What is Compensation?Objectives and Importance

Meaning and Definition

Compensation or remuneration is the payment an employee receives in return for his or her contribution to the organization. It occupies an importance place in the life of an employee. His or her standard of living,status in the society,motivation,loyalty, and productivity depends upon the compensation he or she receives.

According to Gary Dessler___”Compensation means all forms of pay or rewards going to employees and arising from their employment”.

According to Terry Leap___”It is a broad term pertaining to financial rewards received by persons through their employment relationship with an organization”.

According to R. Wayne Mondy___”It is the total of all rewards provided to employees in return for their services. The overall purpose of providing compensation are to attract,retain and motivate employees”.

Objectives of Compensation

1. To establish equity: To establish equity. It includes income distribution through narrowing of inequalities,increasing the wages of the lowest paid employees,protecting real wages, and the concept of equal pay for work of equal value.

2. To improve employee’s efficiency: It is increasingly used to motivate employees to improve their performance for effectively and efficiently achieving the goals and objectives of the organization.

3. To maintain macroeconomic stability: Maintaining macroeconomic stability is another objective of compensation. It can be achieved through high employment level and low inflation.

4. To control cost: A rational system helps an organization to obtain and retain workers at a reasonable cost. With effective compensation management, workers will not be over-paid or under-paid.

5. To maintain industrial peace: It helps the employees to stand motivated and keep their morale high. It helps to improve union-management relations and in turn, it would bring industrial peace.

6. To comply with legal regulations: A sound compensation system considers the legal challenges imposed by the government and ensures the employer’s compliance.

Importance of Compensation

  • Helps in attracting talent.
  • Acts as source of organizational Effectiveness.
  • Serves as medium between organizational and employees.
  • Helps in Retaining Employees.
  • Motivates employees for better performance.
  • Encourages healthy competition and collaboration.
  • Helps to differentiate between good and poor performance.
  • Stimulates employees involvement.
  • Strengthens organizational competitiveness.
  • Maintain organizational Harmony.

Influencing Factors

  • Bargaining power of employees.
  • Cost of living.
  • Condition of product marketing.
  • Comparative wages.
  • Ability to pay.
  • Productivity of labour.
  • Job requirements .
  • Government policies.
  • goodwill of the company.