[Type the document title]

Based on the definition discussed above, compensation can be broadly classified under two heads:

 Direct Compensation
 Indirect Compensation

1. Monetary / Direct Compensation

Direct/Monetary Compensation refers to a form of financial reward given to employees for their
services at a regular time interval. It is further divided into the following types:

Basic Wages/Salaries

It is usually the cash component of the wage structure that determines other components. It is usually a
fixed amount but can be periodically changed due to increments or performance-based hikes.

Wage refers to the hourly rate of pay, and salary refers to the monthly rate of pay, irrespective of the
number of hours invested by the employee. They are subjected to changes due to external factors and
vary based on the industry type, nature of the job, and merit.

Allowances

Allowances are additional financial components of the compensation; they are fixed and help
employees meet their daily needs above their base salary. The most common types are:

 House Rent Allowance: Organizations usually compensate for employees’ housing facilities,
differing based on the metro and non-metro cities.
 Dearness Allowance: This helps employees face the onslaught of inflation of prices of goods
and services.
 Leave Travel Allowance: Employees are given allowances to take vacation time alone or with
family and friends.
 City Compensation Allowance: It is compensation paid to employees to cover the additional
cost of living in cities and varies according to location.

 Special Allowance: They give employees an additional sense of social security and motivation
to work. Examples of this allowance include overtime, mobile, travel allowances etc.

Bonuses and Incentives

Incentives are paid to employees beyond their base salary and depend on their productivity, sales,
profit, or cost-reduction efforts. They can be paid to an individual employee or a group of employees
for their additional efforts.

[Type text] Page 1

 [Type the document title]

A bonus is a pre-defined amount paid to employees during festive seasons or company profit. It is
made mandatory by the government and usually amounts to one month’s salary to boost their
confidence and social security.

Commissions

Employees receive them during a particular time, which varies according to the sales revenue or
company profits. They are mostly paid to sales employees on the achievement of their targets on a
monthly or a periodic basis.

Stock Options

In this, employees can purchase the company’s shares at a fixed price lower than the market price, and
only employees who worked for a certain period (generally three to five years) are eligible for this type
of compensation.

Benefits

Employee benefits include health insurance, medical coverage, retirement benefits, legal insurance, etc.
A Glassdoor survey reveals that 48% of employees consider a good benefits package over a salary
while accepting a job offer.

Thus, the monetary aspect of employee compensation helps satisfy their basic needs by guaranteeing
social security and economic safety.

But is it enough to satisfy the higher-level needs of employees?

Well, no, your compensation package needs to have indirect benefits, too.

We may ask why, because employees value them more than your financial benefits.

2. Non-monetary / Indirect Compensation

Non-monetary compensation plays a vital role in the lives of today’s workforce. They are crucial to the
long-term survival of employees in the organization while impacting the reputation and profitability of
the company.

Non-financial reward is a reward focused on the needs most people have, although to a different
degree for achievement, recognition, responsibility, influence, and personal growth.

– Armstrong & Murlis

They are of the following types:

[Type text] Page 2

 [Type the document title]

Reward and Recognition

Recognizing the employees often boosts their motivation and enhances their productivity. They can be
recognized for their efforts, performance, attitude, team spirit, problem-solving ability, etc., with a
reward to increase their overall performance.

Recognition can be a small gesture of ‘Well done’ or a public appreciation and be either in a verbal or
written form. Small gestures of acknowledgment at regular intervals make the employees more
enthusiastic and satisfied in their job role.

Promotion

Promotions promote a positive attitude among employees by providing opportunities for personal
growth, increased responsibilities, and increased social status. It infuses a spirit of healthy competition
among the employees, impacting the overall levels of job satisfaction and productivity.

Prolonged spells of delayed or no promotions increase the rate of employee attrition, as the employees
feel their growth is stunted and look for opportunities elsewhere. So, a fair promotion system helps
organizations retain their talented employees.

Work-life balance initiatives

A flexible work schedule increases the mental, physical, emotional, and social wellness of employees.
Introducing work-life balance initiatives like remote work, hybrid work, reduced office hours, etc.,
helps employees fulfill their commitments to their family and friends.

Flexible schedules are directly proportional to employee morale, which makes it easier to cultivate a
healthy work environment. This helps create highly confident, motivated, and stress-free employees
who are happier and healthier in their workplaces.

Career Development Opportunities

Employees place continuous growth opportunities and learning new skills above other needs. A proper
career progression plan provides employees with social security and helps them develop skills to assist
in their future roles.

Investing in the employees’ L&D programs develops employees with the latest skills and helps
organizations stay ahead of the competition. With this, organizations can create future leaders for their
top positions and reduce the hiring costs for the top positions.

Integrating these non-monetary components in your compensation makes it more comprehensive and
attractive for your existing workforce while also attracting the right talent to your organization.

[Type text] Page 3

 [Type the document title]

Factors affecting wages/compensation:

1. Demand and supply of labour: wage is a compensation or price for the services rendered by a worker.
Wages are based on the demand and supply of labour force available in the market. If there is huge supply of
the labour, the wages will increase ,on the other hand, if there is a scarcity of labour force, wage will increase.

2. Ability to pay: employer’s ability to pay is an important factor affecting wages not only for the individual
firm, but also for the entire industry. This depends on the financial position and profitability of the firm.

3. Cost of living: another important factor affecting te wage is cost of living of wages. This tend to vary money
wage depending upon the variation in the cost of living index following rise or fall in the general price level and
consumer index.

4. Productivity of workers: to the achieve the best result fromthe worker and to motivate him to increase his
efficiency, wages have to be productivity based. Productivity is the key factor in the operations of a company.

5. Labour unions: organized labour able ensures better wages than the unorganized one. Higher wages may
have to be paid by the firm to its workers under the pressure of trade unions. If trade union fail in their attempt
to raise the wages and other allowance through collective bargaining they might resort too strike, this exerts
influence on employer to concede at leastpartial demands of labour union.

6. Government: several laws have been enacted by the government to protect the working class. Laws on
minimum wages, hours of work, equal pay for equal work, payment of dearness allowance, bonus, etc. have
been enacted to bring about measure of fairness in compensating the working class. Thus, the laws enacted and
labour policies framed by the government have an important influence on wages and salaries paid by the
employers.

7. Prevailing wage rates: wages in a firm are influenced by the general wage level or the wages paid by the
similar occupations in the industry, region and economy as a whole. External alignment of wages is essential
because if wages paid by the firmare lower than those paid by the other firms, the firm will not be able to attract
and retain efficient employees.

[Type text] Page 4

 [Type the document title]

Compensation Structure
A compensation structure outlines the framework for how employees are rewarded for their contributions to the
organization. It encompasses various elements that make up an employee’s total compensation package, which
goes beyond just the basic salary.

Key Components of a Compensation Structure:

1. Basic Salary Component
The fundamental component of any compensation structure is the basic salary. It forms the fixed portion of an
employee’s pay and serves as a steady income base. The basic salary is determined based on factors such as job
role, responsibilities, experience, and industry standards.
2. Allowances and Special Pay
In addition to the basic salary, compensation structures often include allowances and special pay. These are
designed to provide financial support for specific needs or circumstances. Some common allowances include
housing allowance, transportation allowance, and medical allowance.
3. Incentives and Bonuses
To drive performance and encourage exceptional contributions, many organizations incorporate incentives and
bonuses into their compensation structures. These rewards are tied to individual or team performance and can
significantly boost an employee’s overall earnings.
4. Benefits and Perks
Employee benefits and perks contribute to the holistic compensation package. These can range from health
insurance, retirement plans, and paid time off to wellness programs, employee discounts, and flexible work
arrangements.

Designing an Effective Compensation Structure

Crafting a compensation structure that resonates with both employees and the organization requires careful
consideration of various factors. Here’s how you can approach the process:
1. Job Evaluation and Analysis
Begin by conducting a thorough job evaluation and analysis. Understand the roles and responsibilities within
the organization to determine the appropriate compensation levels for each position.
2. Market Research
Stay informed about industry standards and market trends. Benchmark your compensation structure against
similar organizations to ensure competitiveness and attractiveness to potential employees.
3. Performance Metrics
Integrate performance metrics into your compensation structure. Rewarding employees based on their
individual and team contributions can drive motivation and align efforts with business goals.

[Type text] Page 5

 [Type the document title]

4. Flexibility and Customization

Recognize the diversity of your workforce and provide flexibility in compensation options. Allow employees to
customize certain components of their compensation package to suit their preferences and needs.

[Type text] Page 6