Compensation is the payment or remuneration for the work done by someone in the form of commission, wages, salary, or otherwise. In most cases, it is in terms of goods and not monetary. This is meant to compensate someone after an injury or after the damage caused. Compensation can also be defined as the amount of money and non-monetary payment provided by an employer to an employee in return for the work he has performed (Burton & McFadden, 2004, p. 73). In addition, compensation can also include payments such as sales commission, checks, rewards, recognitions, overtime pay, profit sharing, and bonuses. Others include company-paid house, stock options in some instances, and company paid car (Lance & Berger, 2008, p. 300).
Compensation or pay philosophy is a firm’s commitment and dedication on how it values and care for employees. A compensation philosophy is consistent because it gives the company and its employees a line of reference. This is important when discussing salary increment during negotiation of compensation packages (Sirkin & Cagney, 1996, p. 233). The main goal or objective of compensation or pay philosophy is to; attract, influence, motivate, and retain employees in the company. A competitive compensation philosophy is required by companies in the private sector. However, public companies should adopt a well-rounded philosophy that focuses only on work life and benefits. Compensation or pay philosophy is essential because it is one of the factors that will ensure companies achieve its set goals and objectives (Burton & McFadden, 2004, p. 77).
Critical components of a compensation strategy
Compensation strategy and compensation policy are several compensation responsibilities, ownerships, and components have to be defined to all employees. In addition, compensation components should not only have one owner, but it should be distributed and connected to all business leaders. This financial tool is meant to motivate all employees. Most Human Resource Management function has centralized the compensation components ownership (Lance & Berger, 2008, p. 309).
However, this approach has been proven to work for a limited time, and then it fails and hurts all business operations. Compensation policy defines the responsibilities and roles of different departments and the rules and regulations applied to each compensation components in the company. There are four main components of compensation policy. These are basic salary, bonuses, incentives, and benefits (Burton & McFadden, 2004, p. 80).