Compensation and Benefits in the Organization

Compensations and benefits travel beyond the regular paycheck or salary offer and can often be the deciding factor as to whether a job offer has a good financial proposition or not. They are common tools used by employers to advance their company.

Clever employers are aware of this tidbit and usually make the best offers to attract quality employees to their organizations.

There is a lot to know about compensation and benefits in the organization and in this must-read article, we have outlined all the important facts about compensation and benefits.

What are Compensation and Benefits?

Employee compensation and benefits are used interchangeably but have independent meanings. Compensations and benefits are generally regarded as salary and other benefits (which can be monetary or non-monetary) offered to employees by a firm they work for or with.

Compensation refers to the payment made to an employee for their contribution and work input to the organization. In contrast, Benefits refer to forms of value, other than compensation, that employees are entitled to for their input in an organization.

Benefits generally include health insurance plans, retirement/ pension plans, vacation and holiday benefits, life insurance, disability insurance, unemployment and worker’s compensation, maternity leave, profit sharing, stock options, and bonuses. However, profit-sharing, stock options, and bonuses are usually considered as forms of compensation.

Compensation, on the other hand, includes wages, salary structures (salary ranges for job descriptions), or other tips like merit-based payments, bonus-based payments, commission-based payments.

Benefits run on the high side and are expensive for organizations to provide to employees. Hence, the range of benefits is flexible enough to change rapidly to offer value on the company’s budget.

Compensation and benefits are important factors of any business as it boosts employee motivation and enthusiasm. Employees that are paid for their work and earn benefits for their service to the organization will, in turn, produce the best results at the workplace.

Importance of Compensation and Benefits

There are several reasons why compensation and benefits are important. The major reasons being that they;

Increase Employee Retention

Compensation and benefits reflect how much a company values its employees and the work they do. The smartest employers know the importance of these incentives to their employees and strive to offer the best packages in their budget bracket. The better the offer, the more valued the employees will feel which will, in turn, boost their morale and attitude to work. This way, employees are more motivated to stay at a company that offers better compensation and benefits are more motivated to work.

Attract Quality Employees

There is no greater motivation than compensation and benefit. Individuals are naturally attracted to the best financial offers that match their expectations for their job qualifications. With the right offers and packages, potential employees will want a spot in an organization and only the best candidates will be recruited by the organization. This way, only those who would offer value to the company are employed and this would boost the same organization’s output.

Job Satisfaction

One sure way to stimulate job satisfaction is through compensation and benefits. A satisfied employee will drive your company forward. How? They are content with their job and are enthusiastic about fulfilling their roles and carrying out tasks assigned to them. Attractive offers make for driven and productive employees. The employees are likely to put more effort into getting the job done because they are aware of the bonuses that are attached to the company’s growth and success.

Loyalty and Commitment to the Organization

There is an unstated relationship between compensation and benefits and employee loyalty. There is a higher chance that an employee will dedicate a large portion of their time, energy, and even resources to the growth and success of a company if there are benefits attached to it. For example, an employee who has stock options in the organization is aware that their stocks increase with an increase in the company. This would motivate them to make certain sacrifices and commitments to see that the company thrives and expands its horizon.

Categories of Compensation and Benefits

The common types include;

Base/ Fixed Pay

Base Pay is the basic or fixed salary offered to an employee by a company before any tax deductions are made. It is the base compensation (salary or wages) an employee will earn if employed by a company. It also refers to an employee’s annual compensation for their work irrespective of factors like the hours dedicated to the work or their performance quality. Base pay has the largest fraction of the compensation and benefits package offered by an organization to an employee.

Overtime Pay

Overtime generally pertains to hours worked by an employee that exceed their scheduled working hours. If the employee has to go over their normal working hours, it is considered overtime and they are to be compensated for the work done. There is no regulation on overtime limit or pay but it is often decided upon by mutual agreement between the parties involved (in this case, employer and employee) or based on a work pay rate regulation made by the industrial wages board.

Variable Pay

Variable pay refers to any extra compensation or incentive paid to an employee (in addition to their base pay) for their performance in order to motivate them to do more. Usually, when an employee meets their target or plays a huge role in the company’s success, they are recognized and adequately compensated either by a salary increase or they are allotted benefits. Bonus payments, profit sharing, or merit pay are well-known examples of variable pay.

Equity Pay

Equity Pay is non-cash benefits paid to employees by the organization they work for. They usually include stock options, performance shares, or other compensations. This type of compensation is directed at motivating employees to be actively involved in the company’s activities and committed to the company’s growth and success as it would relate to an increase in their stocks or shares. This type is mostly offered to top management or senior-level executives.

Insurance

Offering insurance packages is one of the most effective ways to attract potential employees to your organization. Most companies offer health insurance as an employee benefit and it is one of the common types of compensation and benefits. Employees may enjoy maternity coverage, outpatient and inpatient care, medical check-ups among other health benefits included in a health/medical insurance plan. There are other insurance packages like life insurance, disability insurance, dental insurance, workers’ compensation, or pension plans.

Allowances

Employees are also entitled to benefit allowance which is a stipend paid for specific purposes such as housing and accommodation allowance, transportation allowance, travel/ vacation allowance, leave allowance, healthcare expenses, or others. Some companies, other than paying these allowances directly to the employee, provide these resources for the benefit of the employee.

How do HR Departments Calculate Compensation and Benefits?

There are different variables HR managers or employers consider when calculating compensation and benefits. One common variable is the market rate which is the amount people are willing to pay for a service.

In this case, it refers to the amount employers pay employees for a specific position. There are different market rates for different positions and most employers determine the salary range and choose to settle on compensation within this bracket.

Also, government regulation as regards minimum wage is another variable that HR personnel takes into consideration when setting compensation figures.

Other variables that employers consider with respect to the employee include highest degree earned (and type and degree area), years of work experience in the desired field, years of working with the company, current salary, salary grade level, performance ratings amongst others.

It is important to note, however, that there is no fixed model for calculating compensation figures and it will vary depending on the company.

In need of payroll software or looking to switch to an easy flexible and compliant payroll? Choose PrimePayroll. Our software has a host of features that makes it your HR and payroll solution of choice in today’s business world.

As an employer or HR executive using PrimePayroll, you are guaranteed a seamless integration of compensations into your employee’s payroll. These (benefits or bonuses) can be added to particular pay periods for some set of employees. These variations are auto-injected into the pay breakdown of the specific employees and can be defined to last a period (i.e. a quarter) or for just that particular month.