This document discusses compensation and its various components. It begins by defining compensation as the extrinsic rewards employees receive in exchange for their work, such as wages, salaries, bonuses, and benefits. It then covers different types of direct compensation like pay and incentives, as well as indirect compensation like benefits and services. The document also discusses several theories of compensation including reinforcement theory, expectancy theory, equity theory, and agency theory. Finally, it outlines the major components of compensation, including basic wages/salaries, dearness allowance, commissions, profit sharing, fringe benefits, reimbursements, and sickness/pregnancy benefits.

3. Group Name: INNOVATORSGroup Name: INNOVATORS

4. Gazi Munia Uddin
Lecturer,
Dept. Of Business Administration
Leading University

5.  To know what is CompensationTo know what is Compensation
 To know Compensation typesTo know Compensation types
 To know theories behind compensationTo know theories behind compensation
 To relate classroom study with that of real lifeTo relate classroom study with that of real life
situationsituation

6.  Extrinsic rewards that employees receive inExtrinsic rewards that employees receive in
exchange for their work.exchange for their work.
 Composed of the base wage or salary andComposed of the base wage or salary and
incentives or bonuses and any benefitsincentives or bonuses and any benefits.

7. Figure : Types of Compensation

8. Remuneration provided to employees in exchange forRemuneration provided to employees in exchange for
their labor and services. What makes it direct is that ittheir labor and services. What makes it direct is that it
is given to the employee without an intermediary. Twois given to the employee without an intermediary. Two
Types Direct of compensation:Types Direct of compensation:
 Pay: It consists of wages and salaries received forPay: It consists of wages and salaries received for
performing work.performing work.
 Incentives: They are provided for higher performance.Incentives: They are provided for higher performance.
TYPES OF COMPENSATION (CONTD.)

9. Figure: Direct compensation
Direct compensation

10. TYPES OF COMPENSATION (CONTD.)
Provided for the employee’s benefit, but are not given
directly to the employee. Under indirect compensation
there are major two types of compensation
Benefit: The payment addition to pay
Services: They increase employee wellbeing at no cost or
significantly reduced cost to employee

11. Fig 3. Indirect Compensation
Indirect compensation

13.  Response followed by a reward is more likelyResponse followed by a reward is more likely
to recur in the future.to recur in the future.
 The implication for compensationThe implication for compensation
management is that high employeemanagement is that high employee
performance followed by a monetary rewardperformance followed by a monetary reward
will make future high performance morewill make future high performance more
likely.likely.
 The theory emphasizes the importance of aThe theory emphasizes the importance of a
person actually experiencing the reward.person actually experiencing the reward.
THEORY OF COMPENSATION ( CONTD.)THEORY OF COMPENSATION ( CONTD.)

14.  Like reinforcement theory, expectancy theoryLike reinforcement theory, expectancy theory
(Vroom, 1964) focuses on the link between(Vroom, 1964) focuses on the link between
rewards and behaviors.rewards and behaviors.
 People are motivated by intrinsic and extrinsicPeople are motivated by intrinsic and extrinsic
outcomes they desireoutcomes they desire
 People will only be motivated if outcome isPeople will only be motivated if outcome is
possible.possible.
 People will only be motivated if outcome isPeople will only be motivated if outcome is
contingent.contingent.
THEORY OF COMPENSATION ( CONTD.)THEORY OF COMPENSATION ( CONTD.)

15.  Comparing inputs and outputs of a similar co-workerComparing inputs and outputs of a similar co-worker
 Employee perceptions of what they contribute to theEmployee perceptions of what they contribute to the
Organization, what they get in return, and how theirOrganization, what they get in return, and how their
return-contribution ratio compares to others insidereturn-contribution ratio compares to others inside
and outside the organization,' determine how far theyand outside the organization,' determine how far they
perceive their employment Relationship to beperceive their employment Relationship to be
(Adams, 1963).(Adams, 1963).
 Perceived inequity affects employee effortPerceived inequity affects employee effort
EQUITY THEORY

16.  Focuses on the divergent interests and goals of theFocuses on the divergent interests and goals of the
organization's stakeholders, and the ways that employeeorganization's stakeholders, and the ways that employee
compensation can be used to align these interests andcompensation can be used to align these interests and
goals (Eisenhardt, 1989; Fama & Jensen, 1983).goals (Eisenhardt, 1989; Fama & Jensen, 1983).
 depends partly on the following factors :depends partly on the following factors :
- Risk aversion.- Risk aversion.
- Job programmability.- Job programmability.
- Measurable job outcomes.- Measurable job outcomes.
- Ability to pay.- Ability to pay.
- Tradition.- Tradition.

18.  Cash component of the wage structure based on whichCash component of the wage structure based on which
other elements of compensation may be structured.other elements of compensation may be structured.
 Normally a fixed amount which is subject to changesNormally a fixed amount which is subject to changes
based on annual increments.based on annual increments.
Dearness allowance
 The payment of dearness allowance facilitates employeesThe payment of dearness allowance facilitates employees
and workers to face the price increase or inflation of pricesand workers to face the price increase or inflation of prices
of goods and services.of goods and services.
 The payment may be a fixed percentage on the basic wage.The payment may be a fixed percentage on the basic wage.
Basic wages/Salaries

19.  Can be fixed percentage on the basic wage paid annuallyCan be fixed percentage on the basic wage paid annually
or in proportion to the profitability.or in proportion to the profitability.
 The Government also prescribes a minimum statutoryThe Government also prescribes a minimum statutory
bonus for all employees and workers.bonus for all employees and workers.
 There is also a bonus plan which compensates theThere is also a bonus plan which compensates the
Managers and employees based on the sales revenue orManagers and employees based on the sales revenue or
Profit margin achieved.Profit margin achieved.
Commissions
 May be based on the sales revenue or profitsMay be based on the sales revenue or profits
 always a fixed percentage on the target achieved.always a fixed percentage on the target achieved.
MAJOR COMPONENTS (CONTD.)MAJOR COMPONENTS (CONTD.)

20.  Also called combination or mixed planAlso called combination or mixed plan
 Apart from the salaries paid, the employees may beApart from the salaries paid, the employees may be
eligible for a fixed percentage of commission uponeligible for a fixed percentage of commission upon
achievement of fixed target of sales or profits orachievement of fixed target of sales or profits or
Performance objectivesPerformance objectives
 Paid wages for each of the Quantity producedPaid wages for each of the Quantity produced
 Piece rate wages improves productivityPiece rate wages improves productivity
MAJOR COMPONENTS (CONTD.)MAJOR COMPONENTS (CONTD.)

21. Profit sharing payments
 Paid through payment of cash or through ESOPS.
 Attracts competitiveness and improved productivity.
Fringe Benefits
The provision of fringe benefits does not attract any explanation.
These include.
 Company cars
 Paid vacations
 Membership of social/cultural clubs
 Entertainment tickets/allowances.
 Discounted travel tickets.
 Family vacation packages
MAJOR COMPONENTS (CONTD.)MAJOR COMPONENTS (CONTD.)

22. Reimbursements
 Based on the Expenses incurred and substantiated.
 In many cases, employers provide advances to the employees
for incurring certain expenses
 Some examples are: Travel expenses, Entertainment expenses,
Out of pocket expenses.
Sickness benefits/pregnancy
 Payments during pregnancy of women employees, injury or
illness.
 supporting financial benefits to the family of the bereaved
employees.
MAJOR COMPONENTS (CONTD.)MAJOR COMPONENTS (CONTD.)