Workforce Compensation

What are the components of a compensation system?

Workforce Compensation
Compensation is viewed by employees as fair if based on systematic components. These systems use similar components including job descriptions, salary ranges and structures, and written procedures. Various compensation systems have been developed to determine the value of each job or positions.

The components of a compensation system include:

  • Job Descriptions - A critical component of both compensation and selection systems, job descriptions define in writing the responsibilities, requirements, functions, duties, location, environment, conditions, and other aspects of jobs. Descriptions may be developed for jobs individually or for entire job families.
  • Job Analysis - The process of analyzing jobs from which job descriptions are developed. Job analysis techniques include the use of interviews, questionnaires, and observation.
  • Job Evaluation - A system for comparing jobs for the purpose of determining appropriate compensation levels for individual jobs or job elements. There are four main techniques: Ranking, Classification, Factor Comparison, and Point Method.
  • Pay Structures - Useful for standardizing compensation practices. Most pay structures include several grades with each grade containing a minimum salary/wage and either step increments or grade range. Step increments are common with union positions where the pay for each job is predetermined through collective bargaining.
  • Salary Surveys - Collections of salary and market data. May include average salaries, inflation indicators, cost of living indicators, salary budget averages. Companies may purchase results of surveys conducted by survey vendors or may conduct their own salary surveys. When purchasing the results of salary surveys conducted by other vendors, note that surveys may be conducted within a specific industry or across industries as well as within one geographical region or across different geographical regions. Know which industry or geographic location the salary results pertain to before comparing the results to your company.
  • Policies and Regulations

Compensation will be perceived as fair if it is comprised of a system of components developed to maintain internal and external equity

What are different types of compensation?

Different types of compensation include:

  • Base Pay
  • Commissions
  • Overtime Pay
  • Bonuses, Profit Sharing, Merit Pay
  • Stock Options
  • Travel/Meal/Housing Allowance
  • Benefits include dental, insurance, medical, vacation, leaves, retirement, taxes

Most people assume the term compensation means salary. What someone is paid is only one aspect of a complex topic. Compensation includes not only salary but also the direct and indirect rewards and benefits the employee is provided with,  in return for their contribution to the organization.

To determine compensation, organizations should develop a compensation and rewards program that outline an equitable process for compensating employees. A well-structured program with a good balance of wages, benefits, and rewards will enable an organization to remain competitive and find better talent to join their organization.

Being a "best company to work for" encourages loyalty and helps you maintain your top talent.

What's the difference between a defined benefit plan and a defined contribution plan? 

You typically don't fork over any of your paychecks to participate in a defined benefit plan. Your employer does. But you do have to put your own money into a defined contribution plan like a 401(k) or a 403(b). Obviously, a defined benefit plan is a much better deal for you.

Because defined benefit plans are more costly for employers than defined contribution plans, most of them have - you guessed it - scaled back dramatically or eliminated these plans altogether in recent years. If you still have a defined benefit plan at your company, consider yourself lucky.

Some employers offer both defined benefit plans and defined contribution plans. If yours does, you should definitely participate in the defined contribution plan as well. That's because a defined benefit plan on its own likely won't be generous enough to let you live comfortably in retirement.

Keep employees productive and obtain help with compensation and benefits. Contact us now for a no cost consultation.

Time to Update your Employee Handbook

Request your free guide on when to update your employee handbook.

* required

Email marketing via MailChimp

Client Testimonials

Bruce Taylor

I was impressed by Nancy’s energy, her optimism, and her great intuition about what was happening in the company’s workforce. I would recommend her highly for a senior HR position, and would gladly work with her again.

Bruce Taylor

Streamline Your Hiring Process

JazzHR is a powerful, easy to use and affordable recruiting software that can help you improve and customize your entire hiring process.