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Compensation & Benefits: Definitions & Importance.

Updated on January 9, 2012

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.

COMPENSATION:

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.

BENEFITS:

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 OF COMPENSATION & BENEFITS

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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    • NNazir profile image
      Author

      Nauman Nazir 7 months ago from Pakistan

      Sajjad Ali

      Brother, it's Employee Turnover you want to say. Employee Retention is good, but Employee Turnover is bad and it is something an organization wants to minimize.

      Employee Retention:

      Employee retention refers to the ability of an organization to retain its employees (smallbusiness.chron.com).

      It's not always unfair compensation is responsible for absenteeism!

      I agree that In poor countries the fact that salary is the main motivation behind work and low salary, along with low or no benefits, do result in absenteeism there.

      What you say is true for those people who are trapped in the first and the second steps of Maslow's hierarchy of needs, but people in the higher steps of that hierarchy the two are not the culprits.

      Un-supportive work environment and co-workers,

      Environment full of non-productive stress,

      are also responsible for low performance & absenteeism.

    • NNazir profile image
      Author

      Nauman Nazir 7 months ago from Pakistan

      Sajjad Ali

      It's not always low salary

      In poor countries it holds true, but not for everyone!

      those people who are trapped in the first and second step of Maslow's hierarchy of needs it is true, but people in the higher steps of that hierarchy the two are not the culprits.

      un-supportive work environment and co-workers,

      Environment full of non-productive stress,

      are also responsible for absenteeism.

    • profile image

      Sajjad Ali 20 months ago

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

    • profile image

      Hwaidi 22 months ago

      Thanks :)

    • profile image

      PRINCESS 2 years ago

      its very useful to me, God bless you so much

    • NNazir profile image
      Author

      Nauman Nazir 3 years ago from Pakistan

      @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.

    • profile image

      Roha jabeen 3 years ago

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

    • profile image

      roha jabeen 3 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

    • NNazir profile image
      Author

      Nauman Nazir 3 years ago from Pakistan

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

    • profile image

      Basit Ali 3 years ago

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

    • profile image

      Johne388 3 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

    • NNazir profile image
      Author

      Nauman Nazir 3 years ago from Pakistan

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

      https://hubpages.com/education/Past-performance-an...

    • profile image

      M. Hafeez Ahmed 3 years ago

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

    • profile image

      chacha nate 3 years ago

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

    • profile image

      sammy 3 years ago

      oooooh i love this material is really great..

      I appreciate your help and assistance..Thanks very much

    • profile image

      lotty 3 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

    • NNazir profile image
      Author

      Nauman Nazir 3 years ago from Pakistan

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

      Thank you

    • profile image

      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....

    • profile image

      salma 3 years ago

      nice one now everything is clear!

    • profile image

      errrrrrrrr 3 years ago

      what is the name of the autors?

    • profile image

      guy 4 years ago

      when was this article written

    • profile image

      TWESIGYE GIDION 4 years ago

      FULL OF KNOLEDGE

    • profile image

      AFRICANUS 4 years ago

      HELPFUL

    • profile image

      manojthakor 4 years ago

      thank u for help to get a useful information

    • profile image

      pallone 4 years ago

      wonderful .thanks for making my assignment so easy

      big ups to you all

      may God in heaven grant u more knowledge.

    • profile image

      maha 4 years ago

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

    • profile image

      mduduzi 4 years ago

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

    • profile image

      Harshit 4 years ago

      It is fantastic & full of knowledge

    • profile image

      Harshit 4 years ago

      It is fantastic & full of knowledge

    • profile image

      cat 5 years ago

      thanks for ur info

    • profile image

      ghulam dustgeer 5 years ago

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

    • profile image

      ruby 5 years ago

      Nice article you have here. btw thanks.

    • profile image

      hareg 5 years ago

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

    • profile image

      Aghedo 5 years ago

      Good explanation.

    • profile image

      Moris 5 years ago

      Great Work :)

    • profile image

      ayesha 5 years ago

      very nice explanation

    • profile image

      Syed Asif 5 years ago

      Awsm explanation...

    • profile image

      Juiciellah 5 years ago

      The information is SMART

    • profile image

      David bex 5 years ago

      I enjoy , gud one!

    • profile image

      Ganesh 5 years ago

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

    • profile image

      Gifty Amon 5 years ago

      it really helped me in ma project work

    • profile image

      ariel smith 5 years ago

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

    • profile image

      Khadija 5 years ago

      Hi, Is anyone here doctoral student in HR?

      I need help in making my PhD research proposal.

      Thanks.

    • NNazir profile image
      Author

      Nauman Nazir 5 years ago from Pakistan

      Muhammad, Enny

      Thank you very much for your time and liking the hub

    • profile image

      Enny 5 years ago

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

    • profile image

      Muhammad Tahir 5 years ago

      This is really helpful; thanx

    • NNazir profile image
      Author

      Nauman Nazir 5 years ago from Pakistan

      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.

    • NNazir profile image
      Author

      Nauman Nazir 5 years ago from Pakistan

      Thank you mumtaz khan inqulab for your time.

    • NNazir profile image
      Author

      Nauman Nazir 5 years ago from Pakistan

      Thank you for your time Modesta bron

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

    • profile image

      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..

    • profile image

      mumtaz khan inqulabi 5 years ago

      very nie sir.to shre google thanks

    • profile image

      Modesta broni 5 years ago

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

    • profile image

      Papun 6 years ago

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

    • NNazir profile image
      Author

      Nauman Nazir 6 years ago from Pakistan

      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.

    • NNazir profile image
      Author

      Nauman Nazir 6 years ago from Pakistan

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

    • NNazir profile image
      Author

      Nauman Nazir 6 years ago from Pakistan

      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
      Author

      Nauman Nazir 6 years ago from Pakistan

      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
      Author

      Nauman Nazir 6 years ago from Pakistan

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

    • NNazir profile image
      Author

      Nauman Nazir 6 years ago from Pakistan

      Opeyemi

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

    • profile image

      Rumesa 6 years ago

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

    • profile image

      Rumesa 6 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 ... :)

    • profile image

      rana 6 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 ranaaljack2011@hotmail.com

    • profile image

      M IFTIKHAR ALI 6 years ago

      Good Explanation & Information Regarding Compensation Mgt In HRM

    • profile image

      jing 6 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

    • profile image

      qhim 6 years ago

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

    • profile image

      Sadhna 6 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

    • profile image

      Opeyemi 6 years ago

      Nice write up. Well explained!

    • NNazir profile image
      Author

      Nauman Nazir 6 years ago from Pakistan

      @vedha.s...

      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 :)

    • profile image

      Sumitkumar 6 years ago

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

    • profile image

      vedha.s 6 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

    • NNazir profile image
      Author

      Nauman Nazir 7 years ago from Pakistan

      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.

    • profile image

      ma.theresa_lerias 7 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

      Tere

    • NNazir profile image
      Author

      Nauman Nazir 7 years ago from Pakistan

      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..

    • NNazir profile image
      Author

      Nauman Nazir 7 years ago from Pakistan

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

    • NNazir profile image
      Author

      Nauman Nazir 7 years ago from Pakistan

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

      I thank Allah u find the article interesting.

    • profile image

      ingi yousry 7 years ago

      very usefull

      i enjoyed

      and will read and read

      thx

    • profile image

      shashi 7 years ago

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

    • profile image

      anju mishra 7 years ago

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

    • profile image

      Mohammad S. 7 years ago

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

    • profile image

      moses  7 years ago

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

    • NNazir profile image
      Author

      Nauman Nazir 7 years ago from Pakistan

      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...

    • stars439 profile image

      stars439 7 years ago from Louisiana, The Magnolia and Pelican State.

      Thank You for and interesting hub. GBY

    • profile image

      shakthiprasad 7 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.

    • NNazir profile image
      Author

      Nauman Nazir 7 years ago from Pakistan

      Shiva Kumar-You're Welcome...

      Thank you for stopping by...

    • profile image

      shiva kumar 7 years ago

      its helped to me. thank you very much

    • billyaustindillon profile image

      billyaustindillon 7 years ago

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

    • NNazir profile image
      Author

      Nauman Nazir 7 years ago from Pakistan

      lctodd1947 - Thank u v much...

    • lctodd1947 profile image

      lctodd1947 7 years ago from USA

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

    • NNazir profile image
      Author

      Nauman Nazir 7 years ago from Pakistan

      Thank u v much Mr. Zubair Khan...

    • profile image

      Zubair Khan 7 years ago

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

    • NNazir profile image
      Author

      Nauman Nazir 7 years ago from Pakistan

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

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      Renee S 7 years ago from Virginia

      Excellent explanation of terms.

    • NNazir profile image
      Author

      Nauman Nazir 7 years ago from Pakistan

      G Miah

      Thank you v. much

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

    • G Miah profile image

      Gous Ahmed 7 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
      Author

      Nauman Nazir 7 years ago from Pakistan

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

    • profile image

      jomarie 7 years ago

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

    • NNazir profile image
      Author

      Nauman Nazir 7 years ago from Pakistan

      Thank you Madiha

    • profile image

      madiha 7 years ago

      it is very knowledgeable for management sciences students

    • NNazir profile image
      Author

      Nauman Nazir 7 years ago from Pakistan

      Thank you very much Asif.

      Your comment is very valuable.

    • profile image

      ASIF JAMAL  7 years ago

      really it knwolegdable for the studnt of MANGNT scince