Compensation Components Role

The compensation policy reflects the HR Processes, procedures and common employee life cycle in the organization. The compensation components are designed and developed to further support the organization in achieving its goals.

Each compensation components has to its major role in the organization and the compensation components should focus clearly to address the issues of the organization. The compensation components should not focus on more issues; each issue should be addresses just by one significant component as the employees can clearly understand the reasons to use the compensation component in their situation.

The roles of the compensation components are following:

Base Salaries

The base salaries are the main compensation component and its role is simple – to attract and retain employees. The base salaries are the component bringing the security to the life of employees as it is regular payment independent of the performance and it cannot be decreased easily. The base salary is the base component for the salary competition on the job market as it is the only guaranteed part of the total cash. Most employees are focused on the base salary as it is the only number they can count on.

Bonuses

The role of the bonuses is the extra reward based on the performance of the organization and the contribution of the individual employee to reaching the company goals. The bonuses also support the retention of employees as they have to wait for the bonuses to be paid, usually at least several months, but in some organization, the payment can be deferred for more than 18 months.

Incentives

The incentives are the strictly personalized bonuses, which are not affected by the results of the organization. As the incentives are based on a strict formula, they are used just in units, where many people do the same job and have the same goals to be achieved. The sales staff and Call Centers are the best examples, where the Incentives are used. The role of Incentives is to focus employees on the immediate results with no long term vision. The incentives are excellent for building the market position and gaining the market share, they are not useful for building the relationship with the customer.

Benefits

The benefits are the most difficult compensation component to explain. The role of the benefits is to retain the employees and the retention is the “magic” word to introduce a new benefit to the organization. Honestly, it does not work and the organizations provide very similar benefit packages to its employees and they are not satisfied with them.

The role of the compensation components should be clearly defined in the compensation strategy and the Human Resources should not add new and new compensation components as it does not work. Less is better.