Question

What are the three types of compensation?

How do you develop a compensation plan?

Answer 1

1. The three types of compensation are:

(i) Base compensation – This type of compensation includes the basic salaries and wages that are paid to employees.

(ii) Variable compensation – This type of compensation is variable and depends on the work done by an employee, his/her productivity at work and his/her efficiency at work. For example commission paid to salesman is an example of variable compensation and such type of compensation is tied to percentage of sales target that has been achieved by a salesman.

(iii) Supplementary compensation – This type of compensations are the compensation that is paid as per the wish of the employer. Such type of compensations includes services like medical facility, housing facility and various other forms of benefits which are popularly known as fringe benefits.

2. To develop a compensation plan organizations should start with developing a compensation philosophy. While forming a compensation philosophy business entities should form a compensation committee and determine the level of salaries i.e. whether it should be above or below the market rate of salary. The next step is to conduct a job analysis for all the positions and after which jobs should be evaluated preparing flow charts of all ranks for each department.

Grades should be determined (like senior, junior, intermediate etc) and grade pricing and salary range should be established accordingly. Finally appropriate salary as well as compensation structure is determined. An integral part of developing a compensation plan is to put in place a compensation administration policy that will have performance appraisal forms, merit raise schedules etc.