Study Notes for Compensation and Incentives in Human Resource Management

Lebanese University: Introduction to Human Resource Management

Chapter 4: Compensation and Incentives

1. Meaning and Definition of Compensation

  • Definition: The term compensation refers to something given or received in return for service.

    • Specifically, it can be defined as money received in the performance of work, as well as various benefits and services that organizations provide to their employees.

  • Components of Compensation:

    • It encompasses a wide range of financial and non-financial rewards given to employees for the services they render to the organization.

    • Forms of payment include wages, salaries, special allowances, and employee benefits such as:

    • Paid vacations

    • Insurance

    • Maternity leaves

    • Free travel facilities

    • Retirement benefits

2. Objectives of Compensation Planning

  • Purpose: The primary objective of establishing a sound compensation system is to

    • Create and maintain an equitable rewards system.

  • Additional Aims:

    • Establish and maintain an equitable compensation structure, optimizing the balance of conflicting personnel interests to maximize employee and employer satisfaction while minimizing conflicts.

    • Compensation management is primarily concerned with financial aspects of employee needs, motivation, and rewards.

Objectives of a Sound Compensation Structure

  • For Employees:

    1. Employees are compensated based on the requirements of their jobs, meaning that highly skilled jobs command higher compensation than low-skilled jobs, which helps eliminate inequalities.

    2. Minimization of favoritism.

    3. Establish lines of job sequences and promotion wherever applicable.

    4. Increased employee morale and motivation due to a robust compensation structure.

  • For Employers:

    1. Employers can systematically plan for and control turnover within the organization.

    2. A well-structured compensation system reduces friction and grievances concerning remuneration.

    3. It enhances employee morale and motivation since adequate and well-administered incentives meet employee needs and wants.

    4. It attracts and retains qualified employees by ensuring adequate payment for all jobs.

    5. In negotiations with trade unions, employers can refer to the systematic analysis of jobs and wage facts as the foundation of their wage programs.

3. Factors Affecting Compensation Planning

  • Various factors significantly impact the final decision on compensation planning, including: a) Supply and Demand of Labor:

    • The compensation paid to workers is influenced by the demand for their services. For instance, during times of increased labor demand (e.g., wartime), compensation tends to rise. Conversely, when labor supply is restricted (e.g., by labor unions), compensation may increase as well. On the flip side, decreased labor demand could lead to decreased employee compensation, assuming no external interventions influence these dynamics.

b) Ability to Pay:

  • Labor unions may invoke a company's profitability as a reason for increasing compensation.

c) Management's Philosophy:

  • Management desires to maintain or improve morale, attract high-quality employees, reduce turnover, and enhance employee standards of living, which can affect wages. The relative importance of a given position within the company influences this aspect.

d) Legislation:

  • Various laws prescribed by the government concerning wage and hour regulations play a crucial role in shaping internal compensation practices. These laws set limits on minimum wages and maximum working hours.

4. Various Modes of Compensation

  • Wages and Salary:

    • Wages represent hourly rates of pay; salaries refer to monthly pay rates regardless of hours worked.

  • Incentives:

    • Often termed payment by results, incentives are payments made in addition to base wages and salaries, dependent on productivity, sales success, profit, or cost reduction efforts.

    • Incentive schemes can be categorized into two types:

    1. Individual incentive schemes

    2. Group incentive schemes

5. Incentives & Kinds of Incentives

  • Definition of Incentives:

    • Incentives are monetary benefits offered to employees based on outstanding performance.

    • The nature of incentives can vary for each individual and over time for the same individual.

Categories of Incentives

  1. Individual and Organizational Incentives:

    • Individual incentives are additional compensation awarded to an employee for exceeding a specified performance level through exceptional skill.

    • Organizational or group incentives involve collaboration among employees, management, and unions to achieve broader organizational objectives, such as reducing labor, material, and supply costs.

  2. Financial and Non-Financial Incentives:

    • Financial incentives cover salaries, premiums, rewards, dividends, and investment income.

    • Non-financial incentives provide social and psychological appeals that motivate individuals to perform work efficiently and effectively.

  3. Positive and Negative Incentives:

    • Positive incentives are agreeable factors that motivate individuals to exceed set standards or objectives, including promotions, worker preferences, competition, and individual records.

    • Negative incentives, conversely, are undesirable aspects of a work situation that employees strive to avoid, such as fears of layoff, discharge, salary reductions, and employer disapproval.

6. Fringe Benefits

  • Definition: Fringe benefits refer to additional perks offered by employers beyond wages, salaries, allowances, and bonuses.

  • Purpose: These benefits aim to maintain and promote a favorable employee attitude towards work and the work environment, enhancing morale and motivation.

Types of Fringe Benefits

  1. Old Age and Retirement Benefits:

    • Includes provident fund schemes, pension schemes, gratuity, and medical benefits provided to employees after retirement to ensure financial security in old age.

  2. Workman’s Compensation:

    • Benefits awarded to employees if they become injured or die due to workplace conditions, with the employer bearing sole responsibility.

  3. Employee Security:

    • Regular wage and salary payments contribute to employee feelings of security.

  4. Payment for Time Not Worked:

    • Employees receive payment for work performed during holidays or similar instances.

  5. Safety and Health:

    • Employers are responsible for providing optimal working conditions to ensure employee safety and health, protecting against accidents and unhealthy environments.

  6. Health Benefits:

    • Provision of medical services like hospital and clinical facilities by the organization to employees.

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