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Compensation & Benefits: Definitions & Importance.


Human Resource Management (HRM) has never been as significant as it is today. Companies want to attract, retain and motivate brains to meet objectives. Today Humans are regarded as one of every company’s assets so they need to be efficiently and effectively managed. One of the tools companies use to attract, retain and motivate its people is Compensation Management. In this hub, I shall define compensation and benefits along with their advantages for a company and its workers.

Suppose, you own a boutique. Lets call it myWear - or you can give it any name of your liking. You have hired three salespersons and a receptionist. The salespeople are responsible to look after the sales affairs. The receptionist's duties are to handle the cash and manage the account books. I shall refer to this illustration throughout the hub.


Would the three salespersons and the receptionist work for free? No. They would, like us all, expect something in return. You must have heard a common phrase: Give and Take. You always have to give things to people in return to what you take from them. Compensation refers to this exchange, but in monetary terms. Compensation is the employer's feedback for an employee's work. It simply is the monetary value you would give to your four employees in return of their services.

Gary Dessler in his book Human Resource Management defines compensation in these words "Employee compensation refers to all forms of pay going to employees and arising from their employment." The phrase 'all forms of pay' in the definition does not include non-financial benefits, but all the direct and indirect financial compensations.


Employees today are not willing to work only for the cash alone, they expect 'extra'. This extra is known as employee benefits. Also known as fringe benefits, Employee benefits are non-financial form of compensation offered in addition to cash salary to enrich workers’ lives.

What benefits would you offer to your employees at myWear? Off course, you would offer different benefits to the salespersons and the receptionist. Problem will arise when you begin to decide what benefit to give to whom and on which basis? Employee benefits are not performance-based, they are membership-based. Workers receive benefits regardless of their performances. Employee benefits as a whole have no direct affect on employee performance, however, inadequate benefits do contribute to low satisfaction level and increase absenteeism and turnover in employees (DeCenzo and Robbins; 2007). So you would have to carefully design your benefit package. Your package may include a cell phone to each worker, taking them to a training workshop or seminar, giving them a day or two off every month and so on. While deciding on the benefits package, do consider the associated costs.


Advantages to Your Boutique:

A well designed compensation and benefits plan helps to attract, motivate and retain talent in your firm (which is myWear). A well designed compensation & benefits plan will benefit your boutique in the following ways.

1. Job satisfaction: Your employees would be happy with their jobs and would love to work for you if they get fair rewards in exchange of their services.

2. Motivation: We all have different kinds of needs. Some of us want money so they work for the company which gives them higher pay. Some value achievement more than money, they would associate themselves with firms which offer greater chances of promotion, learning and development. A compensation plan that hits workers’ needs is more likely to motivate them to act in the desired way.

3. Low Absenteeism: Why would anyone want to skip the day and watch not-so-favorite TV program at home, if they enjoy the office environment and are happy with their salaries and get what they need and want?

4. Low Turnover: Would your employees want to work for any other boutique if you offer them fair rewards. Rewards which they thought they deserved?

Advantage to Your Employees:

1. Peace of Mind: your offering of several types of insurances to your workers relieves them from certain fears. Your workers as a result now work with relaxed mind.

2. Increases self-confidence: Every human being wants his/her efforts to get acknowledgment. Employees gain more and more confidence in them and in their abilities if they receive just rewards. As a result, their performance level shoot up.

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Take care of yourself and everyone around you.

This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.

© 2010 Nauman Nazir

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Nauman Nazir (author) from Pakistan on May 17, 2017:

Sajjad Ali

Brother, it's Employee Turnover you want to say. Employee Retention is good, but Employee Turnover is bad and it is something an organization wants to minimize.

Employee Retention:

Employee retention refers to the ability of an organization to retain its employees (

It's not always unfair compensation is responsible for absenteeism!

I agree that In poor countries the fact that salary is the main motivation behind work and low salary, along with low or no benefits, do result in absenteeism there.

What you say is true for those people who are trapped in the first and the second steps of Maslow's hierarchy of needs, but people in the higher steps of that hierarchy the two are not the culprits.

Un-supportive work environment and co-workers,

Environment full of non-productive stress,

are also responsible for low performance & absenteeism.

Nauman Nazir (author) from Pakistan on May 17, 2017:

Sajjad Ali

It's not always low salary

In poor countries it holds true, but not for everyone!

those people who are trapped in the first and second step of Maslow's hierarchy of needs it is true, but people in the higher steps of that hierarchy the two are not the culprits.

un-supportive work environment and co-workers,

Environment full of non-productive stress,

are also responsible for absenteeism.

Sajjad Ali on April 11, 2016:

Low salary, no fair compensation & low benefits leads to lower performance and high employee retention and vice versa.

Hwaidi on February 15, 2016:

Thanks :)

PRINCESS on December 06, 2015:

its very useful to me, God bless you so much

Nauman Nazir (author) from Pakistan on July 01, 2014:

@Roha Jabeen

I excuse for such a late reply as I was busy in exams for MS (Management Science) which are Alhamdulillah over .


Companies use two systems of pay to evaluate and reward employees

1. performance-based pay: You referred to this system

2. skill-based pay: Based on the level of employees' skills. (De Silva, 1998)

The thesis of this article was that 'compensations and rewards pl,ay very important role in attracting, motivating and retaining employees"

Once your company has attracted brains you will then use several pay systems to compensate them based either on their performances or their skills.

Further Read:

de Silva, Sriyan. “Performance-Related and Skill Based Pay: An Introduction.” International Labor Organization Geneva: 1998.

Roha jabeen on June 19, 2014:

Plz guide me on this point that i mentioned above.....

roha jabeen on June 19, 2014:

it,s useful for me but one point confusing me that why not benefit depend on performance. These should be depend on performance otherwise what criteria left behind to give benefit

Nauman Nazir (author) from Pakistan on May 19, 2014:

Thank u Basit Ali for your commenting. However, comment under that article.

Basit Ali on May 15, 2014:

The linked article "Past performance and future prospects of agriculture of Pakistan" is nicely explained and good analysis and predictive article.

Johne388 on April 29, 2014:

Nice read, I just passed this onto a friend who was doing some research on that. And he actually bought me lunch as I found it for him smile Thus let me rephrase that Thanks for lunch! deeeedbadafa

Nauman Nazir (author) from Pakistan on March 18, 2014:

Thank uyou everyone for your commnt s. I hope you will find my new hub a worthy effor: Here is a link to it

M. Hafeez Ahmed on March 12, 2014:

It is value able definition Compensation and Benefits. I appreciate this effort by NNazir.

chacha nate on March 10, 2014:

thanks for this helpful resource!!it has really helped me

sammy on March 06, 2014:

oooooh i love this material is really great..

I appreciate your help and assistance..Thanks very much

lotty on February 28, 2014:

Am grateful to God for such an opportunity to chance on this write up. I am a level 300 student specializing in HRM. Please educate us more on this topic and also if you could treat something on the advantages and dis advantages on companies who uses hard and soft strategies it will be very helpful to some of us. Wishing u a speedy recovery. God bless u

Nauman Nazir (author) from Pakistan on February 21, 2014:

I appreciate every comment and every person's giving time to read the article.

Thank you

raghaveni on February 17, 2014:

very nice who has written this, this article helpful to me....

So... thanks for representing this kind of information....

thank you....

salma on February 13, 2014:

nice one now everything is clear!

errrrrrrrr on January 16, 2014:

what is the name of the autors?

guy on December 06, 2013:

when was this article written

TWESIGYE GIDION on November 12, 2013:


AFRICANUS on October 18, 2013:


manojthakor on August 08, 2013:

thank u for help to get a useful information

pallone on April 08, 2013:

wonderful .thanks for making my assignment so easy

big ups to you all

may God in heaven grant u more knowledge.

maha on April 02, 2013:

nice meterial. it hepful for my assignment and presentation. Also i am confused about that topic so realy thanful.

mduduzi on March 21, 2013:

in compesation, how the unions affect this function in terms like if an employee is injured on duty or work?

Harshit on March 02, 2013:

It is fantastic & full of knowledge

Harshit on March 02, 2013:

It is fantastic & full of knowledge

cat on December 14, 2012:

thanks for ur info

ghulam dustgeer on December 08, 2012:

by ur this slide management student get a good information thank u very much

ruby on November 05, 2012:

Nice article you have here. btw thanks.

hareg on September 30, 2012:

Really, it is a wonderfull explanation & its gives me more understanding . keep it up & may God bless you.

Aghedo on September 14, 2012:

Good explanation.

Moris on July 12, 2012:

Great Work :)

ayesha on June 28, 2012:

very nice explanation

Syed Asif on June 08, 2012:

Awsm explanation...

Juiciellah on June 05, 2012:

The information is SMART

David bex on May 28, 2012:

I enjoy , gud one!

Ganesh on April 22, 2012:

Really nice info..........thank you

Gifty Amon on April 18, 2012:

it really helped me in ma project work

ariel smith on April 10, 2012:

This page was very helpful, its too short though just as I was enjoying it its finished.

Khadija on March 18, 2012:

Hi, Is anyone here doctoral student in HR?

I need help in making my PhD research proposal.


Nauman Nazir (author) from Pakistan on March 11, 2012:

Muhammad, Enny

Thank you very much for your time and liking the hub

Enny on March 06, 2012:

Your hub were very interesting and the illustration simple and understandable.

Muhammad Tahir on February 21, 2012:

This is really helpful; thanx

Nauman Nazir (author) from Pakistan on February 11, 2012:

Thank you mohmmad sahil for your time and comment.

Yes, I will help you, Inshallah!

I'm an MBA in HRM and Marketing myself.

I will guide you to the door, Inshallah, you will have to walk through it.

Nauman Nazir (author) from Pakistan on February 11, 2012:

Thank you mumtaz khan inqulab for your time.

Nauman Nazir (author) from Pakistan on February 11, 2012:

Thank you for your time Modesta bron

Praise to "Allah! it helped you with your long essay. you are Welcome!

mohmmad sahil on February 11, 2012:

nazir bhai its tooo good / fantastic

i m studying in business administration in final semester my speacialisation is human resource and i have make a report on compensation and reward can please help me..

mumtaz khan inqulabi on January 18, 2012:

very nie shre google thanks

Modesta broni on January 16, 2012:

Useful, very very useful.thanks,it has really helped me with my long essay.thanks

Papun on December 10, 2011:

should sales force compensation be linked with customers feedback? what are the advantages and disadvantages of this approach ?

Nauman Nazir (author) from Pakistan on November 04, 2011:

Rumesa: All praise to Allah! We cannot do anything if Allah doesn't want us to.

You're welcome Rumesa, and thank you for your time & your motivating comment.

Yes, as managers we need to clear our minds about the two concepts.

Today's workplace environment is quickly changing and is very competitive. Employees switch organizations the moment they see a better opportunity. If our company doesn't offer a compensation package as good as our competitors, then undoubtedly we're helping them to make the decision today than tomorrow. And we can't plan great with ambiguous concepts and confused minds.

Nauman Nazir (author) from Pakistan on November 04, 2011:

M IFTIKHAR ALI: Thank you so much for your comment & time.

Nauman Nazir (author) from Pakistan on November 04, 2011:

jing: Thank you very much for your time & comment.

Glad to read there is no ambiguity of thoughts in your mind about compensation & benefits.

Praise only to Allah!

Nauman Nazir (author) from Pakistan on November 03, 2011:

Sadhna: Thank you very much for your time & comment.

I was having a very hard time with writing and my health. I had an accident on July 24, and the result was a femoral neck fracture. Praise to Allah, I'm quickly recovering.

Inshallah, I will continue writing on compensation & benefits.

Nauman Nazir (author) from Pakistan on November 03, 2011:

Opeyemi: Thank you very much for your time and comment. :)

Nauman Nazir (author) from Pakistan on November 03, 2011:


Thank you very much..All praise to Allah...

Rumesa on October 17, 2011:

I cant find your next hub Mr NNazir, "parts of salary"...

Rumesa on October 17, 2011:

Excellent! Even my colleague who attended a whole workshop particularly on this topic got confused while explaining the true difference between compensation and benefits, which you have done it so simply and beautifully, while not complicating or over lapping any part. I never stick to reading an article till the end...but this time I did. :) well done!! and Thankyou for helping confused people like us ... :)

rana on October 14, 2011:

hii , i am doing now a diploma in hrm , and what you explain really helped me alooooooooooooot, really thanks, but please can you also explain performance appraisal and give some example of it i feel that i w can understand it more and i will really be very great full this is my email

M IFTIKHAR ALI on October 12, 2011:

Good Explanation & Information Regarding Compensation Mgt In HRM

jing on September 19, 2011:

hey......very informative.thank u very much u'v just help me clear my ideas regarding compensation and benefits..its actually my report in class this friday...Allah bless

qhim on September 17, 2011:

why that compensation and benefit are important in human resource management?

Sadhna on August 25, 2011:

Tx a lot for sharing this and it was sooooooooo useful for my term paper, highly appriciated if you would able to put moer articales on performance based reward system.....

Tx a million

Opeyemi on July 05, 2011:

Nice write up. Well explained!

Nauman Nazir (author) from Pakistan on July 02, 2011:


Praise for Allah Almighty the article was useful for you for your project.

you're welsome vedha.s!

and thank you very very much for your time :)

Sumitkumar on June 27, 2011:

Very well explained..Wud like to see more articles from ur side...Thanks

vedha.s on June 25, 2011:

simply super i is very much usufull for me to do my project in the topic compensation and benefit thankyou very very much

Nauman Nazir (author) from Pakistan on October 03, 2010:

ma.theresa_lerias - Thank you for your time.

Job Grades: After u've determined (Job Evaluation) the value of all the jobs u group jobs with similar responsibilities and duties. All the jobs form grade structure.

Jobs with higher responsibilities and duties are given higher grades (of coarse, are offered higher pay & benefits)

the grades may be named: OG2, OG3 etc OG2 called an Assist Manager & OG3 a Manager etc. Depends on the company policy.

Example: A company divides all the jobs in seven grades. The Job Resp and Job specification of each grade is different.

Salary Scale: Each grade is associated a salary scale. An Assistant Manager at the State bank of Pakistan is paid between PKR25000 to PKR40000. So how does the company determine how much to pay within the grade? it depends on factor such as experience, technical and other skills.

Hope this'll help u.

ma.theresa_lerias on September 16, 2010:

Hi Sir NNazir,

I would just like to ask if you could possibly differentiate a Salary scale from a job grade... for me to clearly workout on the making of which...

I had really hard time.

thanks so much


Nauman Nazir (author) from Pakistan on September 14, 2010:

Mohammad S. and Anju Mishra -

Thank you v. much but i need u all to help me make it better..and write on things that benefit u professionally as well as personally..

Nauman Nazir (author) from Pakistan on September 14, 2010:

Moses-It's really an honor for me..

Nauman Nazir (author) from Pakistan on September 14, 2010:

thank you, Shashi and ingi yousry for your valuable comments.

I thank Allah u find the article interesting.

ingi yousry on September 04, 2010:

very usefull

i enjoyed

and will read and read


shashi on August 08, 2010:

This interesting topic is very well-versed.that's great.

anju mishra on August 08, 2010:

hi,nnazir it'reaily great thought about compensation , i am impressed.

Mohammad S. on August 02, 2010:

Perfect and very beneficial post Mr. Nazir... I liked it so much...

moses on July 06, 2010:

great work,this article has contributed to completing my course work at postgraduate school

Nauman Nazir (author) from Pakistan on June 21, 2010:

shakthiprasad - Welcome to the community. And thank you v much for your reading the hub.

stars439 - You're Welcome! And Thank you for the compliment...

stars439 from Louisiana, The Magnolia and Pelican State. on June 16, 2010:

Thank You for and interesting hub. GBY

shakthiprasad on June 15, 2010:

Hi Nazir-I have recently signed with hubpages and happened to come across your article on executive compensation trends more relevant.keep up the good work.

Nauman Nazir (author) from Pakistan on April 15, 2010:

Shiva Kumar-You're Welcome...

Thank you for stopping by...

shiva kumar on April 15, 2010:

its helped to me. thank you very much

billyaustindillon on April 14, 2010:

A nice hub - basically it all comes down to showing respect and compassion-share value and you will receive value.

Nauman Nazir (author) from Pakistan on March 26, 2010:

lctodd1947 - Thank u v much...

Linda Todd from Charleston on March 25, 2010:

Very nice information and useful. Thank you for sharing this with us. Good work.

Nauman Nazir (author) from Pakistan on March 23, 2010:

Thank u v much Mr. Zubair Khan...

Zubair Khan on March 22, 2010:

Mr. Nnazir this is a very interesting topic & u explain it really well.

Nauman Nazir (author) from Pakistan on March 16, 2010:

lovelypaper: Thank you v. much & Excellent Comment :)

Renee S from Virginia on March 16, 2010:

Excellent explanation of terms.

Nauman Nazir (author) from Pakistan on March 09, 2010:

G Miah

Thank you v. much

Do expect My next hub 'Parts of Salary' soon, Inshallah.

Gous Ahmed from Muslim Nation on March 07, 2010:

Not bad NNazir, when are you writing more hubs? i wouldn't mind reading more of them!

Nauman Nazir (author) from Pakistan on March 03, 2010:

jomarie - Thank you v. much. These r solely not my facts. I cited the sources from which things were taken.

jomarie on March 01, 2010:

thank you...your facts help me a lot in my research...

Nauman Nazir (author) from Pakistan on February 12, 2010:

Thank you Madiha

madiha on February 12, 2010:

it is very knowledgeable for management sciences students

Nauman Nazir (author) from Pakistan on February 12, 2010:

Thank you very much Asif.

Your comment is very valuable.

ASIF JAMAL on February 12, 2010:

really it knwolegdable for the studnt of MANGNT scince

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