Components of an effective compensation system? How is an underpaid employee likely to behave?

Compensation is the reward an employee receives in exchange for performing the organisational tasks. Compensation is Direct and Indirect. Direct compensations are Wages, Salaries, Bonuses or Commission. Indirect Compensation is aid !eave, Insurance, "edical Benefits, #ousing $llowance, etc that are not a part of the direct compensation. Components of effective compensation system: %rganisations have to have effective compensation policy to& $c'uire 'ualified personnel& Compensation should (e on par, if not (etter than prevailing industry rates in order to attract 'ualified persons. )etain present employees& *mployees 'uit if compensation levels are not competitive. *nsure e'uity& Compensation should ensure internal e'uity, i.e. compensation should (e related to relative worth of +o(s. *xternal e'uity should (e maintained (y paying wages similar to those paid to persons performing similar tasks in other companies. Internal e'uity should (e maintained (y paying the employees with similar responsi(ilities, 'ualifications and experience similar salaries. )eward desired (ehavior& Compensation should reinforce desired (ehavior through increments and rewards and act as an incentive for the (ehavior to occur again. Similarly withholding increments for poor performance will ensure that the employee puts in more efforts. ,or example& "any organisations appreciate the employee effort though -hank you cards for the effort they have put in for the month. -his invokes a sense of healthy competition among employees and a positive work spirit. $lso the methods of .Star of the month/ which rate the productivity and efficiency ena(le measuring the employee efficiency. Control Costs& $ rational compensation plan helps attract and retain employees at a reasona(le cost. Without proper structure the organisation may overpay or underpay the employees. A compensation policy is effective if salaries and perquisites are: Ade'uate& In line with what is paid in similar companies in the same geographical area. Balanced& $ reasona(le com(ination of direct and indirect (enefits Cost effective& What the organisation can afford to pay. E'uita(le& Commensurate with the effort put in and the a(ility used. Incentive& Sufficient incentives are needed to motivate the employees to work effectively. ecure& Sufficient to satisfy the employee0s (asic need and make him feel secure !actors affectin" Compensation:

Supply and Demand& -he availa(ility of people and the demand determine the .1oing2Wage2)ate/. When the demand is high and the availa(ility low, salaries are high. When the availa(ility exceeds the demand, salaries are low. $(ility to pay& If a company is doing well and has the a(ility to pay, the tendency is to raise the compensation level. #owever if a company is highly successful, there is little need to pay far more than the competitive rates to o(tain good personnel. -he company may choose to pay a(ove competitive rate to attract the (est availa(ility in the industry. Cost of living& -he cost of living index does not determine the (ase compensation. It indicates what the rate of increase in salary should (e to keep up with the inflation so that employees0 real wages do not reduce. Benefits: Indirect (enefits are employer provided rewards and services other than wages and salaries. -hese (enefits are provided for various reasons& 3. 4eep wages and salaries low and hence o(tain tax (enefits 5. "ake the salary package competitive to recruit and retain talent. 6. $ct as motivators 7. *nsure long 8 term employment as some (enefits are linked to time spent in an organisation. Some other indirect (enefits that companies offer are& Insurance& employees are insured (y the company for accident, disa(ility9death. "edical (enefits& medical (enefits are provided to the employees (y the company through insurance. )etirement (enefits& retirement (enefits like provident fund, gratuity, pension are provided for retiring employees who have served for a long term. aid leave& *mployees are given certain special leave like casual leave, privileged leave, medical leave during which they receive their salary and full (enefits. Certain num(er of days in a year only is allotted for such (enefits. )eim(ursement for travel is also allotted in certain companies. %ther (enefits& Benefits like assistance for housing, children education, marriage loans at low interest are also provided. %ther perks0 like telephone reim(ursement etc are also some of the (enefits that certain organisation avails to the employees.