Types of Employee Compensation HR Should not Miss

May 31, 20212:23 pm722 views
Types of Employee Compensation HR Should not Miss
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Compensation is a vital part of human resource management to drive employee motivation and improve organisational effectiveness. Having a well-managed compensation package accompanied with an ideal salary structure and benefits can help attract and retain the best employees. 

Successful American industrialist and business magnate Henry Ford did say that “Paying good wages is not charity at all – it is the best kind of business.” And this statement remains vital today. In fact, a robust model for business involves providing the right arrangement of salary and compensation to individuals. Companies that align their strategic expectations with compensation plans inspire and drive outstanding employee performance, which eventually drives sales and profits. 

What makes compensation necessary? 

Employee compensation is considered primer by labour acts as a way to ensure that employees are protected during employees’ period of work. That said, compensation packages should not be exclusive to large corporations – everyone should be recognised for the value they bring to an organisation’s success. For many reasons, effective and fair compensation is a must for every business regardless of the size. Also, when an employer protects employees from unexpected accidents by compensating them, it is the same as protecting the company from any ‘injuries’. 

Having a good compensation plan does not only help a business flourish but also help the organisation compete in the respective markets. Generally, employers can reap several benefits by providing the right compensation package, such as attracting top talents on the market, increasing employee motivation at the workplace, boosting employee loyalty, increasing productivity and profitability, improving job satisfaction and engagement, retaining top talents – and most importantly, giving out proper compensation to employees help you stay in compliance with the labour law. 

See also: Compensation Analytics: 7 Areas for HR to Focus

Mandate vs. Optional: Types of employee compensation 

There are two major types of employee compensation, mandatory and optional. Mandatory compensation is the amount of money employers have to give to employees to ensure their safety and health. Generally, all-state will have base pay and work injury compensation as a mandatory compensation employer must provide. There are also civic duties, disability, and family and medical leave compensation. 

In Singapore, for example, the Ministry of Manpower cited that there are three mandatory compensations employers should cover in their employment contract under Work Injury Compensation Act (WICA). These three types include: 

  • Medical leave compensation can be withdrawn by employees when they have a work injury or disease. 
  • Medical expenses include hospital bills, medication and other charges due to work injury. 
  • Lump-sum compensation for permanent incapacity, current incapacity, or death. 

Meanwhile, some of the most common and commonly overlooked types of optional compensations that employer must consider are: 

  • Commissions 
  • Bonus  
  • Profit-sharing distributions 
  • Merit pay or recognition 
  • Incentive plan or achievement award 
  • Tip income 
  • Stock options 
  • Child care and tuition assistance 
  • Travel/meal/housing allowance 
When should employers provide mandatory or optional compensation? 

For the mandatory compensation, employers should refer to each state employment conduct. As for optional compensations, employers can either make the compensation available based on an employee’s hours of work or performance. 

In the past, many organisations based compensation on tenure. That might have worked during an era when employees stayed with an employer for decades. However, in today’s generations, people typically do not stay with one organisation for their entire career. Workers, especially millennials and Gen Z, have been job-hopping in hopes of attaining better pay and career mobility. 

PayScale data showed how companies are approaching compensation beyond tenure. The findings suggested that retention, recruitment, and in-demand, job-specific skills are the top reasons for pay strategy adjustments. Nearly 75 percent of employers surveyed said that budget for variable/incentive pay with bonuses being the most common to compensate employees; while 70 percent of organisations have a compensation strategy or are working on one. 

When building a compensation strategy or updating the existing one, it is imperative to consider how compensation connects to employee performance or development. Employers should take into consideration how compensation will affect and inspire employees to drive the organisation forward. With this in mind, business leaders together with HR should thoroughly observe their workers’ rights and design solid compensation packages that will drive success. 

Read also: Learning by Example: How Managers Can Maximise Compensation and Reward Programs