At the end of this topic, the trainee will be able to: –
- State the meaning of remuneration
- Identify the components of a remuneration package
- Discuss factors affecting remuneration
Compensation and pay are not synonymous terms. Compensation or remuneration refers to all the extrinsic rewards employees receive in exchange for their work. Pay refers only to the actual shilling, dollar, pound that employees receive in exchange for their work. Usually compensation is seen as consisting of the base wage or salary, any incentives or bonuses and any benefits.
Incentives are rewards offered in addition to the base wage or salary and are usually directly related to performance. Benefits are rewards employees receive as a result of their employment and position with the organization.
A reward system consists of financial rewards (fixed and variable pay) and employee benefits, which together comprise total remuneration. Total remuneration is the value of all cash payments (total earnings) and benefits received by employees.
A compensation package consists of two kinds of payments, during employment and after employment. The during employment package consists of; the basic salary, cash allowances, bonus and non-cash perquisites. After employment compensation is in the form of pension, gratuity, limited medical facilities and purchases from cooperative society.
A number of economists have propounded theories, which assert the following: –
- That, the natural price of labour is the subsistence – level wage. Higher wages increase labour supply while low wages below subsistence level may make people to die of disease and malnutrition.
- That there is a predetermined fund (surplus income) which decides the wages
- That workers will never receive full compensation, and that wages constitute an inadequate payment for the surplus value created by the workers to the employer
- That state has to manipulate the allocation of income to wage earners to restore full employment
- That cheap labour will be a basis for comparative cost advantage in international trade
COMPONENTS OF A REMUNERATION PACKAGE
A remuneration package consists of the following: –
- Base pay/basic salary
This is the major component of employment compensation package. Basic salary is worked out on the basis of job evaluation, and is adjusted either because of reclassification or changes in the cost of living index. Basic salary is a range with top and base clearly defined.
Basic salary is the fixed salary or wage, which constitutes the rate for the job. For manual workers it may be referred to as time or day rate. It may provide the platform for determining additional payments related to performance, competence or skill. It may also govern pension entitlements and life insurance when they are related to pay.
The base rate for a job is regarded as the rate for a competent or skilled person in a job. The basic levels of pay for jobs reflect both internal and external relativities
Internal relativities may be measured by some form of job evaluation, which places jobs in a hierarchy. External relativities are assessed by tracking down market rates. Pay levels may also be agreed upon via negotiations i.e. CBA’s or by individual agreements.
In many organizations pay rates are fixed by managerial judgment of what is required to recruit and retain people. The rates may get adjusted due to individual or collective pressures for increases or upgrading.
The base pay may be expressed as an annual, weekly or hourly rates and may be adjusted to reflect increases in the cost of living, market rates, agreement with unions or unilaterally by the management.
Some of the well-known allowances include; house rent, travel allowance, daily allowance, hardship allowance, shift allowance, and so on. The concept of allowance is based on the cost of living index and are meant to compensate for the extra efforts needed for one to perform normal duties. Allowances can be added to the basic pay depending upon the contingencies of the job. The exact quantum of most allowances is usually linked to the basic salary as they present a percentage of the basic.
This is a reward for good performance, which is paid in lump sum related to the results obtained by individuals, teams or the organization. Bonus is seen as profit sharing and focuses on improving productivity for both employer and employee.
Perks are those benefits that do not usually come in the form of cash but are provided to maintain certain needs and status of the employee, and image of the organization. These may include perks such as stock options, club membership, car or housing loans, reimbursement of the cost of children’s education, paid holidays, generous medical benefits, furnishing of residence and many others.
These are payments linked to the achievement of previously set targets, which are designed to motivate people to achieve higher levels of performance. Targets are usually quantified as output, sales and so on.
A special form of incentive in which payments to sales staff are made on the basis of a percentage of the sales value they generate