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Answer: Compensation refers to money and money-related extras. Thus, in addition to a person’s base pay, compensation can include bonuses, merit increases, variable pay, and long-term Incentives. Benefits include the remaining things, such as healthcare, pension plans, stock options, and legal services.
An organisation’s compensation program sends a message to employees about itscommitment to encouraging, recognising, and rewarding employee performance. While money should certainly never be the only motivator, it is definitely important. To be successful, a compensation program must link employee performance with business performance. Employees have to understand what the company expects of them, why the company expects it and the possible rewards when performance expectations are met. Taking this approach in preparing the pay structure provides an ownership context for employees, knowing they are important to the ongoing success of the organisation, and that if they do their part well, they will share in the rewards generated by that success.
Elements of compensation
Let us first discuss the elements of compensation and later we shall discuss what goes into „benefits‟.
The primary elements of a compensation package are:
Base pay: Base pay is the fixed rate of compensation that an employee receives for performing the standard duties and assignment of a job.
Employers need to ensure that base-pay programs are designed to reveal market practices within their identified competitor group. To achieve this, organisations must first identify their competitive market. This can be achieved by considering different factors, including the nature of the industry, geographic location, total employment and annual revenue. Next, they need to conduct an assessment of market pay practices for similar jobs
2 The employee recruitment and retention handbook by Diane Arthur within the recognised competitor group. This assessment should involve the duties, skills, and impact levels of each job evaluated – that is, each job of similar size and scope.
Then a pay structure for managing the competitive base-pay levels for the jobs throughout the organisation should be developed. Pay structures typically consist of a series of pay ranges or bands that reveal competitive rates of pay for specific jobs, as well as allowing room for salary growth.
Jobs of similar value from both the market point of view and an internal point of view are grouped together. Then a competitive pay range is developed around the market rates for the particular jobs.
Variable pay: Performance-based variable pay continues to achieve momentum as a more successful way to identify and reward employee performance. Also known as pay-per-performance, variable pay is popular in today’s corporate world. By including a percentage of variable pay in the compensation plan, organisations ensure that two people with different efficiency levels do not get the same benefits. By doing this, the company rewards productivity and hard work and motivates the under-performers to work hard. Once limited to senior management levels, these incentive or bonus plans are being redesigned to reward the achievement of specific company or employee performance objectives. In a variable pay plan, the size of the award varies among employees and from one performance period to another, based on levels of achievement measured, as well as against pre established company and employee performance targets.
Amounts are usually calculated as a percentage of base pay depending on job category and position. Rewards are normally paid in cash on an annual, semi annual or quarterly basis depending on the plan design. Plan designs range from sales-commission types to individual incentive or bonus plans to team awards. The main idea of these programs is to reward innovation and hard work and to discourage mediocrity in performance.
Skill and competency-based pay: Skill-based pay offers employees extra compensation when they have new skills specially recognised by the company as essential to achieve a competitive advantage. Skill-based pay can be particularly useful for employees who like their current jobs but are looking for new challenges. Competency-based pay is more widespread than skill-based pay because the criteria cover not only measurable skills but also knowledge, performance behaviours and personal attributes. It helps out employees to grow in the company and helps them to close the knowledge gaps needed for creative moves.
Long-term incentive compensation: Long-term incentive compensation vehicles, such as stock-option plans and other deferred-compensation plans, which are not usually used to reward performance, are achieving desirability among employees. These long term incentive compensation plans appreciate employees based on company performance over a long term that is typically three to five years. Stock-option plans are a common form of long-term compensation at public organisations. In most private companies, incentives that reflect stock plans are used for key employees.
Long-term compensation plans can be valuable preservation tools for the success of an organisation. They help to focus on driving and improving the key employees to achieve the financial performance of the company over a longer term.
Elements of benefits
Company benefits can include a wide range of offerings from standard medical insurance to more modern benefits like prepaid legal services, and applicants who are comparing job offers often narrow their choices down to those that offer the most generous benefits package. Applicants and new employees checking their choices of benefit plans often feel confused and overwhelmed as the terminology used can be difficult to recognise and understand. While the different plans are typically designed to deal with the health and welfare of the employee population, understanding them can be
a difficult task. Further complicating matters, some companies share the costs of these benefits with the employees, in an effort to help make up for the significant expenses connected with broad benefit plans. Some of the benefits are discussed below:
Training: For most of the employees, training means more than money. For example, according to one survey of HR executives conducted by the American Management Association, technical and employability training were rated considerably higher than pay-for-performance or bonuses.
Companies typically answer to this interest by sending workers to outside conferences and seminars, repaying employees for tuition, offering managerial training and supporting employees in degree programs.
Health care: The benefits that get the most attention from employers today are health care benefits because of the high costs involved in getting good healthcare facilities and the increasing concern about staying healthy. In the past, health insurance plans included only medical, surgical and hospital expenses. However, today employers include prescribed drugs and dental, optical and mental healthcare benefits in the package they offer their workers.
Typically, an employer offers employees some form of group health insurance or set amount to spend on healthcare or personal insurance plans each year. Employees may be offered insurance after working for a specified period of time, and the level of coverage is usually linked to employment status, with part time employees receiving fewer benefits.
Depending on the company's plan, employees may have to select the healthcare plan, paying a small fee while the company pays the remaining amount of the premium or the employer may cover all insurance-related costs.
In group benefits, employees can have access to different types of healthcare plans, including insurance plans, under which people pay for services at the time of availing them, and submit a bill to the insurance company for reimbursement. Managed healthcare plans like providing services from health maintenance organisations (HMOs) and preferred provider organisations (PPOs), which offer care through a network of providers are also getting immensely popular.
Pensions: Employees have ranked retirement or pension plans as second to medical coverage. However, many employers offer no pension coverage to their employees. Approximately half of the private-sector workforce is not covered for pension by the employer.
There are two main types of pension plans: defined benefit and defined contribution.
In defined benefit plans, the benefits are calculated as a percent of the last few or the highest years of earnings multiplied by years of service. They are then paid in the form of life pensions. These plans are adjusted towards those who are expected to work for the same company throughout their career.
Defined contribution plans generally apply to younger workers. This type of pension plan permits workers to save directly from some selected assets of their own choice.
Stock options: Stock options give employees a chance to buy stock in their company at a predetermined price during a limited time period. In today’s strong economy, employers have found it increasingly essential to provide stock options to attract the most valued workers. For example, more than 70 percent of technical workers now have stock options and 7 to 12 percent of
companies offer stock option plans to all employees, usually allowing from one
hundred to two hundred option shares annually, or an amount based on a
percentage of salary. U.S.
Generally there are two types of stock options:
• Discounted stock options: This type of plan permits an employee to buy the company’s stock at a price below the market value.
• Index options: Some companies issue stock options with employed prices joined to the Standard and Poor’s 500 Index or other peer group stock index. With this method, if the stock price outperforms the index then the exercise price will be less than the fair market value. If the index outperforms the market, the exercise price will be more than the fair market value.