What is Compensation? Definition, Types, and Purpose

what is compensation

Most of you should have heard at least once the term compensation. Apparently, those terms are often used in the business industry. But what is the definition actually?

The term is known as a reward that is given to the employees by the company. But if you wonder about the concept of compensation and what are the types of it, here Clockster has summarized the information for you.

What is Compensation?

In some cases, compensation can be interpreted as expenses. However, in a business, this term refers to the remuneration given by a company to an employee.

Speaking about the definition, every company has its own regulations on how to implement this. It can also be referred to as a kind of appreciation in exchange for the employee’s contribution or achievement to the company. Compensations could be in a number of different forms, such as money and goods.

In addition to that, this could also be an indicator to imply a company’s image. A company that has a good compensation regulation could help the business to compete and flourish in their targeted markets.

Compensation According to Experts

What do experts say about compensation? Some economic experts have shared their opinion over the concept of this term. Here are some of them.

  • Hamali (2018) explains that this is one of the important elements in a company to manage the Human Resources in a company. It comprises several principles such as allowance, promotions, structure, and compensation scale.
  • Nurcahyo (2015) defines it as a return to an employee’s services that has fulfilled the company’s target and goals. – Wibowo (2011) describes compensation as an appreciation for the employee’s contribution to the company in exchange for work performed.

The Purpose

Compensation is an effort to give appreciation to employees over the hard work they have given to achieve the company’s goals. In addition to that, this remuneration also has several other purposes for making a business run well.

Not only that it will bring benefits for the company but also it has huge impacts for the employee itself. Here are some of the answers.

Motivate Workers to Work Better

Receiving good feedback or appreciation is the nature of human beings, such as verbal compliments or any forms of gifts. In line with that, it can provide employees with a sense of satisfaction that their hard work is appreciated. As such, it would also motivate them to perform better.

Employees as Essential Company’s Asset

Aside from giving appreciation, this also functions to retain potential employees as the company’s asset. This cannot just be given to everyone in a company or anyone as there are certain terms and conditions for one to achieve it.

Outstanding employees will be beneficial to achieve the company’s growth. With that being said, an organization that realizes the importance of this will provide a well-managed compensation plan to give reward for their selected employees.

Complying with Company Legality Regulations

Some of you might think that it is the company’s obligation to their employees. In fact, in Indonesia, compensation is mentioned in the government regulations that should be complied by a company.

The regulation is explained in Labor Law No.13 the Year 2003, which states that a company must provide adequate compensation for their employees.

Types of Compensation

As mentioned before, it is a way to appreciate employees in exchange for their contributions to the company. It could be in the form of anything, such as a compliment, goods or money. For a full explanation, keep reading about the types below.

Non-Financial Compensation

Sometimes, it is not all about money, and it is known as non-financial compensation. Instead of money, a company usually gives its employees a chance to handle company’s activities, courses for skill development, and others.

Direct Compensation

Unlike the previous one, this is a reward in the form of numbers. For instance, basic salary, allowance, and other benefits that the workers deserve based on their performance.

Indirect Compensation

Last but not least, we also have indirect compensation. It is about facilitating the employees with work space, proper building, etc.

The Example of Implementing Compensation in a Company

All in all, compensation is something that a company should provide for the employees to appreciate their work. It is believed that the implementation of it will affect the company’s growth. Therefore, it is important to assure that the implementation is going well.

To help you picture the whole implementation of compensation in a company, check the following illustration.

Graphic Designer

‘A’ is a worker in a media agency that is assigned to design the business’ social media. Before the deadline, ‘A’ manages to submit the design and receives a good result. Here, the compensation that the company can give to ‘A’ is whether bonus payment or a better facility to improve his skills.

Now we know what it is. It is a concept of appreciation from the company for the employee. Bear in mind that the kind of appreciation that one receives would be different from the others.

Let’s start managing the implementation of compensation and other related things easily through the Clockster HR application.

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