MNG 4105-Compensation & Benefits: ACADEMIC YEAR 2020/2021

MNG 4105-
COMPENSATION &
BENEFITS
ACADEMIC YEAR 2020/2021
INTRODUCTION TO COMPENSATION AND
BENEFITS
DEFINITION OF COMPENSATION
AND BENEFITS
• Compensation and benefits refer to the
benefits a firm provides to its employees
in exchange for their labor.
Compensation and benefits are thus a
key part of Human Resource
Management.
COMPENSATION
• Compensation is the financial payment made to employees for carrying out the tasks and
responsibilities assigned to them within an organization. Compensation is typically
provided in monetary terms.
• Compensation is a critical aspect of organizations, being directly related to cost of living.
An employee essentially works to meet the expenses of living. Compensation also serves
as a key factor when making decisions on recruitment of new employees. If a company is
seeking to hire a competent workforce, they need to offer an attractive compensation
package.
TYPES OF COMPENSATION
• Basic compensation: Basic salaries are offered in a few companies as a form of

compensation to their employees. Those employees who are at the same level in the
organization receive the same basic pay. However, people with higher educational
qualifications and with better skills and experience usually receive greater pay in
comparison to those with lesser education, experience and skills.
• Performance-related compensation: In these plans, pay can be based on a certain measure
of performance, which may be the employee’s productivity or the department’s productivity.
Most of the times, performance based compensation packages for senior employees include
annual bonuses on the basis of organizational profitability.
TYPES OF COMPENSATION
• Piece-rate compensation: Employees are sometimes paid compensation on the basis of

piece-rate plans, where a base salary is not paid; rather, their pay depends on their output.
This is also referred to as commission-based compensation, where employees are paid a
given percentage of the total sales they produce each day. The greater the sales generated,
the greater the compensation they receive.
BENEFITS
• Benefits signify other non-monetary forms of value that are given to employees in return for
performing their jobs. Benefits are essentially the extra rewards given to employees apart from their
stipulated compensation. These benefits are also called fringe benefits and are provided to employees
in addition to the cash payments with the aim of enhancing the welfare of the employees and also
motivating them.
• Different companies provide different kinds of benefits to organizations, typically including:
insurance plans (life insurance, health insurance), social security benefits (including educational
allowances, retirement plans, company housing, vehicle allowances), as well as paid absences (such
as sick leaves, holidays, vacations). In addition, benefits are offered irrespective of the performance
of the employees, meaning that benefits do not depend on performance, rather, they are based on
membership of the organization.
COMPENSATION VS BENEFITS
Compensation Benefits
Definition The financial rewards given to The non-financial rewards given
employees for providing service to employees as part of their
to the organization employment
Form of remuneration Direct remuneration based on Indirect remuneration
performance of employees
Purpose Draw and retain a competent Motivate employees to perform
and capable workforce better and ensure the well being
of employees
Nature Cash payments Non-cash payments made in
addition to the salaries
Example Cash, salaries and wages Insurance, social security, paid
leaves, vacation, education and
housing allowances
COMPONENTS OF COMPENSATION AND
BENEFITS
COMPENSATION MODELS
• Traditional- Company has fixed salary structure with bands based on employees grade.
An employee has no choice.
• Cafeteria: Employee has a flexibility to choose his/her salary components from the basket
of components offered by the company.
• Combined: a combination of Traditional and Cafeteria.
COMPENSATION FAIRNESS
• Distributive fairness refers to the perceived fairness of the amount of compensation the
employee receives.
• Procedural fairness refers to the perceived fairness of the means used to determine those
amounts.
COMPENSATION STRATEGY
• The compensation strategy is derived from the HR Strategy and it defines the position
of the organization on the job market, the level of the total cash, the main bonus
principles in the organization and rules for the base salary setting.
• The compensation strategy helps the organization to manage the personnel expenses of
the organization and it sets clear limits for the managers and employees.
COMPENSATION STRATEGY
CONTINGENT FACTORS
• Legal Requirements or Government policies (minimum wage)

• Strength of Trade Union
• Labour market conditions (demand & Supply)
• Capacity to pay
COMPONENTS OF A COMPENSATION STRATEGY
KEYS TO AN EFFECTIVE COMPENSATION STRATEGY
• Budget Allocation: This budget allocation will determine how much of the total
compensation budget will be spent on salary and what percentage will be spent on benefits
and other incentives. For example, for a budget of $1000 for compensation, if 90% is salary
and 10% is benefits, you need to determine how that 10% is spent – one scenario might be –
7% on health benefits, 2% on retirement savings and 1% on tuition reimbursement.
• Develop Salary Ranges: Develop salary ranges to ensure employee pay is competitive with
other organizations. To be competitive, it is important to benchmark similar jobs within the
same industry and to create a pay structure.
• Salary Audits: Markets change, therefore it is important to perform routine salary audits to
ensure salary ranges reflect current compensation trends in a particular industry. When
performing an audit, the goal is to determine how competitive are those particular jobs and
what is the external market demanding.
• Benefit Package: Many organizations use benefit packages, in addition to salary, to attract
and retain employees. Their goal is to be competitive with health, retirement, tuition
reimbursement and other benefits because they understand that it can be the determining
factor for a job candidate who is deciding whether to accept a position with an organization,
or an employee who is considering leaving.
• Performance Management System: It is important to have a structured

performance management process to ensure employees are meeting corporate objectives
and are assessed on a regular basis.
• Legal Compliance: A well-defined compensation strategy will incorporate legal
requirements to ensure the organization is in compliance with all federal and state laws.
COMPENSATION PHILOSOPHY
• A compensation philosophy is simply a formal statement documenting the company's

position about employee compensation. It explains the "why" behind employee pay and
creates a framework for consistency. Employers use their compensation philosophy to
attract, retain and motivate employees.
COMPENSATION PHILOSOPHIES SEEK TO:
• Identify the organization’s pay programs and total reward strategies.

• Identify how the pay programs and strategies support the organization’s business strategy,
competitive outlook, operating objectives and human capital needs
• Attract people to join the organization
• Motivate employees to preform at the best of their competencies, abilities and skill sets
• Retain key talent and reward high-preforming employees
HOMEWORK
Choose a company and assess the compensation and benefits structure based on the points
discussed.
REFERENCES
• https://www.digitalhrtech.com/compensation-and-benefits/
• https://www.qsstudy.com/business-studies/differentiate-compensation-benefits
• https://thethrivingsmallbusiness.com/compensation-strategy/
• https://hrmhandbook.com/hrp/compben/compensation-strategy/
• https://www.shrm.org/resourcesandtools/tools-and-samples/hr-qa/pages/compensationphil
osophy.aspx

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MNG 4105-

• Basic compensation: Basic salaries are offered in a few companies as a form of

• Piece-rate compensation: Employees are sometimes paid compensation on the basis of

• Legal Requirements or Government policies (minimum wage)

• Performance Management System: It is important to have a structured

• A compensation philosophy is simply a formal statement documenting the company's

• Identify the organization’s pay programs and total reward strategies.

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