Direct and Indirect Compensation in Organizations - Coursework Example

?Contents Contents Introduction: 2 Direct and Indirect Compensation 4 Adding More Direct Compensation 6 Employee Advantages 8 Facts about Benefits 9 Some Benefits at a Glance 10 Conclusion 13 Works Cited 14 Bibliography 15 Journals 17 Client’s Name: Course: 27 November 2012 Introduction: Appropriate compensation must be provided to the employees in order to retain them, the productivity of an organization increases when experienced employees work in unison. Direct compensation is different from indirect compensation, the salary paid to the employees is direct compensation, indirect compensation includes perks like giving an employee a car once he reaches a certain level, indirect compensation can motivate employees and can hence improve their productivity. Employees who aspire for status will work hard towards getting the company car and this will be very beneficial for the organization. This paper will comprehensively analyze whether a company should add direct compensation or not when employees undervalue the cost of benefits. “Employee benefits typically refers to retirement plans, health life insurance, life insurance, disability insurance, vacation, employee stock ownership plans, etc. Benefits are increasingly expensive for businesses to provide to employees, so the range and options of benefits are changing rapidly to include, for example, flexible benefit plans.” (Direct and Indirect Compensation) Maternity leave, vacation pay and holiday pay are some of the best examples of benefits, there are two types of benefits namely tangible benefits and intangible benefits, the above examples are all tangible benefits, some of the intangible benefits include appreciation, working in a good working environment, likelihood of promotion and so on. Employees crave for fringe benefits, fringe benefits mainly refer to tangible benefits, tangible benefits are generally believed to be better than intangible benefits. Compensation is much different from benefits, compensation could be wages, salary or tips paid to employees for their services to an organization. Base pay and variable pay are the two most important factors on which the compensation is decided. Base pay depends on the role of an employee in an organization, the expertise required to conduct that particular role also plays an important part. Variable pay mainly depends on the performance of an employee in his role, when an employee performs well, he is rewarded with incentive pay and bonus pay come the end of the year, and this is a fine example of variable pay. Benefits play a pivotal role in retaining employees; benefits can also increase the job satisfaction amongst employees. Employees start working harder in order to get these benefits that an organization offers, this increases the overall productivity of the organization and the goals are easily achieved. “Employee benefits are an important part of any company’s offering to their prospective or existing staff. There can be numerous advantages to establishing an employee benefits scheme, not only for the employee, who can receive useful non-cash benefits in addition to, or in place of, part of their salary, but also for employers, who can bulk out their salary offering with additional benefits to their staff.” (Advantages of Benefits) Direct and Indirect Compensation It is very important to understand the difference between direct and indirect compensation, many employees fail to value indirect compensation and as a result of which quit an organization. Direct compensation is the salary or the wages given to the employees, indirect compensation refers to the non-monetary benefits provided to the employees, facilities like hospitalization, overtime policy and so on fall under non-monetary benefits. Here is a diagram which would throw more light upon the same. Indirect-Compensation (2011) “Today the compensation systems are designed aligned to the business goals and strategies. The employees are expected to work and take their own decisions. Authority is being delegated. Employees feel secured and valued in the organization. Organizations offer monetary and non-monetary benefits to attract and retain the best talents in the competitive environment. Some of the benefits are special allowances like mobile, company’s vehicle; House rent allowances; statutory leaves, etc.” (Indirect-Compensation) Direct compensation is all about the monetary benefits offered to employees, it is determined on basic salary and the role of an employee in an organization. Important factors like house rent allowance, conveyance, leave travel allowance, bonus and special allowance are included under direct compensation. Here is a diagram which will throw light upon direct compensation and what is normally included under it. Direct Compensation (2011) The benefits are many times undervalued by employees, a company car is a big luxury, an organization paying the mobile bills for an employee is again a big luxury, certain benefits are very useful but undervalued time and time again by the employees. Adding More Direct Compensation Adding more direct compensation would greatly affect the loyalty of employees, this will have adverse effects on their performance. It is ideal to have a total compensation package in place, a total compensation package includes direct compensation, indirect-compensation and psychological compensation. It is very important to consistently motivate the employees and this is where psychological satisfaction comes into play. Direct compensation directly affects the employees psychologically; it either gives them a psychological boost or brings them down purely depending on the amount they are drawing each month. A total compensation package never ignores the importance of direct and indirect compensation, ignoring either can greatly affect the employees. Direct and indirect compensation are both equally important, some employees might only want direct compensation but the organization should never greatly focus on direct compensation, indirect-compensation is also equally important. A well designed compensation program is a must for every organization, even an organization where only a handful of employees work should have a well designed compensation program, it should be fair and it should compensate the employees to improve their overall job satisfaction. Job satisfaction and compensation are very closely related concepts. An organization with inadequate compensation system would succeed in recruiting employees but most of the employees will leave after a certain period of time, employee retention becomes an arduous task for organizations with an inadequate compensation system. Designing an adequate compensation system is a very big challenge and finding the right mix is an even bigger challenge. Direct and indirect-compensation should be equally important in a compensation system. The profits increase when employees are retained, a well drilled group of employees will obviously perform much better than new recruits who will take their time to learn what is expected of them. Motivation is out of the question when a formal compensation system is not in place, the productivity becomes much less when a bunch of unmotivated employees work, no organization would want that to happen, it will directly affect their profit. Employees consistently ask questions like “why did I get only 5% raise this year.”? “Why am I not being promoted.”? And many more, a formal compensation system sets all these questions right and also strikes a balance between direct and indirect-compensation. The bargaining power of the employees has increased over the last decade, this means that the pressure on organizations is even more these days. Both direct and indirect-compensation has increased a lot in the last 10 years. The increase in bargaining power has pushed organizations to develop a better compensation plan. Every organization aims at employee retention because it maximizes profits and decreases the cost, but with an imbalanced compensation system employee retention is implausible. It is extremely important to strike the right balance between direct and indirect-compensation to facilitate satisfaction amongst the employees. Employee Advantages “Some of the advantages of accepting a benefits scheme for an employee are obvious. In the first instance, if the benefits are attractive then you will have access to useful offerings such as a pension scheme or company car, without having to make these arrangements yourself. This is of particular use for utilities such as mobile phones, which can be provided as a non-cash benefit by an employer. Furthermore, if some of the activities or utilities that you would be paying for anyway are available as benefits, you will have a clearer idea of your cash flow situation and will not have to set money aside for these things.” (Advantages of Benefits) Benefits play a crucial role in motivating the employees, an ordinary employee will work his socks off to reach a level which provides many benefits, for instance many employees might work in unison to get promotion and with it the company car, this works wonders for the productivity of the organization. On the other hand, if the employees get only direct compensation, they will sit back and this will greatly affect their loyalty and productivity. Non-productive employees are no assets for an organization, they become liability and the easiest way of turning them into liabilities is to alter the compensation package and to add more direct compensation instead of indirect-compensation. “Finally, tax advantages are extended to employees as well as employers. Through cooperation with your employer, you should be able to negotiate a benefits package that provides a tax advantage; for example, if your employer pays for your mobile phone, this is treated as a non-taxable benefit. Sundries such as this can represent a significant tax saving over the course of a year. As an employee, it is important to remember that you may be pressured into accepting a salary sacrifice arrangement. You should only agree to this if the benefits being offered are useful, and you are happy with the price at which they are being offered (that is, the portion of your salary that you are giving up in return for the benefits).” (Advantages of Benefits) Facts about Benefits Benefits are mainly to motivate employees and to get the best out of them; here are some facts about benefits which must be taken into account by every manager. It is important to fund mandated programs There is no evidence that benefits motivate the employees, no study or research has been undertaken to prove the same so it is safe to assume that benefits play a very little role in motivating the employees It is a fact that almost all the employees view benefits and services as entitlement Most employees are not aware of the benefits and this is why they majorly undervalue it. It is the duty of every manager to ensure that all the employees know about these benefits, ignorance is bliss but in this particular case it is not bliss, it can cost an organization very dear. Employees would keep their noses to the grindstone should they know about these benefits but without knowing about them it is unfair to expect them to deliver the goods. Motivating the employees has become very difficult these days, telling them about the benefits can easy motivate them and they would not even ask for more direct compensation when they get to know about the benefits offered by the organization. Communication in an organization is very important, this important message must be communicated to all the employees and their productivity is ought to improve upon knowing about these benefits. Some Benefits at a Glance Different organizations offer different benefits to employees, some of the most important benefits are as follows: Paid Vacation: Imagine working for 6 days a week, 12 hours every day, it is implausible to continuously work for that long. The productivity is ought to take a hit, paid vacation did not exist earlier but it has been introduced to reward employees who deliver results and who overachieve in an organization. Paid holiday is another very popular benefit offered by numerous organizations, full-time employees are offered over 10 holidays, some of the most popular ones are Christmas, New Years’ day, Labor Day and so on. Private Pension Private pension is relatively a new concept and it is offered to employees who remain with an organization for long and deliver results consistently, it is quite a task to perform day in, day out but life is a joy for those who manage to do it on a daily basis. Stock Ownership Plans: Stock ownership plans is perhaps the easiest way of making the employees work harder, when they purchase the stocks of the company, they become partners of the company and if they don’t work hard the value of the stock will fall when the results of the organization is declared so they have to work hard to take the organization to the next level in order to earn more money both in terms of salary and through company stock. Organizations buy the stock back at a fixed price if the stock is underperforming to share the losses of employees, it is a good way of ensuring that the employees work really hard to achieve the desired goals set by the organization. Education Programs: There are several organizations that support their employees to pursue higher education to enhance their skills and productivity, this is a huge benefit and several employees make the most of this benefit. Organizations pay a huge chunk of the fees for the employees to make them more qualified and much better then what they were earlier. Child Care: Several parents fail to show up at work because they have to take care of their child, this has hampered the growth of several employers and to avoid this organizations have introduced child care plan under which experts have been recruited to take care of the children so that the employees don’t cite this as a reason to fail to show up at work. Other Benefits: Life insurance, healthcare, disability insurance are some of the other benefits that organizations offer to their employees, these benefits have a lot of value but some employees fail to understand its value and insist on getting more direct compensation. Conclusion The paper shed light upon direct and indirect compensation, it is an open secret that employees have stopped valuing benefits, they would rather take home more direct compensation than have benefits in an organization but it does not mean that the organization should increase more direct compensation. Doing so would surely hamper the productivity of employees and it will have ramifications on the balance sheet of the organization. It has also been discussed that several employees are unaware of these benefits and this is why they undervalue it, to solve this it is very important to communicate well to the employees, group meetings can be organized by the managers and these benefits should be discussed with the employees to motivate them, stock ownership plan is an excellent way of motivating the employees, when they become partners of the organization they will automatically work much harder than ever to earn more money. These are some ways to enhance the performance of employees but at no cost should an organization offer more direct compensation to the employees, it will never work and it will hamper the growth of the organization rather than making things better. Works Cited Advantages of Benefits (2011). Human Resources http://en.allexperts.com/q/Human-Resources-2866/2011/3/Direct-Indirect-compensation.htm (Accessed on 27 November 2012) Direct and Indirect Compensation (2011). Human Resources http://en.allexperts.com/q/Human-Resources-2866/2011/3/Direct-Indirect-compensation.htm (Accessed on 27 November 2012) Direct Compensation (2011). Pay Roll http://payroll.naukrihub.com/compensation/direct-compensation.html (Accessed on 27 November 2012) Indirect-Compensation (2011). Pay Roll http://payroll.naukrihub.com/compensation/indirect-compensation.html (Accessed on 27 November 2012) Bibliography Armstrong, M. 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