Compensation management is one of the most challenging human resource areas because it contains many elements and has a far-reaching effect on the organisation’s goals. The purpose of providing compensation is to attract, retain and motivate employees. There are two main types of financial compensation.
** Direct financial compensation – the pay that a worker receives as wages, salaries, commissions and bonuses, and
** Indirect financial compensation – all financial rewards that are not included in direct compensation (i.e. benefits).
An example of direct financial compensation is the money the worker receives as wages at the end of the week, or as a salary paid at the end of the month. Many companies pay salaries straight into the employee’s bank account.
An example of indirect financial compensation is when the company contributes to an employee’s housing subsidy or a pension plan.
Not all compensation is financial. A worker can get great satisfaction from his work and enjoy the environment in which he works. This is called non-financial compensation and cannot be counted in terms of money. For example, a veterinarian might enjoy working outside, going to farms to treat animals and deliver calves. A publisher might enjoy the challenge of producing books that will enrich people’s lives.
It is not always possible to provide a perfect pay package (the agreement between the organisation and the employee about how much money and other benefits the employee will receive). Because of this, some companies allow their employees to work out their own compensation packages.
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