What Is Compensation?

Compensation refers to any payment received by an employee in exchange for work, including salary, benefits, and bonuses. Compensation can also refer to money paid to compensate for a loss or an accident.

What Are the Types of Compensation?

The different types of compensation include:

  • Salary;
  • Hourly wages;
  • Commissions;
  • Overtime;
  • Bonuses;
  • Stock options;
  • Any type of allowance;
  • Benefits (insurance, leaves, retirement, etc.);
  • Tips;
  • Non-monetary compensation (recognition).

How Is Compensation Used?

Besides its function as an act of payment, proper compensation fulfills broader goals such as:

How Do Compensation Plans Work?

Compensation plans, also called compensation programs, allow organizations to ensure that employees are paid fairly through a transparent process.

Compensation plans are based on job requirements, budgets, reward strategies, and conditions of the job market. They are the reflection of the goals and the value of a company.

The steps to create an efficient compensation plan include:

  1. Setting the objectives of the program;
  2. Developing a compensation philosophy;
  3. Ranking each position based on their responsibilities;
  4. Establishing levels for seniority for each position;
  5. Determining the salary or hourly rate by position and seniority;
  6. Implementing benefits policies;
  7. Creating a communication plan;
  8. Monitoring and adjusting the compensation plan as needed.

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