Compensation

Compensation, its Components and an Effective Policy

Many have their own definition of what compensation means to them. Many think it is money or time earned as a reward for performance. Others think compensation is an entitlement an employer provides. Compensation will be defined; the philosophy behind it, critical components of a compensation strategy and an effective compensation policy will be given to give a better understanding of these aspects.

What is Compensation?

Compensation is considered the rewards an employee obtains for doing their job. It can be in the form of both monetary and nonmonetary. Monetary can be based on the employee’s performance level or their knowledge and skills that are associated to their job. The monetary reward is also considered the “core compensation” of an employee. This consists of their base pay, hourly or salary. The employee’s pay can be modified over time to help compensate for the cost of living in the area, incentive or seniority pay, and also for pay-for-knowledge skill-based pay the employee has attained. (Martocchio, 2013, p.4)

The nonmonetary compensation is also known as benefits that an employer may provide its employees to help attract and attain them with their organization. Some of the benefits that may be offered would be paid time off, tuition reimbursement for education, monetary support to help off-set child care, and medical insurance. Although these benefits are not necessarily a requirement, some employers do offer such benefits to attract employees and stay competitive in the market place. This is not to be confused with the legally required benefits that are mandated for each employer to provide to their employees.

Compensation Philosophy

A compensation philosophy is merely an organization’s written statement explaining

their stance about their employees’ compensation. This will explain the employee’s pay and how the company came to this pay structure and pay strategy. The...