Compensation refers to any payment received by an employee in exchange for work, including salary, benefits, and bonuses. Compensation can also refer to money paid to compensate for a loss or an accident.
What Are the Types of Compensation?
The different types of compensation include:
- Salary;
- Hourly wages;
- Commissions;
- Overtime;
- Bonuses;
- Stock options;
- Any type of allowance;
- Benefits (insurance, leaves, retirement, etc.);
- Tips;
- Non-monetary compensation (recognition).
How Is Compensation Used?
Besides its function as an act of payment, proper compensation fulfills broader goals such as:
- Recruiting and attracting qualified employees;
- Improving employee satisfaction and motivation;
- Rewarding employee for their good work;
- Reducing employee turnover.
How Do Compensation Plans Work?
Compensation plans, also called compensation programs, allow organizations to ensure that employees are paid fairly through a transparent process.
Compensation plans are based on job requirements, budgets, reward strategies, and conditions of the job market. They are the reflection of the goals and the value of a company.
The steps to create an efficient compensation plan include:
- Setting the objectives of the program;
- Developing a compensation philosophy;
- Ranking each position based on their responsibilities;
- Establishing levels for seniority for each position;
- Determining the salary or hourly rate by position and seniority;
- Implementing benefits policies;
- Creating a communication plan;
- Monitoring and adjusting the compensation plan as needed.
