Direct Compensation vs. Benefits

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1.Introduction
System of rewards is one of the key aspects in managing human resources within any organization. It has profound impact on attracting, retaining and motivation of employees and as a result on the overall performance of an organization. There is no doubt that employee compensation, which according to Dessler refers to all forms of pay or rewards going to employees, is the crucial factor in employee motivation. There are different two types of compensation: direct and indirect compensation. Direct compensation refers to monetary benefits offered and provided to employees in return for doing their job. The most common forms of direct compensation are wages, salaries, incentives, commissions and bonuses. Indirect compensation refers to pay in the form of financial benefits. [Dessler 390] All employee benefits can be divided into health, educational, employee incentive, family, lifestyle, recreational, government, retirement, savings, and transportation benefits. [http://www.referenceforbusiness.com/encyclopedia/Eco-Ent/Employee-Benefits.html] A common distinction between direct and indirect forms of employee compensation is that the former creates an employee's standard of living, whereas the latter protects that standard of living. [http://www.referenceforbusiness.com/encyclopedia/Eco-Ent/Employee-Benefits.html] Benefits is a very important and powerful instrument used in employee recruitment, retention, motivation, performance, and satisfaction, however for businesses it is more expensive to provide benefits to employees than use direct compensation. And while some benefits, such as government sanctioned ones, for example pension plans, are mandatory, the majority are supplementary, the availability of supplementary benefits is dependent on a business's compensation structure. Each company has to decide what is more valuable, therefore more motivating, for its workers and what is more cost-effective for the company - to provide benefits or simply add more direct pay. This decision depends on a number of factors, but most importantly on the size of a company, according to Benefits Quarterly. [http://www.referenceforbusiness.com/encyclopedia/Eco-Ent/Employee-Benefits.html]

2.Approaches to motivation and compensation
Over the past hundred years a number of theories have been developed that attempt to describe human motivation. The most popular theories - Taylor’s Theory of Scientific Management and Maslow’s Hierarchy of needs theory are discussed below. 2.1 Theory of Scientific Management

In 1911 american engineer Frederick Winslow Taylor published one of the earliest motivational theories. In his work Principles of Scientific Management Taylor put forward the idea that workers are motivated mainly by pay, so according to his approach employees should be paid based on their productivity. From his observations, Taylor made the following key assumptions about human behaviour at work:

1)Man is behaving as “economically rational actor” concerned with his own best economic interests; 2)People respond as individuals, not as groups;
3)People can be treated in a standardised fashion, like machines. [http://wikiofscience.wikidot.com/science:motivation#toc9]

Based on these assumptions Taylor devised the scientific system that required division of labour, the breaking down of production into a series of small tasks that could then be timed and rated. Then it should be specified exactly how each task is to be done and workers should be given appropriate training and tools so they could work as efficiently as possible on one set task. Workers are then paid according to the number of items they produce in a set period of time- piece-rate pay. As a result workers were encouraged to work hard and maximise their productivity. [http://tutor2u.net/business/gcse/people_motivation_theories.htm] Taylor also standardised the role of management, including setting managers apart from operations and giving them more...
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