilize
many similar components including job descriptions, salary ranges/structures, and written procedures.

The components of a compensation system include

 Job Descriptions A critical component of both compensation and selection systems, job
descriptions define in writing the responsibilities, requirements, functions, duties, location,
environment, conditions, and other aspects of jobs. Descriptions may be developed for jobs
individually or for entire job families.

 Job Analysis The process of analyzing jobs from which job descriptions are developed. Job
analysis techniques include the use of interviews, questionnaires, and observation.

 Job Evaluation A system for comparing jobs for the purpose of determining appropriate
compensation levels for individual jobs or job elements. There are four main
techniques: Ranking, Classification, Factor Comparison, and Point Method.
  Pay Structures Useful for standardizing compensation practices. Most pay structures include
several grades with each grade containing a minimum salary/wage and either step
increments or grade range. Step increments are common with union positions where the pay
for each job is pre-determined through collective bargaining.

 Salary Surveys Collections of salary and market data. May include average salaries, inflation
indicators, cost of living indicators, salary budget averages. Companies may purchase results
of surveys conducted by survey vendors or may conduct their own salary surveys. When
purchasing the results of salary surveys conducted by other vendors, note that surveys may
be conducted within a specific industry or across industries as well as within one geographical
region or across different geographical regions. Know which industry or geographic location
the salary results pertain to before comparing the results to your company.

 Policies and Regulations

What are different types of compensation?

Different types of compensation include:

 Base Pay
 Commissions
 Overtime Pay
 Bonuses, Profit Sharing, Merit Pay
 Stock Options
 Travel/Meal/Housing Allowance
 Benefits including: dental, insurance, medical, vacation, leaves, retirement, taxes...

What are regulations affecting compensation?

 FLSA

Compensation Plans
Develop a program outline.

 Set an objective for the program.

 Establish target dates for implementation and completion.
 Determine a budget.
Designate an individual to oversee designing the compensation program.

 Determine whether this position will be permanent or temporary.

 Determine who will oversee the program once it is established.
 Determine the cost of going outside versus looking inside.
 Determine the cost of a consultant's review.
Develop a compensation philosophy.

 Form a compensation committee (presumably consisting of officers or at least including one

officer of the company).
 Decide what, if any, differences should exist in pay structures for executives, professional
employees, sales employees, and so on (e.g., hourly versus salaried rates, incentive-based
versus noncontingent pay).
 Determine whether the company should set salaries at, above, or below market.
 Decide the extent to which employee benefits should replace or supplement cash
compensation.
Conduct a job analysis of all positions.

 Conduct a general task analysis by major departments. What tasks must be accomplished by
whom?
  Get input from senior vice presidents of marketing, finance, sales, administration, production,
and other appropriate departments to determine the organizational structure and primary
functions of each.
 Interview department managers and key employees, as necessary, to determine their specific
job functions.
 Decide which job classifications should be exempt and which should be nonexempt.
 Develop model job descriptions for exempt and nonexempt positions and distribute the
models to incumbents for review and comment; adjust job descriptions if necessary.
 Develop a final draft of job descriptions.
 Meet with department managers, as necessary, to review job descriptions.
 Finalize and document all job descriptions.
Evaluate jobs.

 Rank the jobs within each senior vice president's and manager's department, and then rank
jobs between and among departments.
 Verify ranking by comparing it to industry market data concerning the ranking, and adjust if
necessary.
 Prepare a matrix organizational review.
 On the basis of required tasks and forecasted business plans, develop a matrix of jobs
crossing lines and departments.
 Compare the matrix with data from both the company structure and the industrywide market.
 Prepare flow charts of all ranks for each department for ease of interpretation and
assessment.
 Present data and charts to the compensation committee for review and adjustment.
Determine grades.

 Establish the number of levels - senior, junior, intermediate, and beginner - for each job family
and assign a grade to each level.
 Determine the number of pay grades, or monetary range of a position at a particular level,
within each department.
Establish grade pricing and salary range.

 Establish benchmark (key) jobs.

 Review the market price of benchmark jobs within the industry.
 Establish a trend line in accordance with company philosophy (i.e., where the company wants
to be in relation to salary ranges in the industry).
Determine an appropriate salary structure.

 Determine the difference between each salary step.

 Determine a minimum and a maximum percent spread.
 Slot the remaining jobs.
 Review job descriptions.
 Verify the purpose, necessity, or other reasons for maintaining a position.
 Meet with the compensation committee for review, adjustments, and approval.
Develop a salary administration policy.

 Develop and document the general company policy.

 Develop and document specific policies for selected groups.
 Develop and document a strategy for merit raises and other pay increases, such as cost-of-
living adjustments, bonuses, annual reviews, and promotions.
 Develop and document procedures to justify the policy (e.g., performance appraisal forms, a
merit raise schedule).
 Meet with the compensation committee for review, adjustments, and approval.
Obtain top executives' approval of the basic salary program.

 Develop and present cost impact studies that project the expense of bringing the present staff
up to the proposed levels.
 Present data to the compensation committee for review, adjustment, and approval.
Present data to the executive operating committee (senior managers and officers) for review
and approval.
Communicate the final program to employees and managers.

 Present the plan to the compensation committee for feedback, adjustments, review, and
approval.
 Make a presentation to executive staff managers for approval or change, and incorporate
necessary changes.
 Develop a plan for communicating the new program to employees, using slide shows or
movies, literature, handouts, etc.
 Make presentations to managers and employees. Implement the program.
 Design and develop detailed systems, procedures, and forms.
 Work with HR information systems staff to establish effective implementation procedures, to
develop appropriate data input forms, and to create effective monitoring reports for senior
managers.
 Have the necessary forms printed.
 Develop and determine format specifications for all reports.
 Execute test runs on the human resources information system.
 Execute the program.
Monitor the program.

 Monitor feedback from managers.

 Make changes where necessary.
 Find flaws or problems in the program and adjust or modify where necessary.
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Let's start our discussion of Compensation Management with a simple question: "What is
compensation?" In very simple terms, compensation is the results or rewards that the employees
receive in return for their work.
Compensation includes payments like bonuses, profit sharing, overtime pay, recognition rewards
and sales commission, etc.
Compensation can also include non-monetary perks like a company-paid car, company-paid
housing and stock opportunities. Compensation is a vital part of human resource management,
which helps in encouraging the employees and improving organizational effectiveness.
From a manager's point of view, the compensation package offered to a company's employees is
essential not only because it costs money, but because it is likely to be the primary reason the
employees work for the firm.
Compensation packages with good pay and advantages can help attract and retain the best
employees. A quick survey of employees about compensation is likely to expose an expectation that
wages are fair and cover basic living expenses, keep up with inflation, leave some money for savings
(perhaps for retirement) and leisure, increment over time.
A company's compensation scheme also informs a great deal about the firm's values and
cultures. Employees often look at what a company pays rather than what it says. In many
aspects, people behave as they are rewarded.
A compensation scheme projects what the company expects of its employees. For example, if
quality is an essential value, then it should be implemented through some element of the total
compensation system.
Objectives of Compensation Policy
The objectives of compensation policy are as follows −
 Allure suitable staff.
 Keep qualified personnel.
 Develop reward structures that are equitable with logical and fair pay relationships between
differently valued jobs.
 Manage pay structures to mirror inflationary effects.
 Assure that rewards and salary costs handle changes in market rates or organizational
change.
 Appraise performance, duty, and loyalty, and provide for progression.
 Abide with legal requirements.
 Maintain compensation levels and differentials under review and control salary or wage
costs.
Clearly, managing a firm's compensation policy is a complex task as it facilitates systematically
administered and equitable salaries, reconciles employees' career aspirations with respect to
earnings, aligns employees' personal objectives with those of the organization, and keeps the firm's
costs under control.
To summarize, compensation management is a synchronized practice that includes balancing the
work-employee relation by facilitating monetary and non-monetary benefits for employees.
Importance of Compensation Management
A good compensation is a must for every business organization, as it gives an employee a reason to
stick to the company.
An organization gains from a structured compensation management in the following ways −
 It tries to give proper refund to the employees for their contributions to the organization.
 It discovers a positive control on the efficiency of employees and motivates them to perform
better and achieve the specific standards.
 It creates a base for happiness and satisfaction of the workforce that limits the labor turnover
and confers a stable organization.
 It enhances the job evaluation process, which in return helps in setting up more realistic and
achievable standards.
 It is designed to abide with the various labor acts and thus does not result in conflicts
between the employee union and the management. This creates a peaceful relationship
between the employer and the employees.
 It excites an environment of morale, efficiency and cooperation among the workers and
ensures satisfaction to the workers.
In short, we can say that compensation management is required as it encourages the employees to
perform better and show their excellence as well as provides growth and development options to the
deserving employees.
Types of Compensations
We have learnt about what compensation and its importance is. However, when it comes to an
organization, be it private or public, compensations are further divided into the following −

Direct Compensation
It is naturally made up of salary payments and health benefits. The creation of salary ranges and pay
scales for different positions within an organization are the central responsibility of compensation
management staff.
Direct compensation that is in line with the industry standards facilitates employees with the
assurance that they are getting paid fairly. This helps the employer not to worry about the costly loss
of trained staff to a competitor.

Indirect Compensation
It focuses on the personal encouragements of each individual to work. Although salary is essential,
people are most productive in jobs where they share the company's values and priorities.
These benefits can include things like free staff development courses, subsidized day care, the
chances for promotion or transfer within the company, public recognition, the ability to effect change
or bring some changes in the workplace, and service to others.
These are the two types of compensation that need to be managed and have its own contribution in
the development of the organization. Moving forward, we will see the different components of
compensation.
Components of Compensation
Compensation as a whole is made up of different components that work as an aid for an employee
after retirement or in case of some accident or injury. Now we shall see the key elements or
components that make compensation.

Wages and Salary

Wages mark hourly rates of pay, and salary marks the monthly rate of pay of an employee. It is
irrelevant of the number of hours put in by an employee working in the firm. These are subject to
annual increase.

Allowances
Allowances can be defined as the amount of something that is allowed, especially within a set of
rules and regulations or for a specified purpose. Various allowances are paid in addition to basic pay.
Some of these allowances are as follows −
 Dearness Allowance − This allowance is given to protect real income of an employee
against price rise. Dearness allowance (DA) is paid as a percentage of basic pay.
 House Rent Allowance − Companies who do not provide living accommodation to their
employees pay house rent allowance (HRA) to employees. This allowance is calculated as a
percentage of salary.
 City Compensatory Allowance − This allowance is paid basically to employees in metros
and other big cities where cost of living is comparatively more. City compensatory allowance
(CCA) is normally a fixed amount per month, like 30 per cent of basic pay in case of
government employees.
 Transport Allowance/Conveyance Allowance − Some companies pay transport allowance
(TA) that accommodates travel from the employee’s house to the office. A fixed amount is
paid every month to cover a part of traveling expenses.

Incentives and Performance Based Pay

Incentive compensation is performance-related remuneration paid with a view to encourage
employees to work hard and do better.
Both individual incentives and group incentives are applicable in most cases. Bonus, gain-sharing,
commissions on sales are some examples of incentive compensation.

Fringe Benefits/Perquisites
Fringe benefits include employee benefits like medical care, hospitalization, accident relief, health
and group insurance, canteen, uniform, recreation and the likes.
In recent years, a great deal of attention has been directed to the development of compensation
systems that go beyond just money. We can say that all the components of compensation
management play a very important role in the life of an employee.
In particular, there has been a marked increase in the use of pay-for-performance (PrP) for
management and professional employees, especially for executive management and senior
managers. Compensation is a primary motivation for most employees.
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ensation.htm

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Definition: Compensation
Compensation is the monetary benefit which is given to an employee or worker giving their services to
an organization. Compensation includes components like salary, wages, bonuses etc. The
compensation provided helps in motivating the employees, build their career and ensure that their are
committed in achieving the company goals.
Compensation is something, most usually money, which is given to the employees of an organization
or company as payment or reparation for their service towards the organization or because of their
loss incurred due to any organizational activity.

Importance of compensation
Compensation is important for an organization to consider its mission and vision and its strategies and
then  devise the compensation system such that all these components are inter-linked and aligned
with each other. Compensation comes under the parlance of human resource (HR) department of an
organization. It is the tool that organizations use to manage and reward their employees, so that they
perform efficiently. The compensation system that company follows should be an attracting one, and it
should motivate its employees to work and justify the amenities provided to them by the company.
The compensation system should also ensure that the turnover rate remains low and the employees
remain motivated. Along with other non-monetary perks & incentives, the company
offers compensation and benefits to its employees. Companies have to devise a compensation
plan based on the position, responsibility and qualification of an employee.

Components of compensation
Compensation can be divided into the following components:
1. Completely fixed (per month or year)
2. Some fixed component, along with a variable component (which is decided based on the rating of
the employee and his meeting of the targets)
Posted in Human Resources Terms, Total Reads: 22057
Definition: Compensation
Compensation is the monetary benefit which is given to an employee or worker giving their services to
an organization. Compensation includes components like salary, wages, bonuses etc. The
compensation provided helps in motivating the employees, build their career and ensure that their are
committed in achieving the company goals.
Table of Contents +
Read Next
 Compensation & Benefits
 Compensation Carve-out
 Compensation Plan
 Compensation Committee
Compensation is something, most usually money, which is given to the employees of an organization
or company as payment or reparation for their service towards the organization or because of their
loss incurred due to any organizational activity.

Importance of compensation
Compensation is important for an organization to consider its mission and vision and its strategies and
then  devise the compensation system such that all these components are inter-linked and aligned
with each other. Compensation comes under the parlance of human resource (HR) department of an
organization. It is the tool that organizations use to manage and reward their employees, so that they
perform efficiently. The compensation system that company follows should be an attracting one, and it
should motivate its employees to work and justify the amenities provided to them by the company.
The compensation system should also ensure that the turnover rate remains low and the employees
remain motivated. Along with other non-monetary perks & incentives, the company
offers compensation and benefits to its employees. Companies have to devise a compensation
plan based on the position, responsibility and qualification of an employee.

Components of compensation
Compensation can be divided into the following components:
1. Completely fixed (per month or year)
2. Some fixed component, along with a variable component (which is decided based on the rating of
the employee and his meeting of the targets)
3. Total variable component, where the total salary depends on the rating received during evaluation
4. Bonus is a component given monthly or yearly based on company's performance

The compensation system followed by a company should be regularly evaluated and updated as per
its evolving strategies and also based on the moves of its competitors. Mostly compensation is paid at
regular intervals like a monthly payment. However, in certain cases the payment of wages and
salaries is delayed, which is known as deferred compensation. 
 Sometimes instead of giving money, companies do payments on behalf of employees, which is also
referred as indirect compensation.

Types of compensation
Based on the seniority, responsibility and position of an employee, there are various types of
compensation plans:
1. Executive compensation for CEOs, managing directors, chairman etc. Mostly salaries and perks
are decided by the compensation committee. 
2. Workers compensation is the salary and wages provided to employees and workers.
All these summarize an overall description about compensation in HRM.
Hence, this concludes the definition of Compensation along with its overview.
HUMAN RESOURCES: COMPENSATION, BENEFITS & REWARD
237
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 Follow
Who is in charge of compensation, benefits and rewards schemes?
Most employees don’t just work for the love of their job. Most people also want a decent salary and
other incentives that will reward them for their hard work.
These remuneration packages need to be created, managed and distributed efficiently. This is where
HR professionals that specialise in compensation and benefits get involved.
Without these guys nobody would get that ‘just been paid’ feeling at the end of the month and
Christmas bonuses would certainly be a thing of the past. For many people, compensation and
benefits professionals are the most important guys in the HR department. Why? Well, because they
control the money of course!

What are the responsibilities of someone in compensation, benefits and rewards?

Basically, people who work in compensation and benefits are responsible for devising policies for an
organisation’s salary, bonus and incentive schemes. These might include:
 Salaries
 Bonuses
 Commission
 Company cars
 Pensions
 Life assurance
 Profit sharing
 Dental plans
 Medical insurance
 Vouchers
 Capital bonds reward schemes.
They are then in charge of administering, managing and evaluating the payroll, salary structures, and
incentive schemes. Basically, they make sure that the right people get the right amount of money, at
the right time.

Why is a good compensation, benefits and rewards scheme important?

The right compensation and benefits schemes ensure that hard-working employees are rewarded
fairly and in the most cost-effective way for the company. This in turn then motivates employees to
sustain their performance.
The compensation, benefits and reward schemes that these HR professionals manage are not only
important for retaining and motivating employees, but also for attracting new people to the company.
Salary and incentive packages are one of the main reasons why people apply for specific jobs. The
more attractive compensation and benefit schemes tend to generate more interest in new positions.
What skills do HR employers in this sector look for?
Compensation, benefits and reward careers are all about money. Consequently, HR professionals
who work in this area need to be numerate, commercially aware and have a detailed knowledge of
financial laws and regulations.
As well as monitoring their own company’s salary structures and benefits, these people may be
required to research and analyse the salary rates of their competitors.
However, it’s not all about numbers, paycheques and payrolls. These guys need excellent
communication skills to make recommendations to employees on pension and insurance schemes,
and to liaise with government departments and trade unions with regards to compensation and
benefits issues.
Indeed, these roles have a strategic element too, as the needs of the company and employees need
to be balanced effectively. Furthermore, compensation and benefits are directly linked to market
changes. Consequently, difficult decisions regarding salary and benefits alterations may need to be
made within this department.

Would I be in charge of all compensation, benefits and reward schemes?

The size of the organisation determines what kind of work you might be doing in your compensation
and benefits career. In smaller organisations, some people might deal with the whole range of
responsibilities, whereas larger companies may offer careers which focus on one specific aspect of
the compensation and benefits remit, such as payroll management.
If you’re interested in an HR career that specialises in compensation, benefits and rewards, check out
the occupational profile of a Compensation and Benefits Manager. If a career in HR sounds perfect for
you, take a look at the various HR jobs listed on our jobs board!
237
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reward
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. In this article, we will provide you with a full guide about compensation and
benefits. 
Contents
What are compensation and benefits?
Why are compensation and benefits important?
Compensation and benefits and employee motivation
How do HR Departments calculate compensation and benefits?
3 Models to Explain Compensation and Benefits
Compensation and benefits package example
Frequently Asked Questions

What are compensation and benefits?

When you receive a job offer, the first thing you 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. Typically, when employees think about compensation, the salary is what they think of. But,
for many employees (especially senior employees) compensation is far more than just the regular
paycheck.
Benefits cover indirect pay. This can be health insurance, stock options, or any myriad of things
offered to employees. All of these things are critical in any job offer. Two jobs that offer identical
salaries may vary wildly in the benefits category, making one a better financial proposition than the
other.
Overtime pay, stock options, 401k matches, pension plans, days off, and even free lunches make up
an essential part of the compensation and benefits package. 
Some benefits are country-specific. In the United States, health insurance makes up a key component
of benefits. Who your employer is, determines your health care options – even down to which doctors
you can see and which medications are covered.
  
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In Europe, there is often a focus on more social benefits, including maternity and paternity leave,
severance pay, and termination notice. In countries like France and Finland, it is not uncommon for
employers to pay for restaurant vouchers that cover part of the employee’s lunch. 

Cultural
differences in benefits: In France, employees get a restaurant voucher for every workday if their
company doesn’t have a canteen.
Most often, compensation and benefits (commonly referred to as comp & benefits) fall under the
responsibility of the Human Resources department. In a small company, an HR generalist would
handle all aspects of this process, while in a large company, there would be dedicated departments to
manage these.
Why are compensation and benefits important?
Compensation and benefits are important for two reasons.
First, people won’t work for you without pay. And unless you’re a non-profit organization, it’s illegal to
ask them to work for you for free. There is a social contract between the employer and employee,
where the employee puts in the work and the employer rewards this. Compensation and benefits are
an important part of that equation.
Other things play a role too – and we’ll discuss them later – but what the employee receives is central.
In addition to salary, benefits remain a crucial motivator for job candidates.
Second, as of June 2019, benefits make up 31.4 percent of the cost of employing someone. 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.
But, how does compensation motivate employees and do increases make a difference?
Compensation and benefits and employee motivation
Glassdoor found that a 10 percent increase in base pay resulted in a 1.5 percent increase in the
chance that the employee would stay at the company for their next role, rather than moving on. While
their findings were statistically significant and turnover is expensive, it’s probably not enough to
convince a boss to give someone a 10 percent raise. 
This same research found that a higher company rating on Glassdoor resulted in a four percent
increase in the chance that someone would stay at the company. Salary is clearly important, but there
is something other than money going on.
A Payscale study gives some insight into the influence of salary. They found a strong correlation
between pay and engagement (and engagement profoundly influences retention), but what was
stronger is pay clarity. When employees understood that their compensation was fair, it increased
their engagement.
Procedural and distributive fairness
Compensation fairness consists out of two elements: procedural fairness and distributive fairness.
1. Distributive fairness refers to the perceived fairness of the amount of compensation the
employee receives.
2. Procedural fairness refers to the perceived fairness of the means used to determine those
amounts.
Research shows that both distributive fairness and procedural fairness lead to higher employee
retention.
However, when it comes to employee engagement (or motivation), procedural fairness seems more
important than distributive fairness. A study in the UK showed a link between procedural fairness and
engagement. Another study among Chinese compulsory school teachers showed that procedural
fairness, not distributive fairness, predicted employee motivation. 
In other words, it’s not so much about money as it is about communication and honesty. Traditionally,
many companies keep salary information confidential. Some managers even punish employees for
sharing their salaries with co-workers, even though the National Labor Relations Act protects
employees’ rights to discuss their working conditions, including salary. Secrecy can backfire, though,
as employees are concerned that their pay is not fair. 
When an employee clearly understands that their compensation is commensurate with their skills,
position in the company, and broader job market, they are more likely to be engaged in their work.
Benefits and motivation
Salary is only a part of compensation, though. Other benefits, such as pensions, 401ks, and stock
options, also help increase employee retention. Many of these benefits require a period before the
employee is vested. That is, you don’t receive the money or benefit from these forms of compensation
until you’ve worked a minimum amount of time. If you quit before this date, you give up the stock or
401k match or other benefits.
Researchers at the University of Pennsylvania found that delayed compensation did decrease
turnover overall, but it also resulted in employees quitting just after they did vest. In other words,
employees are acting strategically when choosing to leave their jobs. They wish to move on but also
want to maximize their compensation.
The Society for Human Resource Management (SHRM) found that 62 percent of U.S. employees
rated their health care benefits as very important to them, meaning that this is an area that companies
can focus on to increase engagement and retention. 
The same SHRM study also found that indirect compensation benefits also strongly influenced
employee happiness. Things such as paid time off (63 percent said it was very important), flexibility
(53 percent), and family-friendly benefits (35 percent) strongly influenced employee satisfaction with
their jobs. The traditional money-based programs, such as retirement benefits, were also important.
Still, at 48 percent saying retirement benefits were important, you can see how flexibility and vacation
may cost you less and increase happiness overall.
Of course, because compensation and benefits can vary across companies and geographic regions,
it’s important to benchmark your programs to ensure you’re maximizing the benefits from your
programs.
How do HR Departments calculate compensation and benefits?
While governments set the floor for pay, known as a minimum wage, businesses are generally free to
set their own wages. However, you’d be hard-pressed to hire an accountant for minimum wage.
Instead, you’ll need to pay a market rate.
A market-rate can also be defined as a “going rate” and is the amount people are willing to pay for a
particular good or service. Employees are offering their services and fall under this definition. There
are market rates for each position, but because people are rarely transparent about salaries, this can
be difficult to ascertain.
A compensation specialist will use salary surveys to help her determine a market rate. A salary survey
asks many businesses to share their compensation data for positions. The data is then anonymized
and sold back to businesses. In this way, a company can determine that the average rate for a junior
accountant is $X, while the average rate for a marketing manager is $Y.
Because positions vary from company to company, you cannot just look at the salary survey and base
all your salaries on the average salary for someone with that title. A marketing manager at a Fortune
500 company will have a very different job description than a marketing manager at a 25-person
business.

 
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Compensation managers will determine not only an ideal salary for a position but a salary range.
Because candidates vary wildly, it doesn’t always make sense to pay different people the same
amount. One person may have more experience and better skills than another and deserves a higher
salary. Each range has a mid-point, which you may hear as a compa-ratio. If you have a compa-ratio
of 100 percent, that means you are at the midpoint of the salary range.
Determining where someone fits within that salary range can also be complicated. Compensation
managers often use statistical tools, such as regression analysis, to establish a proper salary position.
The variables that the regression use can include
 Highest degree earned (and type and degree area)
 Years of experience
 Tenure with the company
 Position tenure
 Current salary
 Full-time equivalent status
 Exempt vs. non-exempt status
 Grade level or salary band classification
 Employee location (if you have multiple locations)
 Job performance ratings
In addition to salaries, stocks, retirement benefits, health insurance, and any other benefit are
included in compensation figures. 
3 Models to explain compensation and benefits
While compensation and benefits is a flat model to explain differences in pay, there are two scientific
models that enable us to understand compensation and benefits in a better way.
Compensation and benefits vs. total rewards
As discussed, compensation and benefits are not the only aspects of employee happiness,
engagement, and retention. The Total Rewards Model demonstrates the interplay between the
organization and compensation. 
The Total Rewards Model, coined by WorldatWork, proposes that total rewards are made up out of
two elements:
1. Direct compensation. This consists of:
1. Salary. This is the base and variable pay for work.
2. Rewards. Other monetary benefits from working at the company, including health
care, retirement pay, and allowances. 
2. Indirect compensation. This consists of:
1. Work-life balance. A good work-life balance is crucial for a happy career. 
2. Recognition. Recognition by colleagues and supervisors, as well as external
recognition for your job.
3. Development & career. Training and development, mentor programs, talent
(mobility) programs.
If you only look at compensation when determining what makes employees happy, you’ll fall short.
Total rewards look at how all aspects of an employee’s work-life impact their
satisfaction. Research shows that Total Rewards offers a valid framework to reduce employee
turnover. 
For years, Gallup tracked employee engagement daily and found that engagement generally stayed
between 30 and 35 percent of employees. This means there is a lot of work to be done in this area.
As established above, pay and benefits are not the only things that make employees
happy. Management practices have significant impacts on employee happiness and profitability and
even reduced workplace accidents. Ignoring the culture part of an employees’ total rewards can
reduce company performance and increase turnover.
Warr’s Vitamin model
Another approach to compensation and benefits is Warr’s vitamin model. A vitamin deficiency
produces bodily impairment and may lead to physical illness. Normal vitamin intake improves health.
However, an excess of vitamins can have different effects. According to Warr, an overdose of
vitamins C and E neither improve nor impair the individual’s health. However, excess of vitamins A
and D lead to toxic concentrations, which causes ill health.
Warr grouped job characteristics in these two categories, CE and AD.
1. CE is short for Constant Effects. Once an optimum is reached, any additional resources
don’t add anything to employee well-being. Examples include 
1. Pay level
2. Pleasant environment
3. Safe work practices
4. Adequate equipment
5. Value to society
6. Supportive and considerate supervision
7. Job security
2. AD is short for Additional Decrement. Once the optimum is reached, any additional
resources hurt employee well-being. Examples include 
1. Task discretion
2. Influence
3. Skill use
4. Number of job demands
5. Difficulty of job demands
6. Range of different tasks
7. Future predictability
8. Availability of feedback
9. Amount of social contact.
It is key to identify the optimum level for employees when it comes to compensation and benefits. Too
much will either cost the organization resources (time, money, administration) in the case of CE, or
will decrease employee well-being in the case of AD.
Researchers in Germany found that Warr’s theories did have a correlation with employee happiness
and engagement and business success, at least in the German Horticulture business. While that may
be a very specific area, it’s worth noting that these ideas do have merit, and looking at the total picture
(or making sure employees receive all their vitamins) has a positive impact on your business.
Simon Sinek’s Why model
Simon Sinek’s Why model can also apply to compensation and benefits. As Warr’s Vitamins and the
Total Rewards Matrix demonstrate, employees want to know the why and understanding that
influences their performance. Sinek says that the best and most influential communicators begin with
the why – why we do this. And the answer to the question, “Why?” cannot be to achieve shareholder
value. That does not inspire.
 
Inspiration and understanding of underlying company culture and values increase
engagement, especially among Millennials and Gen Z. The oldest Millennials are now in their late 30s
(defining the millennials as those born between 1981 and 1996), but they still behave differently than
prior generations. They prefer to meet with their managers one on one–and finding the why in their job
is part of this. Millennials want to see companies benefiting society, not just shareholders. If you can
explain why your company exists, it can impact your millennial turnover and engagement.
Your compensation packages and your total rewards models should not remain static. There are
generational differences. As Gen Z enters the workforce, you’ll note that they (generally speaking)
behave differently than prior generations, and compensation needs to adjust.
Compensation and benefits package example
What should a compensation and benefits package look like? There is no one answer for that as the
package for a grocery store clerk will have little in common with the CEO’s package. However, here
are some standard items that companies often include in a job offer. You’ll need to adjust for your
organization, local laws, and employee level. 
 Salary
 Overtime pay
 Bonuses and commissions (discretionary and non-discretionary)
 Retirement (defined benefit and defined contribution plans)
 Stock options
 Restricted stock
 Vacation
 Profit-sharing
 Merit pay
 Sign-on bonuses
 Relocation bonuses
 Housing, school, and meal reimbursement
 Healthcare benefits (medical, dental, vision, etc.)
Salespeople, for instance, will need a commission plan that details what their commission is, and
under what circumstances they receive it (is it when the paperwork for the sale is signed or is it when
the customer pays?). Profit-sharing plans need to define what constitutes a profit, and when such, the
company pays the bonuses (yearly, quarterly?). 
Companies must operate within the confines of laws. Summary Plan Descriptions should define
everything legally, and you should provide these to employees, so they know precisely what their
compensation and benefits are. While all these things are, generally, negotiable, you must maintain
equity with similarly situated employees, to prevent illegal or immoral discrimination. 
Compensation packages cannot detail the total rewards aspect of any job offer. But, understand that
your job candidates look for that. Websites such as Glassdoor give insights into your total rewards,
whether you like it or not. It’s important to remember that candidates consider all that information
when deciding to accept or reject a job offer.
You can no longer hide behind a large salary offer and hope that everyone ignores the culture your
office has to offer.
Compensation and benefits are key components for company success, employee engagement, and
turnover. You should evaluate your plans and programs regularly (at least yearly) to ensure that you
meet both employee expectations and remain competitive in the marketplace.
FAQ
What are compensation and benefits?
Typically, when employees think about compensation, the salary is what they think of. Benefits cover
indirect pay. Think of health insurance, stock options, or various other things offered to employees.
What is the difference between compensation and benefits?
Put simply, compensation covers people’s direct pay, their salary. Benefits cover employees’ indirect
pay, things like health insurance and stock options but also social benefits such as parental leave.
Why are compensation and benefits important?
Compensation and benefits are important for two reasons. First, people won’t work for you without
pay. Second, benefits are a significant expense with a clear goal and thus not something businesses
can overlook.
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