Compensation and Benefits

You open the newspaper and the following job advertisement grabs your attention: Wanted; Hardworking individual who is willing to work 60 hours a week in a less than ideal environment. The job pays no money but gives you the opportunity to say I’ve done that. Sound intriguing to you? Probably not. Although there are exceptions, most of us work for money. What our jobs pay and what benefits we get fall under the heading of compensation and benefits. Determining what the levels of compensation will be is by no means easy.

How are pay levels determined?

Compensation administration: The process of determining a cost effective pay structure that will attract and retain competent employees, provide an incentive for them to work hard, and ensure that pay levels will be perceived as fair.

How does management decide who gets paid Rs 70 an hour and who receives Rs 2 crores a year? The answer lies in compensation administration. The goals of compensation administration are to design a cost effective pay structure that will attract and retain competent employees and to provide an incentive for these individuals to exert high energy levels at work. Compensation administration also attempts to ensure that pay levels, once determined, will be perceived as fair by all employees. Fairness means that the established pay levels are adequate and consistent for the demands and requirements of the job. Therefore, the primary determination of pay is the kind of job an employer performs. Different jobs require different kinds and levels of skills, knowledge, and abilities and these factors vary in their value to the organization. So, too do the responsibility and authority of various positions. In short, the higher the skills, knowledge and abilities and the greater the authority and responsibility the higher the pay.

Although skills, abilities and the like directly affect pay levels, other factors may come into play. Pay levels may be influenced by the kind of business, the environment surrounding the job, geographic location and employee performance levels and seniority. For example, private sector jobs typically provide higher rates of pay than comparable positions in public and not for profit jobs. Employees who work under hazardous conditions (say, bridge builders operating 200 feet in the air), work unusual hours (e.g. the mid night shift) or work in geographic areas where the cost of living is higher (e.g. Chicago rather than Parkersburg West Virginia) are typically more highly compensated. Employees who have been with an organization for a long time may have had a salary increase each year.

Irrespective of the foregoing factors one other factor is most critical – management’s compensation philosophy. Some organizations, for instance don’t pay employees any more than they have to. In the absence of a union contract that stipulates wage levels, those organizations only have to pay minimum wage for most of their jobs. On the other hand, some organizations are committed to a compensation philosophy of paying their employees at or above wage levels in order to emphasize that they want to attract and keep the best of talent.

Why do organizations offer employee benefits?

Employee benefits: Membership based rewards designed to enrich employees’ lives.

When an organization designs its overall compensation package, it has to look further than just an hourly wage or annual salary. It has to take into account another element, employee benefits. Employee benefits are non-financial rewards designed to enrich employees’ lives. They have grown in importance and variety over the past several decades. Once viewed as fringes today’s benefit packages are considered effort to provide something that each employee values

The benefits offered by an organization will vary widely. Most organizations are legally required to provide Social Security and workers’ and unemployment compensations, but organizations also provide an array of benefits such as paid time off from work, life and disability insurance, retirement and health insurance benefits are frequently paid by both the employer and the employee.

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