All the rewards that are given as a return to the employees for their services are known as worker compensation. There are different ways and types of worker compensation, especially how to determine a financial compensation. All of these activities are managed by Human Resource Management.
Types of Worker Compensation
Direct & Direct Financial Compensation
Direct financial compensation includes the following items that can be received by any employee, such as salaries, wages, bonuses, and commission, etc and all the financial returns that is not present in the direct compensation are known as indirect financial compensation.
It can take the form of satisfaction that an employee may get from his work or from the physical & psychological environment of the work. Total compensation program is composed of all such rewards.
Equity in Financial Compensation
The competent employees must be attracted, motivated & retained by the employees. Moreover the organizations should keep their worker compensation system as equity based, because all the efforts for the accomplishment of organizational goals depend upon the compensation system of the organization.
Equity means that the employees perceived that they are fairly treated by the organization in such a way that the employee compensation system should be fair to all the employees of the organization.
- External Equity
External equity is associated with the paying to the employees in comparison with the employees of other organizations who are performing the same jobs.
- Internal Equity
When employees are paid in relation to the value of their jobs inside the organization, there exists internal equity.
- Employee Equity
In this kind, the employees of the organizations are paid according to some unique factors like seniority or performance level etc.
- Team Equity
When such higher productive teams are paid more than lower productive teams then there exist team equity.
Determinants of Financial Compensation of Individual
The theory of employee compensation is not good enough to give accurate explanation about the worth of an employee in relation to his job.
- The organization
- The Labor Market
- The Job
- The Employee
All of the elements affect the pricing of a job which in turns specifies the financial compensation of an employee.
Organization as Deciding Factor of Financial Compensation
- Compensation Policies
The compensation policies are established by the organization that makes the organization as pay follower, pay leader, or an average pay provider in the labor market.
- Pay Follower
The organization that pays its employees below the market rate either on the basis of poor financial performance is referred to as market follower. Such organization reflects the idea that it does not require potential employees.
- Pay Leader
The organization that pays salaries & wages to its employees which are relatively higher than the competitive organizations is referred to as market leader.
- Going Rate or Market Rate
It is the average market pay that most of the organizations offer to their employees for a particular job.
Labor Market as Deciding Factor of Financial Compensation
The labor market is related to the geographical area from which the potential employees are recruited.
- Compensation Surveys
Prevailing pay rates are ascertained by the large organizations in a routine manner in which the information is obtained for the development of direct & indirect compensation.
- Benchmark Job
A job that is famous in the industry & organization & that shows the complete structure of the job & includes relatively higher portion of workforce.
- Cost of Living
The pay should be increased according to the increasing level of cost of living.
- Labor Unions
The management can obtain accurate labor market data when labor unions employ comparable pay in their demands as standard for making compensation.
The pricing of goods or services of an organization are also affected by the compensations given to employees. The customers of the organization also take interest in the compensation decisions.
The compensation decisions are influenced by the ups & downs of the economy.
The legislator policies also influence the decision of compensation made by the company.
The Job as Deciding Factor of Financial Compensation
The compensation is generally paid according to the worth of the job which is linked with the responsibilities & duties of the job. For this following are certain techniques which are employed to find the value of a certain job.
- Job Analysis & Job Description
The worth of a particular job is ascertained by analyzing the contents of that job. For this purpose a technique called job analysis is applied which is used to find the required knowledge & skills for performing the duties of particular job. Another technique called job description is used as by product of job analysis for the documenting the responsibilities & duties of a job. There are many purposes of job description like job evaluation.
- Job Evaluation
In job evaluation, the organization compares one job with another in order to ascertain the worth of a certain job.
The Employee as Deciding Factor of Financial Compensation
The factors related with the employee also play significant role in ascertaining the compensation. Following are some of the important aspects of the determinant of employee.
- Performance Based Pay
The performance appraisal is helpful in determining the performance base pay for the employees of the organization. These may take the following forms.
01- Merit Pay
03- Skill Base Pay
04- Competency Base Pay
The seniority of an employee can also influence the compensation system. Seniority is referred to as the duration of time period that an employee spends in working certain division or department of the organization.
The experience of an employee can be served as an influential factor in determination of compensation because it greatly affects the performance of the employee.
The potential of the employees can also influence the compensation system.