The Components of Compensation - Business Management for Financial Advisers

Hertzberg’s Hygiene theory refers to how certain factors are necessary to maintain “Hygiene” or ensure that the employees are not dissatisfied.

  • These factors alone do not contribute to “quantum” jumps in employee satisfaction. Rather, the absence of these factors makes employees dissatisfied.
  • The point here is that if a fair and just compensation is provided, the employee has the “baseline” requirements met which ensures that he or she is now in a position to go for higher things like job satisfaction and fulfillment.
  • However, if compensation is found to be lacking, the employee might very well be unhappy and dissatisfied with the company leading to attrition and other such negative outcomes.
  • Hence, having the right compensation is the first step in getting the best of employees.

Components of a compensation

Components of a compensation

If we take a look at the components of a compensation system, we find that employers decide on what is the right compensation after taking into account the following points.

  • The job descriptionof the employee that specifies how much should be paid and the parts of the compensation package.
  • The Job Description is further made up of responsibilities, functions, duties, location of the job and the other factors like environment etc.
  • These elements of the job description are taken individually to arrive at thebasic compensation along with the other components like benefits, variable pay and bonus.
  • It needs to be remembered that the HRA or the House Rental Allowance is determined by a mix of factors that includes the location of the employee and governmental policies along with the grade of the employee.
  • Hence, it is common to find a minimum level of HRA that is common to all the employees and which increases in proportion to the factors mentioned above.
  • The job evaluationthat is a system for arriving at the net worth of employees based on comparison with appropriate compensation levels for comparable jobs across the industry as well as within the company.
  • Factors likeExperience, Qualifications, Expertise and Need of the companydetermine how much the employer is willing to pay for the employee.
  • It is often the case that employers compare the jobs across the industry and arrive at a particular compensation after taking into account the specific needs of their firm and in this respect salary surveys and research results done by market research firms as to how much different companies in the same industry are paying for similar roles.

The components of compensation that have been discussed above are the base requirements for any HR Manager who is in charge of fixing the compensation for potential employees. There are other variables as well that would be discussed in subsequent articles. This article has introduced several concepts around the topic of components of compensation and these concepts are crucial for HR professionals as well as those aspiring management professionals who want to make a career in the corporate world.

Before concluding this article, it needs to be remembered that exit interviews have shown that over 70% of employees who quit their jobs do so because they are dissatisfied with the compensation that they are getting. Hence, all HR professionals and managers must take this aspect into account when they determine the compensation to be paid to employees.

we looked at some of the components of compensation that are paid out to employees and the way in which these components are fixed by HR managers and companies.

To take the first component that is common to all packages at all levels (hence the term basic - however, it is not the same for all levels).

  • Basic pay is the base on which the compensation package rests. This is the equivalent of the base of the pyramid and the other components are usually fixed as a percentage of the basic pay. It is common to find components like HRA (House Rental Allowance) and Additional Pay as a certain percentage (say 20% or 30%) of the Basic.
  • There are many companies that have introduced the concept of Variable Paywhere this particular component of the compensation is not fixed, but is a percentage of the Basic that is paid out according to the performance of the company, group and the individual. Hence, the term performance linked pay is also used for variable pay.

If we take the three sub-components of the Variable Pay -

  • The companyperformance linked payis as the term implies paid out as a percentage of the Basic that is tied to the performance of the company as a whole. So, if a company performs exceedingly well in the given quarter, then the employee might get a large percentage (say 100% or 150%) of the base of the component. If a company does do not well or does only moderately better, then the employee might get a lower percentage of the base (say 50% or 75%).
  • Thegroup performance linked payis paid out in a similar manner but the point of reference in this case is the performance of the group or the division in which the employee works.
  • Finally, the most important sub-component is theIndividual Performance Linked Paythat is paid out according to the performance of the employee and hence is entirely tied to the way in which the employee performs as determined by the rating that he or she gets at the end of the performance cycle.

The rationale for these components is that an employee would be better motivated to perform individually, contribute to the group to which he or she belongs and finally, perform well keeping in view the overall growth of the company. Hence, these sub components of compensation have been designed to spur the employee to excel not only in an individual capacity but as a team member and finally, a responsible employee of the company. The idea here is to discourage silo based performance and instead concentrate on all round performance.


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