The role of compensation and rewards in modern organization


Compensation is an essential and universal component of the management process of every organization. Most organizations want to fulfill their mission, achieve their objectives and maximize return on their investment, particularly on their human capital. Doing so requires that their compensation philosophy, design, delivery and decisions be balanced, fair, focused, and understood by their employee and potential employee constituencies.


Role of Compensation and RewardsAn effective compensation system is about much more than base pay. It incorporates a wide range of elements, from the handling of raises and bonuses to providing benefits and offering non-monetary advantages such as learning opportunities and job security.

In fact, focusing on a well-designed, comprehensive compensation package is often much more effective in improving business performance than simply increasing employees’ base pay without regard for the broader picture.

Compensation takes the forms of wages and benefits. The pay structure consists of:•Wages which are a monetary payment for services performed on an hourly basis for specified quality of labor (blue-collar worker) either an employee or employer (working for someone else).

Wage rate is usually the main monetary concern discussed between the worker and the potential employer when negotiating employment or an employment contract.

•Salary is often interchanged with the word wage, but salary is usually governed by an employment contract for a fixed period of time such as a week, month, or per year that requires the employee to possess special training or abilities associated to that particular job position (usually referred to as a white-collar worker).

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•Employee Benefits are offered from many companies to attract, retrain, improve morale and promote employee productivity. Benefits are usually offered in addition to general wages in a wide variety from company to company in the form of, but are not limited to, paid holidays, vacations, health insurance, dental plans, sick leave, pensions, and 401(k) that are not based on the employee’s performance.

“Show Me the Money!” Cuba Gooding Jr. demanded in his Oscar winning performance in the movie Jerry McGuire. Workers soon began using this line all across the United States. “Show me the money,” they asked of their employers. Show me the money, and I’ll improve my performance. (Simon, n.d., para. 1).

Many companies feel that employee compensation is the dominate factor in employee satisfaction. Therefore, companies try to buy employee satisfaction with increased pay and benefits. Abraham Maslow is known for establishing the theory of a hierarchy of needs, writing that human beings are motivated by unsatisfied needs, and that certain lower needs need to be satisfied before higher needs can be satisfied. Compensation and benefits satisfy the two most basic needs of Maslow’s Hierarchy (physiological and safety). Emotional needs satisfy the three upper needs of Maslow’s Hierarchy (love, esteem, and self-actualization).

Those companies who provide equal wages and benefits receive better recruitment and retention qualities, improved employee morale and performance; reduced absenteeism and labor turnover through enhancing employees’ association between the company and themselves have a positive effect on the company productivity, however, there are other ways to create greater employee satisfaction. At the Reliance Industries, they have a variety of employee incentives to encourage employee loyalty and continue their employment with the company for several years. They offer benefits such as recognition lunches, perfect attendance awards, employee discounts, retirement plans, etc.

People do more of what they enjoy and less of what they don’t enjoy! People who enjoy working are more productive! Reward and recognition systems are motivational tools used by organizations to inspire commitment from employees who feel good about doing good work. The importance of rewarding and recognizing employees for their contributions to the organization cannot be understated. Employees who feel genuinely appreciated by their employers are loyal and dedicated to achieving organizational goals. Effective reward and recognition systems cultivate employee satisfaction and loyalty, which ultimately impacts performance measures such as customer satisfaction, efficiency, effectiveness, and financial results. Unfortunately, not all reward and recognition programs are effective. There is a risk of negative consequences when ineffective incentives are adopted resulting from poor planning or erroneous theories.

Management is required to pay what is dictated from external pressures such as the government that requires employers to abide by state and Federal laws. Some of these laws include the Minimum wages act 1948, which sets the minimum wage amount for employees specifying the number of hours that an employee can work before requiring the employer to pay overtime. Even if a company is not unionized the union carries a great impact on wages and salaries through lobbying and striking for higher paying wages for union members and non-union members. Other factors involving equal wages is from community and industry wage patterns.

If the company expects to hire and retain the very best employees, they must offer a competitive wage that is offered for the same occupation that is relatively the same earningThe influence of remuneration over distribution of income, consumption, saving, employment and prices is also significant. This aspect assumes greater importance in the developing economy in India where it becomes necessary to take measures for a progressive reduction of the concentration of the income and/or to combat inflationary trends. Thus the wage policy of the organization should not become an evil to the economy.

From the above explanation we can see that compensation and rewards play a very important role in the organization. These should be designed in such a way that it not only satisfies the employees but keep them motivated to achieve the organizational objectives.

Advantages of Fair Compensation SystemsIt is essential that each organization devise a fair compensation system which has the following advantages:•A fair compensation system will motivate the employees towards greater efficiency and productivity•It will encourage an average employee to achieve above average targets if the compensation systems promote an integrated view of rewards-not only traditional, quantifiable elements, but also more intangible, non cash elements such as career opportunities, learning and development, work challenge, and supportive culture•A system which is simple and flexible and can adapt to the changing needs of the organization. This will help each and every employee to compute his own compensation receivables, instead of wasting time due to the complex nature.

•Uniformity is essential for a compensation system so that it is easily understood by all levels of the organization and also will help to be consistent with other programs.

•Implementation should be relatively easy so that the employee’s donot suffer for the reasons which are not in control.

•It will boost the morale of the employees just because it is fair and does not give room for discrimination due to caste, race etc.

•This will encourage for scientific job evaluation and encourage transparency in the system•Due to the system it will be easier to comply with the various labor acts.

•The system will help in efficiently resolving the conflicts between the management and the labor if any.


The first thing employers should consider when developing compensation packages is fairness. It is absolutely vital that businesses maintain internal and external equity. Internal equity refers to fairness between employees in the same business while external equity refers to relative wage fairness compared to wages with other farms or businesses. No matter the compensation level, if either internal or external equity is violated, a business will most likely experience employee dissatisfaction and employees with begin to balance their performance through a variety of ways ranging from decreased productivity to absenteeism and eventually to leaving the business.


Compensation Management in the Knowledge-Based World by Richard I. HandersonCost Accounting Methods and Problems by R.S.Davar

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The role of compensation and rewards in modern organization. (2016, Jul 05). Retrieved from

The role of compensation and rewards in modern organization
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