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What do you mean by Compensation Structure? Essay


When it comes to employee compensation, most managers are busy asking: “What do I have to pay to…?” That is not an easy question to answer. A better question might be: “What do I want my compensation package to say?”Compensation package of the organization says it all like the child care and health benefits say that the company values family. Giving longevity bonuses for employees on the anniversaries of their employment says that the company value employees who stay with the business. Throwing a party at the end of your business’s busy season lets the employees and their families know that you appreciate it when your people go the extra mile. No matter what compensation elements the company uses, they all carry a message.

That message is important. Compensation packages can be linked to business structure, employee recruitment, retention, motivation, performance, feedback and satisfaction. Compensation is typically among the first things potential employees consider when looking for employment. It is important, therefore, to give a lot of consideration to your business’s compensation structure. After all, for employees, compensation is the equivalent not to how they are paid but, ultimately, to how they are valued.

TextCompensation StructureA Successful compensation structure, are more like a total rewards system, containing non-monetary, direct and indirect elements. It’s important to give a lot of consideration to the business’s compensation structure because it ultimately reflects how employees are valued. The compensation program consists of:Direct compensation is an employee’s base wage. It can be an annual salary, hourly wage or any performance based pay that an employee receives, such as profit-sharing bonuses.

Indirect Compensation is far more varied, including everything from legally required public protection programs such as Social Security to health insurance, retirement programs, paid leave, child care or housing.

Non-Monetary Compensation can include any benefit an employee receives from an employer or job that does not involve tangible value. This includes career and social rewards such as job security, flexible hours and opportunity for growth, praise and recognition, task enjoyment and friendships.

Employers have a wide variety of compensation elements from which to choose. By combining many of these compensation alternatives, progressive mangers can create compensation packages that are as individual as the employees who receive them.

The general consensus of recent studies is that pay should be tied to performance to be effective. However this is not possible in all businesses because performance can be affected by many factors over which employees have no influence, like stress, pressure to perform. Successful managers must search for things employees influence and base performance objectives on these areas. An operation may benefit from the following: tenure bonuses for long-time employees, equipment repair incentives to encourage good equipment maintenance, or bonuses for arriving to work on time.

Let’s see the elements of the compensation structure in detail1)Basic Pay and Salaries: This is the most important part of the compensation structure as the cash payment is one of the essential part of the employees life from this, he can determine what he can afford and what he cannot. Salary is determined by various factors like education, qualification and relevant experience. Once the pay is defined it can be revised depending on the performance of the employee2)Salary Add-Ons: This is the additional payments made over and above the basic pay like overtime pay, shift differentials, housing allowance, transport allowance etc.

3)Stock Options: A right to buy a piece of the business which may be given to an employee to reward excellent service. An employee who owns a share of the business, will go an extra mile to work hard and achieve the goals of the organization. Stock options are usually deducted from the basic pay, the employee has the options to select the percentage how much he wants to contribute. The best part is it becomes a compulsive savings for the employee.

4)Annual Payments: The oldest element of the annual payment is the bonus paid for Diwali in India, even during the British times. The annual payments also include an exemption in taxes, leave allowances, etc.

5)Performance Bonuses: A bonus is paid when specified performance objectives are met. This inspires employees to set and achieve a higher performance level and is an excellent motivator to accomplish organizational goals. Performance Bonuses can show an employer appreciates his/her employees and ensures that good performance or special events are rewarded.

6)Other Benefits: This include medical benefits which include coverage of all the medical reimbursements, pay when unable to work because of accidents, employee insurance, recreational benefits like club membership etc.

7)Retirement benefits: Retirement is not actually those who like to keep changing jobs like the IT professional or the call centre employees but for the loyal employees who work for many years are benefited by these. The retirement benefit should be such that emphasis on the seniority of the employee like if the employee works for more than three years in the company then only he gets the employers contribution etc.

8)Revision of Compensation: As the inflation is on a high and also the trends are changing this element is specifically important in the chanignig economy. The compensation structure should be flexible enough to adapt revision or changes in the pay scales if the need arises. Nowadays revision is done most annually rather than in three years.

9)Retention strategies: it is relatively easy to hire but to retain is one of the most difficult task. The retention strategies to be adapted could be interest free loans or low interest loans, healthy environment to work with, added benefits designed by the company like added benefits on the retirement benefits. This will not only help retain the employee but also motivate to perform better.

Some indirect compensation elements are required by law: social security, unemployment and disability payments. Other indirect elements are up to the employer and can offer excellent ways to provide benefits to the employees and the employer as well. For example, a working mother may take a lower-paying job with flexible hours which will allow her to be home when her children get home from school. A recent graduate may be looking for stable work and also an affordable place to live. Both of these individuals have different needs and, therefore, would appreciate different compensation elements.


Compensation structure has to be designed in a meticulous way and all the components should be considered. If you want employees to be innovative-reward them for new ideas. If you want employees to stay for a long time instead of training new employees every season-offer bonuses or tie their wages to their tenure. If you need employees that show up on time, work hard, and can be trusted with the most challenging of tasks-recruit those people; reward those people; promote those people. The future of every business depend on the people, people will intern depend on the compensation, compensation will be paid according to the structure designed so everything is interlinked.


Compensation Management in a Knowledge Based world by Richard I.HandersonCompensation Managment by Prof Sateeshchandra Joshi

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