What is Compensation?

What is Compensation?

Introduction to Compensation

Compensation is the results or rewards that the employee receives in return for their work. Also, It includes profit sharing, Overtime payment, bonuses, sales commissions, recognition rewards, etc.

Objective of the Compensation

  • Allure suitable staff
  • keep qualified personnel
  • Manage pay structures to mirror inflationary effects
  • Appraise performance, duty and loyalty and provide for progression


  • Tries to give the proper refund to the employees for their contribution to the organization.
  • Increase the job evaluation process, which in return helps in setting up more realistic and achievable standards.
  • Discovers a positive control on the efficiency of employees and motivates them to perform better and achieve the specific standard.
  • Creates a base for the happiness and satisfaction of the workforce that limits labor turnover and confers a stable organization.

Types of Compensation

  • Direct Compensation
    • In general it includes salary payments and health benefits.
  • Indirect Compensation
    • It focuses on the personal encouragement of each individual to work. These benefits are such as chances for promotion and transfers within the organization, courses, public recognition, etc.

Wages and salary

wages mark hourly rates of pay and salary marks as monthly rates of pay for an employee.


  • This defined as the amount of something that is allowed, especially within a set of rules and regulations or for a specified purpose.
  • Dearness Allowance : this is paid as a percentage of basic pay.
  • House Rent Allowance: when a company can’t provide accommodation for their employees they give house rent allowance for their employees. Here calculated as a percentage of salary.
  • Transport Allowance: a fixed amount is paid monthly to cover employees traveling expenses. So they can cover their transport cost.

Incentives and performance-based pay

For example Bonuses, gain-sharing, commissions on the sale

Fringe Benefits

This includes employee benefits such as medical facilities, accident relief, canteen, uniform, recreation, etc.