Compensation & Benefits: Definitions & Importance.

Human Resource Management (HRM) has never been as significant as it is today. Companies want to attract, retain and motivate brains to meet objectives. Today Humans are regarded as one of every company’s assets so they need to be efficiently and effectively managed. One of the tools companies use to attract, retain and motivate its people is Compensation Management. In this hub, I shall define compensation and benefits along with their advantages for a company and its workers.

Suppose, you own a boutique. Lets call it myWear - or you can give it any name of your liking. You have hired three salespersons and a receptionist. The salespeople are responsible to look after the sales affairs. The receptionist's duties are to handle the cash and manage the account books. I shall refer to this illustration throughout the hub.


Would the three salespersons and the receptionist work for free? No. They would, like us all, expect something in return. You must have heard a common phrase: Give and Take. You always have to give things to people in return to what you take from them. Compensation refers to this exchange, but in monetary terms. Compensation is the employer's feedback for an employee's work. It simply is the monetary value you would give to your four employees in return of their services.

Gary Dessler in his book Human Resource Management defines compensation in these words "Employee compensation refers to all forms of pay going to employees and arising from their employment." The phrase 'all forms of pay' in the definition does not include non-financial benefits, but all the direct and indirect financial compensations.


Employees today are not willing to work only for the cash alone, they expect 'extra'. This extra is known as employee benefits. Also known as fringe benefits, Employee benefits are non-financial form of compensation offered in addition to cash salary to enrich workers’ lives.

What benefits would you offer to your employees at myWear? Off course, you would offer different benefits to the salespersons and the receptionist. Problem will arise when you begin to decide what benefit to give to whom and on which basis? Employee benefits are not performance-based, they are membership-based. Workers receive benefits regardless of their performances. Employee benefits as a whole have no direct affect on employee performance, however, inadequate benefits do contribute to low satisfaction level and increase absenteeism and turnover in employees (DeCenzo and Robbins; 2007). So you would have to carefully design your benefit package. Your package may include a cell phone to each worker, taking them to a training workshop or seminar, giving them a day or two off every month and so on. While deciding on the benefits package, do consider the associated costs.


Advantages to Your Boutique:

A well designed compensation and benefits plan helps to attract, motivate and retain talent in your firm (which is myWear). A well designed compensation & benefits plan will benefit your boutique in the following ways.

1. Job satisfaction: Your employees would be happy with their jobs and would love to work for you if they get fair rewards in exchange of their services.

2. Motivation: We all have different kinds of needs. Some of us want money so they work for the company which gives them higher pay. Some value achievement more than money, they would associate themselves with firms which offer greater chances of promotion, learning and development. A compensation plan that hits workers’ needs is more likely to motivate them to act in the desired way.

3. Low Absenteeism: Why would anyone want to skip the day and watch not-so-favorite TV program at home, if they enjoy the office environment and are happy with their salaries and get what they need and want?

4. Low Turnover: Would your employees want to work for any other boutique if you offer them fair rewards. Rewards which they thought they deserved?

Advantage to Your Employees:

1. Peace of Mind: your offering of several types of insurances to your workers relieves them from certain fears. Your workers as a result now work with relaxed mind.

2. Increases self-confidence: Every human being wants his/her efforts to get acknowledgment. Employees gain more and more confidence in them and in their abilities if they receive just rewards. As a result, their performance level shoot up.

I hope this hub added to your knowledge of compensation management.

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Comments 103 comments

hafeezrm profile image

hafeezrm 7 years ago from Pakistan

A nice hub from NNazir. Difference between compensation and benefit is well explained.

NNazir profile image

NNazir 7 years ago from Pakistan Author

Thank you Mr. hafeezm for your reading the hub...

oderog profile image

oderog 7 years ago from Nairobi

That's great NNazir, when you compensate your employee's poorly there will be always a high turn over with a short period of time and this would hinder your company's effectiveness, I find this hub useful and keep it up

Malik Tahir 7 years ago

Well explained compensation. can you provide some more explanation on " how to control that high turn over? "

NNazir profile image

NNazir 7 years ago from Pakistan Author

Thank you oderog for your valuable comments

Malik Tahir: The best way to control the high turnover is to design a 'fair' compensation plan.

By fair I mean that The employee shouldn't perceive he/she is not receiving what he/she deserved.

In the given illustration how can u develop a fair plan?

Provide a salary + commission package. This means provide salary floor and commission in addition to that.

2. In addition, u must train them to SELL efficiently and effectively.

3. Developing a sales pipeline takes time, don't push too hard.

4. They will ONLY b loyal with myWear - your boutique - if they believe they have a FUTURE and ample of development chances.

I hope I've answered your question.

ASIF JAMAL  7 years ago

really it knwolegdable for the studnt of MANGNT scince

NNazir profile image

NNazir 7 years ago from Pakistan Author

Thank you very much Asif.

Your comment is very valuable.

madiha 7 years ago

it is very knowledgeable for management sciences students

NNazir profile image

NNazir 7 years ago from Pakistan Author

Thank you Madiha

jomarie 6 years ago

thank you...your facts help me a lot in my research...

NNazir profile image

NNazir 6 years ago from Pakistan Author

jomarie - Thank you v. much. These r solely not my facts. I cited the sources from which things were taken.

G Miah profile image

G Miah 6 years ago from Muslim Nation

Not bad NNazir, when are you writing more hubs? i wouldn't mind reading more of them!

NNazir profile image

NNazir 6 years ago from Pakistan Author

G Miah

Thank you v. much

Do expect My next hub 'Parts of Salary' soon, Inshallah.

lovelypaper profile image

lovelypaper 6 years ago from Virginia

Excellent explanation of terms.

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NNazir 6 years ago from Pakistan Author

lovelypaper: Thank you v. much & Excellent Comment :)

Zubair Khan 6 years ago

Mr. Nnazir this is a very interesting topic & u explain it really well.

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NNazir 6 years ago from Pakistan Author

Thank u v much Mr. Zubair Khan...

lctodd1947 profile image

lctodd1947 6 years ago from USA

Very nice information and useful. Thank you for sharing this with us. Good work.

NNazir profile image

NNazir 6 years ago from Pakistan Author

lctodd1947 - Thank u v much...

billyaustindillon profile image

billyaustindillon 6 years ago

A nice hub - basically it all comes down to showing respect and compassion-share value and you will receive value.

shiva kumar 6 years ago

its helped to me. thank you very much

NNazir profile image

NNazir 6 years ago from Pakistan Author

Shiva Kumar-You're Welcome...

Thank you for stopping by...

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shakthiprasad 6 years ago

Hi Nazir-I have recently signed with hubpages and happened to come across your article on executive compensation trends more relevant.keep up the good work.

stars439 profile image

stars439 6 years ago from Louisiana, The Magnolia and Pelican State.

Thank You for and interesting hub. GBY

NNazir profile image

NNazir 6 years ago from Pakistan Author

shakthiprasad - Welcome to the community. And thank you v much for your reading the hub.

stars439 - You're Welcome! And Thank you for the compliment...

moses  6 years ago

great work,this article has contributed to completing my course work at postgraduate school

Mohammad S. 6 years ago

Perfect and very beneficial post Mr. Nazir... I liked it so much...

anju mishra 6 years ago

hi,nnazir it'reaily great thought about compensation , i am impressed.

shashi 6 years ago

This interesting topic is very well-versed.that's great.

ingi yousry 6 years ago

very usefull

i enjoyed

and will read and read


NNazir profile image

NNazir 6 years ago from Pakistan Author

thank you, Shashi and ingi yousry for your valuable comments.

I thank Allah u find the article interesting.

NNazir profile image

NNazir 6 years ago from Pakistan Author

Moses-It's really an honor for me..

NNazir profile image

NNazir 6 years ago from Pakistan Author

Mohammad S. and Anju Mishra -

Thank you v. much but i need u all to help me make it better..and write on things that benefit u professionally as well as personally..

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ma.theresa_lerias 6 years ago

Hi Sir NNazir,

I would just like to ask if you could possibly differentiate a Salary scale from a job grade... for me to clearly workout on the making of which...

I had really hard time.

thanks so much


NNazir profile image

NNazir 6 years ago from Pakistan Author

ma.theresa_lerias - Thank you for your time.

Job Grades: After u've determined (Job Evaluation) the value of all the jobs u group jobs with similar responsibilities and duties. All the jobs form grade structure.

Jobs with higher responsibilities and duties are given higher grades (of coarse, are offered higher pay & benefits)

the grades may be named: OG2, OG3 etc OG2 called an Assist Manager & OG3 a Manager etc. Depends on the company policy.

Example: A company divides all the jobs in seven grades. The Job Resp and Job specification of each grade is different.

Salary Scale: Each grade is associated a salary scale. An Assistant Manager at the State bank of Pakistan is paid between PKR25000 to PKR40000. So how does the company determine how much to pay within the grade? it depends on factor such as experience, technical and other skills.

Hope this'll help u.

vedha.s 5 years ago

simply super i is very much usufull for me to do my project in the topic compensation and benefit thankyou very very much

Sumitkumar 5 years ago

Very well explained..Wud like to see more articles from ur side...Thanks

NNazir profile image

NNazir 5 years ago from Pakistan Author


Praise for Allah Almighty the article was useful for you for your project.

you're welsome vedha.s!

and thank you very very much for your time :)

Opeyemi 5 years ago

Nice write up. Well explained!

Sadhna 5 years ago

Tx a lot for sharing this and it was sooooooooo useful for my term paper, highly appriciated if you would able to put moer articales on performance based reward system.....

Tx a million

qhim 5 years ago

why that compensation and benefit are important in human resource management?

jing 5 years ago

hey......very informative.thank u very much u'v just help me clear my ideas regarding compensation and benefits..its actually my report in class this friday...Allah bless

M IFTIKHAR ALI 5 years ago

Good Explanation & Information Regarding Compensation Mgt In HRM

rana 5 years ago

hii , i am doing now a diploma in hrm , and what you explain really helped me alooooooooooooot, really thanks, but please can you also explain performance appraisal and give some example of it i feel that i w can understand it more and i will really be very great full this is my email

Rumesa 5 years ago

Excellent! Even my colleague who attended a whole workshop particularly on this topic got confused while explaining the true difference between compensation and benefits, which you have done it so simply and beautifully, while not complicating or over lapping any part. I never stick to reading an article till the end...but this time I did. :) well done!! and Thankyou for helping confused people like us ... :)

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Rumesa 5 years ago

I cant find your next hub Mr NNazir, "parts of salary"...

NNazir profile image

NNazir 5 years ago from Pakistan Author


Thank you very much..All praise to Allah...

NNazir profile image

NNazir 5 years ago from Pakistan Author

Opeyemi: Thank you very much for your time and comment. :)

NNazir profile image

NNazir 5 years ago from Pakistan Author

Sadhna: Thank you very much for your time & comment.

I was having a very hard time with writing and my health. I had an accident on July 24, and the result was a femoral neck fracture. Praise to Allah, I'm quickly recovering.

Inshallah, I will continue writing on compensation & benefits.

NNazir profile image

NNazir 5 years ago from Pakistan Author

jing: Thank you very much for your time & comment.

Glad to read there is no ambiguity of thoughts in your mind about compensation & benefits.

Praise only to Allah!

NNazir profile image

NNazir 5 years ago from Pakistan Author

M IFTIKHAR ALI: Thank you so much for your comment & time.

NNazir profile image

NNazir 5 years ago from Pakistan Author

Rumesa: All praise to Allah! We cannot do anything if Allah doesn't want us to.

You're welcome Rumesa, and thank you for your time & your motivating comment.

Yes, as managers we need to clear our minds about the two concepts.

Today's workplace environment is quickly changing and is very competitive. Employees switch organizations the moment they see a better opportunity. If our company doesn't offer a compensation package as good as our competitors, then undoubtedly we're helping them to make the decision today than tomorrow. And we can't plan great with ambiguous concepts and confused minds.

Papun 5 years ago

should sales force compensation be linked with customers feedback? what are the advantages and disadvantages of this approach ?

Modesta broni 5 years ago

Useful, very very useful.thanks,it has really helped me with my long essay.thanks

mumtaz khan inqulabi 5 years ago

very nie shre google thanks

mohmmad sahil 5 years ago

nazir bhai its tooo good / fantastic

i m studying in business administration in final semester my speacialisation is human resource and i have make a report on compensation and reward can please help me..

NNazir profile image

NNazir 5 years ago from Pakistan Author

Thank you for your time Modesta bron

Praise to "Allah! it helped you with your long essay. you are Welcome!

NNazir profile image

NNazir 5 years ago from Pakistan Author

Thank you mumtaz khan inqulab for your time.

NNazir profile image

NNazir 5 years ago from Pakistan Author

Thank you mohmmad sahil for your time and comment.

Yes, I will help you, Inshallah!

I'm an MBA in HRM and Marketing myself.

I will guide you to the door, Inshallah, you will have to walk through it.

Muhammad Tahir 5 years ago

This is really helpful; thanx

Enny 4 years ago

Your hub were very interesting and the illustration simple and understandable.

NNazir profile image

NNazir 4 years ago from Pakistan Author

Muhammad, Enny

Thank you very much for your time and liking the hub

Khadija 4 years ago

Hi, Is anyone here doctoral student in HR?

I need help in making my PhD research proposal.


ariel smith 4 years ago

This page was very helpful, its too short though just as I was enjoying it its finished.

Gifty Amon 4 years ago

it really helped me in ma project work

Ganesh 4 years ago

Really nice info..........thank you

David bex 4 years ago

I enjoy , gud one!

Juiciellah 4 years ago

The information is SMART

Syed Asif 4 years ago

Awsm explanation...

ayesha 4 years ago

very nice explanation

Moris 4 years ago

Great Work :)

Aghedo 4 years ago

Good explanation.

hareg 4 years ago

Really, it is a wonderfull explanation & its gives me more understanding . keep it up & may God bless you.

ruby 4 years ago

Nice article you have here. btw thanks.

ghulam dustgeer 4 years ago

by ur this slide management student get a good information thank u very much

cat 4 years ago

thanks for ur info

Harshit 3 years ago

It is fantastic & full of knowledge

Harshit 3 years ago

It is fantastic & full of knowledge

mduduzi 3 years ago

in compesation, how the unions affect this function in terms like if an employee is injured on duty or work?

maha 3 years ago

nice meterial. it hepful for my assignment and presentation. Also i am confused about that topic so realy thanful.

pallone 3 years ago

wonderful .thanks for making my assignment so easy

big ups to you all

may God in heaven grant u more knowledge.

manojthakor 3 years ago

thank u for help to get a useful information

AFRICANUS 3 years ago




guy 3 years ago

when was this article written

errrrrrrrr 3 years ago

what is the name of the autors?

salma 3 years ago

nice one now everything is clear!

raghaveni 3 years ago

very nice who has written this, this article helpful to me....

So... thanks for representing this kind of information....

thank you....

NNazir profile image

NNazir 3 years ago from Pakistan Author

I appreciate every comment and every person's giving time to read the article.

Thank you

lotty 2 years ago

Am grateful to God for such an opportunity to chance on this write up. I am a level 300 student specializing in HRM. Please educate us more on this topic and also if you could treat something on the advantages and dis advantages on companies who uses hard and soft strategies it will be very helpful to some of us. Wishing u a speedy recovery. God bless u

sammy 2 years ago

oooooh i love this material is really great..

I appreciate your help and assistance..Thanks very much

chacha nate 2 years ago

thanks for this helpful resource!!it has really helped me

M. Hafeez Ahmed 2 years ago

It is value able definition Compensation and Benefits. I appreciate this effort by NNazir.

NNazir profile image

NNazir 2 years ago from Pakistan Author

Thank uyou everyone for your commnt s. I hope you will find my new hub a worthy effor: Here is a link to it

Johne388 2 years ago

Nice read, I just passed this onto a friend who was doing some research on that. And he actually bought me lunch as I found it for him smile Thus let me rephrase that Thanks for lunch! deeeedbadafa

Basit Ali 2 years ago

The linked article "Past performance and future prospects of agriculture of Pakistan" is nicely explained and good analysis and predictive article.

NNazir profile image

NNazir 2 years ago from Pakistan Author

Thank u Basit Ali for your commenting. However, comment under that article.

roha jabeen 2 years ago

it,s useful for me but one point confusing me that why not benefit depend on performance. These should be depend on performance otherwise what criteria left behind to give benefit

Roha jabeen 2 years ago

Plz guide me on this point that i mentioned above.....

NNazir profile image

NNazir 2 years ago from Pakistan Author

@Roha Jabeen

I excuse for such a late reply as I was busy in exams for MS (Management Science) which are Alhamdulillah over .


Companies use two systems of pay to evaluate and reward employees

1. performance-based pay: You referred to this system

2. skill-based pay: Based on the level of employees' skills. (De Silva, 1998)

The thesis of this article was that 'compensations and rewards pl,ay very important role in attracting, motivating and retaining employees"

Once your company has attracted brains you will then use several pay systems to compensate them based either on their performances or their skills.

Further Read:

de Silva, Sriyan. “Performance-Related and Skill Based Pay: An Introduction.” International Labor Organization Geneva: 1998.

PRINCESS 14 months ago

its very useful to me, God bless you so much

Hwaidi 12 months ago

Thanks :)

Sajjad Ali 10 months ago

Low salary, no fair compensation & low benefits leads to lower performance and high employee retention and vice versa.

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