Compensation and benefits are two critical elements of human resource management. They are both part of the remuneration package provided to employees in return for the services they provide to the organization. They serve as the key motivators for carrying out the job. It is important for a company to offer an attractive remuneration package made up of both monetary and non-monetary elements so as to attract a skilled and competent workforce.
Compensation is essentially the monetary payment made to an employee for carrying out the jobs he has been assigned. On the other hand, benefits refer to the non-monetary kinds of values offered to employees apart from the monetary compensation in return for the contribution they make to the organization.
Definitions and explanations
Compensation
The different forms of payments made to employees because of the tasks they perform for the organization are known as compensation. Compensation is typically provided in monetary terms. It is essentially the financial payment made to employees for carrying out the tasks and responsibilities assigned to them within an organization.
Based on the nature of the work, different kinds of compensation are made to employees. These include:
- Basic compensation: Basic salaries are offered in a few companies as a form of compensation to their employees. Those employees who are at same level in the organization receive the same basic pay. However, people with higher educational qualifications and with better skills and experience usually receive greater pay in comparison to those with lesser education, experience and skills.
- Performance-related compensation: In these plans, pay can be based on a certain measure of performance, which may be the employee’s productivity or the department’s productivity. Most of the times, performance based compensation packages for senior employees include annual bonuses on the basis of organizational profitability.
- Piece-rate compensation: Employees are sometimes paid compensation on the basis of piece-rate plans, where a base salary is not paid; rather, their pay depends on their output. This is also referred to as commission-based compensation, where employees are paid a given percentage of the total sales they produce each day. The greater the sales generated, the greater the compensation they receive.
Compensation is a critical aspect of organizations, being directly related to cost of living. An employee essentially works to meet the expenses of living. Compensation also serves as a key factor when taking decisions on recruitment of new employees. If a company is seeking to hire a competent workforce, they need to offer an attractive compensation package. There are various factors that determine an employee’s compensation, including their educational background, nature of work, previous work experience, skills, etc. An individual’s compensation increases when they perform well and when move ahead in the organizational hierarchy.
Benefits
Benefits signify other non-monetary forms of value that are given to employees in return for performing their jobs. Benefits are essentially the extra rewards given to employees apart from their stipulated compensation. These benefits are also called fringe benefits and are provided to employees in addition to the cash payments with the aim of enhancing the welfare of the employees and also motivating them.
Different companies provide different kinds of benefits to organizations, typically including: insurance plans (life insurance, health insurance), social security benefits (including educational allowances, retirement plans, company housing, vehicle allowances), as well as paid absences (such as sick leaves, holidays, vacations). Benefits are often determined by one’s position in the organization. In addition, benefits are offered irrespective of the performance of the employees, meaning that benefits do not depend on performance, rather, they are based on membership of the organization.
It is important to formulate the benefit package carefully because when the benefits are inadequate, employees can suffer from low motivation and satisfaction, leading to decreased efficiency.
Difference between compensation and benefits
The difference between compensation and benefits is given below:
1. Meaning
Compensation is defined as the financial remuneration given to employees in return to the services they provide to the organization. On the other hand, benefits is defined as the non-financial forms of rewards given to employees in addition to their cash salary for the services they offer to the organization.
2. Form of remuneration
Compensation is a direct form of remuneration that is based on the performance of the employee. It may depend on the employee’s performance on his own, or on the performance of the department or the whole organization, with bonuses being awarded for exceptional performance. However, benefits is an indirect form of remuneration that is given to employees as part of their employment condition, i.e. it is not performance based. Rather, employees are entitled to receive benefits being members of the organization, irrespective of their performance.
3. Purpose
The purpose of compensation is to attract and retain a competent and skilled workforce. Benefits, on the other hand, seek to enhance the welfare of the employees and motivate them to improve their performance.
4. Nature
Compensation is made as cash payments to employees, whereas benefits are the non-cash forms of value offered to the employees for the contributions they make to the organization.
5. Examples
Compensation mainly includes salaries and wages, while insurance plans, paid leaves, holidays, vacations and social security benefits are some of the types of benefits offered to employees.
Compensation vs benefits – tabular comparison
A tabular comparison of compensation and benefits is given below:
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| Meaning | ||||
| The financial rewards given to employees for providing service to the organization | The non-financial rewards given to employees as part of their employment | |||
| Form of remuneration | ||||
| Direct remuneration based on performance of employees | Indirect remuneration | |||
| Purpose | ||||
| Draw and retain a competent and capable workforce | Motivate employees to perform better and ensure the well being of employees | |||
| Nature | ||||
| Cash payments | Non-cash payments made in addition to the salaries | |||
| Examples | ||||
| Cash, salaries and wages | Insurance, social security, paid leaves, vacation, education and housing allowances | |||
Conclusion – compensation vs benefits
Compensation and benefits are both part of the salary package offered to an employee. The major difference between the two depends on whether they are financial or non-financial in nature. Compensation form the major part of the remuneration package of an employee; however, benefits are also important and should not be disregarded. Each employee has different needs and is motivated by different things. Hence, it would not be appropriate to consider that all employees have the same needs and motivations. Some employees will be motivated by financial rewards, while others with non-financial rewards. Hence, when designing the remuneration package, both forms of rewards should be considered.
