Compensation can be described as a systematic approach to providing monetary value to employees in exchange for work performed. Employee compensation may achieve several purposes in recruitment, job-performance and job satisfaction. It can be defined as all the rewards earned by employees in return for their labor. We have to say that сompensation is divided into direct and indirect components. First type is direct compensation: it consists of pay received in the form of salaries, bonuses and commissions provided as regular and consistent intervals. The second type is indirect compensation, it includes all financial rewards that are not included in direct compensation and can be added to form part of the social contract between the employer and employee for example benefits, leaves, retirement plans, education, and employee services. While non-financial compensation can be referred to topics for example career development and opportunities, recognition, as well as work environment and conditions. In determining effective rewards, the uniqueness of each employee must also be considered. All people have different reasons for work. The most appropriate compensation will meet these individual needs, fair compensation is in the mind of the employees.
Compensation can be described as a motivational tool. It can be said to be the reward for a task performed. It plays a key role in job performance. The effect of compensation can be negative if monetary compensation and finding benefits inadequately satisfy the worker. On the other hand, monetary compensation, as strong motivators, includes recognition and promotion which controls the workers morale. Away from basic salaries and wages other monetary compensations employed for employers include bonuses. Compensation cannot directly improve employee performance, but is able to increase his motivation and strengthen organizational commitment. Motivation gives a strong effect on relationship between compensation and employee performance. A strong compensation structure could limit the efficiency because employees expect a fixed comp. irrespective of job input. Company vacation, insurance, housing allowance, transportation allowance and meals end also year and bonuses can be strong sources of motivation. Employer help to achieve his company's goals through performing assigned jobs, while employee seek motivation to meet the design lied goals in which the country is able to help them by setting attainable conditions and measures. A well thought and fair compensation system aligned with success in fulfilling the designated goals is the basis of social peace in the company and surely motivates employers to deliver the required performance. But attention should also be paid to nonfinancial motivational tools. The harder it is to define and grasp these tools the more significant a role they play in motivating employees.
So, good compensation strategy should include a balance between internal equity and external competitiveness. For sure, compensation and benefits affect the productivity and happiness of employees, and the ability of organization to effectively realize its objectives as well. It is an advantage to ensure that employees are creatively compensated and knowledgeable of their benefits. The role of compensation system will have positive impact on the efficiency and results produced by employees.