Components of 

Compensation Management – belt, etc. where houses are not available at a

Basic Wage, Dearness Allowance, House Rent reasonable rent.
Allowance, Other Allowances, Incentives and
Fringe Benefits If the employees are required to pay house
rent as per the prevailing market rates, a
Employee compensation is one of the most substantial portion of their wages will go as
strategic and important functions of human house rent and the employees will not be left
resource management. It continues to evolve with sufficient money to meet their other
as part of a system of all the combined requirements.
rewards that employers offer to employees.
Compensation is considered as part of a total Component # 4. Other Allowances:
rewards system which mainly includes basic
wage, dearness allowance, house rent Apart from the basic, dearness allowance,
allowance, other allowances, incentives and many other allowances are paid to employees
fringe benefits. to compensate them adequately so that the
total package of remuneration provides them
Component # 1. Basic Wage: suitable compensation package.

Basic wage is fixed on the basis of weightage Component # 5. Incentives:

given to jobs in an organizational context at
various levels on the basis of skills, efforts, Incentive compensation is performance-
qualifications, etc. which are required to linked remuneration paid with the aim to
perform those jobs. Determination of encourage employees to work more and
weightage given to each job is done on the perform better. Both individual incentives
basis of studies carried out by industrial and group incentives are used. Bonus, profit-
engineers along with other experts. Practices sharing, commissions on sales are some
prevailing in other similar organizations are examples of incentive compensation.
also taken into consideration.
Component # 6. Fringe Benefits/Perquisites:
Component # 2. Dearness Allowance:
Different types of benefits are paid
Employees are employed with a particular particularly to senior managers. Provident
wage or salary rate. In due course of time due funds, pensions, gratuity, encashment of
to price increase, the real income of earned leave, company house, company car,
employees goes down. It means with the leave travel concession (LTC), medical aid,
same level of wages employees are unable to interest free loan, holiday homes,
buy goods and services, which they were able entertainment, stock options, etc. are
to buy before increase in prices. Dearness examples of such benefits.
allowance is paid to employees by way of
compensating them for the loss of real
income caused to them by increase in the
cost of living due to increase in prices.

Component # 3. House Rent Allowance:

Organizations are set up in various types of

locations such as urban centres; industrial
Components of Compensation Management – employee’s performance but group incentive
Wages and Salary, Incentives, Fringe Benefits, scheme is applicable to a group of workers
Perquisites and Non-Monetary Benefits who are required to complete collectively a
given work in a given time. The incentive
Components of compensation means amount paid to the group is divided among
components of remuneration to employees. the group members on equitable basis.
An average employees in the organized
sector is usually entitled to various benefits. 3. Fringe Benefits:
These benefits include both financial and
non-financial benefits. Specifically, the Fringe benefits which are given to employee
components of remuneration to an include such benefits as provident fund,
employee’s comprise wages or salaries, gratuity, medical care, hospital allowance,
incentives, fringe benefits, perquisites and accident relief, health insurance, canteen
non-monetary benefits. benefits, recreation, leave-travel allowance,
etc.
1. Wages and Salary:
4. Perquisites:
Wages and salary are generally paid on
monthly basis, though many times, wages are Perquisites are the allowances given
paid on hourly or daily basis, whereas in the executives and other higher level officers.
case of salary, the number of hours worked is They include such allowances as company
not at all considered. Wages and salary are car, club membership, paid holidays,
subject to annual increments. They differ furnished residential bungalows, stock option
from job to job, depending upon the nature schemes, foreign travel benefits etc.
of the job.
5. Non-Monetary Benefits:
They also differ from employee to employee
depending upon the nature of the job, Non-monetary benefits include such benefits
seniority and merit. However, employees which are given in kind and not in terms of
working in the same job such as teachers, money. They include such benefits as
clerks, etc. get the same salary but wages recognition of merit, issue of merit
may differ from employee to employee when certificates, job responsibilities, growth
number of hours worked also differs. prospects, competent supervision,
comfortable working conditions, job-sharing,
2. Incentives: flexi-time etc.

Incentives which are also called ‘payments by

results’ are paid to the employees in addition
to wages and salaries. Incentives depend
upon productivity or efficiency of the
workers, sales effected, profit earned or cost
reduction efforts.

Incentives schemes may be classified as – (i)

individual incentive schemes and (ii) group
incentive schemes. Individual incentive
scheme is applicable to specific individual
The Compensation Plan of living and personal development. These
include protection programs such as insurances,
The Compensation Plan (CP) under RA No. 6758
paid leaves, perquisites and training programs.
is an orderly scheme for determining rates of
compensation of government personnel. It was
crafted to attract, motivate and retain good and
SIGNIFICANCE OF WAGES
qualified people to accomplish the Philippine
Government’s mission and mandates, to Minimum wage rates are determined by factors
encourage personal and career growth, and to such as poverty threshold, prevailing wage rates
reward good performance and length of service. as determined by the Labor Force Survey, and
To achieve these goals, the CP has a mix of socio-economic indicators (i.e. inflation,
compensation components, namely; basic pay employment figures, Gross Regional Domestic
or salaries, fringe benefits, incentives and non- Product, among others), which insures better
financial rewards which provide reasonable workers protection.
levels of compensation packages within existing
government resources, and are administered Wages play a major role in the economy by
equitably and fairly. giving workers spending power. This refers not
only to the money workers earn that they spend
3.2 Concepts of Compensation on necessities, but also the money they save or
use in the short term for consumer goods,
3.2.1 Total Compensation – This represents all
recreation, travel and investing.
financial and nonfinancial rewards and
entitlements arising from employment
relationship.

3.2.2 Intrinsic Rewards - These are derived

from the work environment, which are valued
internally by an individual, like quality of
worklife, job satisfaction, challenge, personal
and professional growth opportunities, feeling
of belonging, freedom to act, visionary
leadership, and the like.

3.2.3 Extrinsic Rewards/Entitlements – These

comprise all compensation benefits, both
monetary and non-monetary, and received
directly or indirectly by the employee.

3.2.4 Direct Compensation - These are cash

compensation items which are either fixed or
variable and are paid to an employee for the
performance of work. These include basic pay,
cash allowances and fringe benefits.

3.2.5 Indirect Compensation - These are usually

non-cash or in-kind benefit items that
contribute to the employee’s welfare, standard