What are the components of Compensation ?

Different organizations have different compensation polices with different content. It is what gives them their competitive advantage. These are grouped under the headings of fixed and variable compensation as under:

Fixed compensation:

1.    Base pay

2.    DA

3.    HRA

4.    Compensation-based pay

5.    Pay for fixed term employment

6.    Fringe benefits

7.    Performance pay

8.    Retirement fund

9.    Total package


Variable compensation:

1.    Long term incentives

2.    Share schemes

3.    Short term incentives

4.    Organization wide incentives


Designing compensation system :

There are many bases for making payment of compensation. Basis of compensation payment is based on skill and performance. skill based payments take place usually at lower level positions and performance-based payments take place for managerial and professional positions. Organizational should review any particular combination of skills-based and performance-based payments that it has adopted to ensure the effectiveness of compensation system. The following basis of compensation payments exists in organizations.

1. Skill-based pay: a skill is the knowledge and ability required to competently perform a task. Tasks any require multiple skills. Reading, math computation, manual dexterity, etc are basis skills. Skill-based pay is an input based payment system in which employee receive increases in pay for undergoing training and their range or depth of skills. The skills required under skill-based pay are:

  1. Technical know-how which encompasses depth, breadth and integration of knowledge.
  2. Critical thinking skills which cover problem solving, organizational, self and project management, and future thinking skills.
  3. Interactive capabilities which include listening, communication, team and leadership skills.


2. Merit based pay: Merit pay is an approach to compensation that rewards the higher performing employees with additional pay or incentive pay.

3. Knowledge-based pay: An organization make sure that pay-for-knowledge structure is:

  1. Internally aligned with work relationship with in the organization.
  2. Skill blocks.
  3. Skill certification.
  4. Perform a skill analysis in order to identify and collect information about knowledge and skills required to perform work in an organization.


4. Competency-based pay: According to Competency Based Pay, an employee is paid for the skills and knowledge he possesses and not according to the job or position he is currently holding. This kind of pay structure motivates employees as the employee feels he is being paid for the worth he/she has. The entire structure of the company revolves around this then. The motivated employees rise and get promoted. The employees are not paid by the virtue of their position but competency, hence competency based pay.

5. Market-based pay: Market pay systems are easy to understand and flexible enough to respond to changes that directly impact an organization and its industry.  Organization affiliation tends to be shorter now as opposed to the career length affiliations of past generations that elevated importance of internal equity over external competitiveness.

HR-Professionals 12 Compensation 12


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