Compensation is what is paid to an employee, whether in the form of wages, salary or incentives by the employer for a specific amount of time, skill and effort made available by the employee in fulfilling specific job requirements (Biesheuval, 1984). Compensation is important in organisations as it conveys information to an employee about their relative importance to the organisation and provides a scale to identify how much recognition they are receiving for their contribution (Harley and Stephenson, 1992). Compensation shows employees how much they are appreciated and worth. The most important differentiating element between jobs is the effort involved in performing a job (Biesheuval, 1985).
Objectives of pay systems (Harzing and Van Ruysseveld, 1999):
Objective: How to achieve it. To attract employees: Job salary
To keep qualified employees: Bonus or incentive to stay e.g. shares To stimulate effective performance: Payment by results
To teach employees new behaviours at work: Multi-skill bonus To compensate for inconvenient working conditions: A separate allowance
Monetary and non-monetary compensation
Compensation is made up of many parts. Although money (extrinsic compensation) is the most recognised, other factors can be just as rewarding. Employee benefits are one type of non-monetary compensation and are intended to improve the quality of work life of an organisations labour force (Sherman and Bohlander, 1992). These benefits make up a significant portion of the wage bill. Although benefits were initially introduced as a bonus to employees, they have since come to be expected in the workplace (ibid). Employee input is integral in determining the type of non-monetary compensation that is the most desired (ibid).
Benefits (Sherman and Bohlander, 1992):
Medical aid funds including health and dental plans
Pension funds where the employer also contributes a percentage. Employee assistance programs where counselling and assistance are provided with day-to-day issues such as career planning and emotional trauma. Education assistance plans where the employer pays a portion towards further study. This often benefits the employer as the employee becomes more multi-skilled and efficient at their job. Child and elder care where an in-house crèche is often provided. Food services such as a cafeteria that provides free or subsidised meals. Free housing in hostels.
Social and recreational services such as a gym.
Expense allowance etc
Unemployment insurance has been made compulsory by the law and allows people to have a minimum wage to live on while they are looking for further employment should they become unemployed (Venter, 2003).
Other types of compensation are reward programs where employees receive public recognition for their work. E.g., employee of the month competitions or even just receiving acknowledgement in the form of a thank you can boost employee morale (Pierce and Gardner, 2002). This is called intrinsic compensation as it is related directly to the nature of work (Harzing and Van Ruysseveld, 1999). Other forms of intrinsic compensation:
Good career prospects
The role of the external environment
Labour market conditions, area wage rates, industry wage rates, government taxes, collective bargaining agreements, and the cost of living are all external factors that need to be taken into account when determining wages (Sherman and Bohlander, 1992). Organisations have little or no control of these factors. A South African specific factor is that due to apartheid many previously disadvantaged races such as Blacks, Coloureds and Indians were excluded from the labour force or under paid. These inequalities need to be...