Compensation is the remuneration provided to a permanent employee of an organization for rendering his or her services to the organization. Compensation can be monetary or non-monetary. Non-monetary remuneration is in the form of perks, praise etc. Some companies offer their employees a part in the shares of the company. This not only adds to the compensation but also makes them feel a part and parcel in decision making of the organization. This strategy contributes towards creating commitment among employees.
A well structured compensation and reward system plays a pivotal role in a business organization. Among all the factors of production namely material, money, machinery and men the most important resource is humans for any organization. The materials and machinery can not be utilized optimally for production process without manpower. Moreover, if the manpower is not competent enough the quality of production would decline thereby pushing the organization towards loss.
An entrepreneur expects profits as a reward for his risk taking. Thus, to safeguard his interest of profit maximization he must compensate the manpower he has employed appropriately. When employees are under paid they loose interest in the organization and they start looking for better opportunities. Their motivation declines as a result the quality of production reduces. When the employees are over paid they become lethargic and too casual about the work. Therefore, it is best to compensate employees as per the industry norms.
A fair compensation system is essential for every organization as it boosts morale and inculcates commitment. It has a positive impact on the efficiency and output of workforce. It motivates an average worker to perform better and achieve the set standards. It contributes towards establishing the ideal job evaluation structure that has transparency and fixing standards would be more realistic and achievable.
Such a compensation structure would be applied to all levels of organization. The workers would be able to calculate their remuneration. It is easy to implement and does not penalize workers for reasons beyond their control.
Such a system would comply with various labor laws and help in amicable settlement of disputes. It would provide hardworking employees with chances to excel.
