Compensation is the total remuneration given to an employee for their contribution to the business’ success. The contribution can be in the form of knowledge, skills, time and commitment. It is usually awarded in the form of salary/wages but compensation is more than just the paycheck. It could be in the form of both cash or non-cash form. Good compensation is central to attracting, retaining and motivating highly skilled employees.
The most common types of compensation include:
- Base pay (hourly, weekly, monthly or annual)
- Profit sharing dividend
- Stock options
- Workers compensation
- Benefits such as medical insurance
- Allowances (travel, housing or meal)
- Gym and club memberships
- Vacation time
Overall, a compensation structure should have four key components:
- Base pay
- Variable pay plans such as commissions and overtime.
- Benefits such as health insurance, gym memberships and vacation time
- Reward and recognition plans such as bonus and profit-sharing dividend.
To create a competitive compensation plan, a business should:
- Define a compensation philosophy that aligns with the business’ overarching vision and mission.
- Competitor research to establish what rivals and peers are paying.
- Conduct job analysis for each position.
- Set a base salary/wage for each role based on job role, industry benchmarks and relevant laws.
- Develop a plan for annual pay rise.
- Set a performance based plan for reviewing compensation.
Compensation is not solely at the business’ discretion or completely driven by market forces. Different jurisdictions have rules and regulations governing how companies can set compensation including a minimum wage. In the US for example, there are federal, stale and local laws.
Several factors determine compensation such as business financial health, business location, employee education, employee experience, competitor salary, employee productivity and local rules/regulations.