Compensation is the full reward an employee receives in exchange for services accomplished in the organization. Financial compensation includes both indirect and direct pay. Direct financial compensation consists of pay received by an employee in the form of salaries, bonuses, commissions and wages given at consistent and regular intervals. It broadly includes a rise in the cost of living or market adjustments, equitable wages and salaries, performance bonuses or fair commissions(Ivancevich, 2010)..
On the other hand, indirect financial compensation comprises all the financial rewards that are not contained within direct compensation, and it is known to form the portion of the social contract between the employee and employer such as leaves, retirement plans, benefits, employee services and education. These benefits may include Insurance plans such as Supplementary Health, Dental, Life and even Vision. Retirement plans, social security benefits, employee insurance, workers compensations can also be included. It also offers paid absence like sick leaves, vacations, education and holiday leaves (Ivancevich, 2010).
Before implementing any compensation system or process in an organization, it good to understand the impacts it has on the organization and gravity at which it will impact the organization if not managed effectively. Employees in any organization expect to be appreciated for their work. Direct compensation incentives like money can be considered as the most important compensation that motivates employees though indirect compensations incentives work efficiently as well. The main goal of compensation is to attract, motivate and retain employees who are competent in an organization. Any organizations planning to implement compensations whether direct or indirect, it is good to first know the government labor laws that usually govern employees’ compensation(Brown,Sturman & Simmering,2003).According to Lacmanović (2006) financial compensation is of importance as it acts as the most influencing factor for employees’ motivation, it minimizes industrial disputes that may arise as it helps in harmony and peace maintenance in an organization, it increases employees’ satisfaction and encourages employees to put more efforts in their work to name just but a few.
Adjusting indirect compensation components
Many companies are improving their indirect compensation components for them to be competitive in the current markets. It includes benefits that are non-monetary provided and offered to all employees for the services provided by them to the firm. Some companies provide indirect financial compensation that is personalized and based on specific requirements and needs of their employees. For example, there are some who require childcare help, work from home, and by adjustment of such benefits, the companies are able to employ bright and loyal employees for a longer period. Other companies are changing their leave policy to suit their employees such as sick or medical leave, casual leave, statutory pay and maternity leave which are sufficient (Stahl, Björkman, & Morris, 2012).
Overtime policy is adjusted to provide employees with adequate facilities and allowances during their overtime by issuing overtime pay and transport facilities. They are also provided with subsidies to get consistent checkups that give them social and emotional security. Provision of life and accidental insurance for employees gives them the emotional security and a feeling of being valued and appreciation in the organization and thus working wholeheartedly. To reduce employee’s stress, they are offered travel allowances and leaves to go for a holiday and some organizations organize for a tour for the employees. Other organizations offer retirement benefits such as pension plans that benefit employees after retiring from the organization at the recommended age.
Some organization provides for guest house and holiday homes in different locations for their employees. They make sure that employees do not face any difficulties while at the guest house by locating the homes in hill station and other holiday spots that are most wanted. Employees who cannot work during regular shifts and have valid reasons and personal problems are provided with flexible timings. Provision of all these compensations helps the organization to motivate, attract and retain employees. The adjustments made in indirect compensation aid the organization to compete successfully in the current markets (Stahl, Björkman, & Morris, 2012).
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