Compensation Elements

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Compensation Elements


Compensation is referred to the act of providing a person with money or other things of economic value in exchange his services, or to provide for the costs of injuries that they have incurred. Employee compensation can be referred to all forms of pay going to employees and arising from their employment. Compensation includes:

Direct financial compensation

Direct financial compensation consists of pay received in the form of wages, salaries, bonuses and commissions provided at regular and consistent intervals.

Indirect financial compensation

Indirect financial compensation includes all financial rewards that are not included in direct compensation and understood to form part of the social contract between the employer and employee such as benefits, leaves, retirement plans, education, and employee services

Non-financial compensation

Non-financial compensation is referred to topics such as career development and advancement opportunities, opportunities for recognition, as well as work environment and conditions.

Compensation Plan

An “employee compensation plan” collectively refers to all the components in addition to the manner in which the compensation is paid and for what purpose employees receive case bonuses, salary increases and incentives.


  • Recruit & retain qualified employees
  • Increase or maintain morale
  • Determine basic wage & salary
  • The reward for job performance
  • Increase job satisfaction and employee motivation
  • Control absenteeism and turn over

Compensation Plans

  • Develop a program outline.
  • Set an objective for the program.
  • Establish target dates for implementation and completion.
  • Determine a budget.
  • Designate an individual to oversee designing the compensation program.
  • Determine whether this position will be permanent or temporary.
  • Determine who will oversee the program once it is established.
  • Determine the cost of going outside versus looking inside.
  • Determine the cost of a consultant’s review.
  • Compensation is perceived by employees as fair if based on systematic components. Various compensation systems have developed to determine the value of positions. These systems utilize many similar components including job descriptions, salary ranges/structures, and written procedures


The components of a compensation Plan include:

Job Descriptions

 A critical component of compensation plans, 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:

  1. Ranking
  2. Classification
  3. Factor Comparison
  4. 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 pre-determined 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.

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 including: dental, insurance, medical, vacation, leaves, retirement, taxes…

What are regulations affecting compensation?

The Fair Labor Standard Act establishes minimum wage, overtime pay, recordkeeping, and youth employment standards affecting employees in the private sector and in Federal, State, and local governments. Covered nonexempt workers are entitled to a minimum wage of not less than $7.25 per hour effective July 24, 2009.

Monitor the program.

Monitor feedback from managers.

Make changes where necessary.

Find flaws or problems in the program and adjust or modify where necessary.



Joe Flynn is a Silicon Valley Entrepreneur who created Lavante, Inc. Lavante was started with the vision using Machine Learning, Natural Language Processing and advanced Data Extraction techniques to transform the traditionally manual-based Account Payable Recovery industry. Lavante Was acquired by PRGX Inc. in November 2017. Joe is currently working on a new venture using Artificial Intelligence and Machine learning to transform trade partner communications across the entire supply chain.