(a). The term ‘Compensation’ refers to all forms of financial and non-financial benefits that an employee receives as part of an employment relationship.

(b). An effective compensation system typically has the following characteristics:

(i) It enables an organisation to attract and retain qualified, competent workers.

(ii) It motivates employee performance, fosters a feeling of equity, and provides direction to their efforts.

(iii) It supports, communicates, and reinforces an organisation’s culture, values, and competitive strategy.

(iv) Its cost structure reflects the organisation’s ability to pay.

(c). (i) Direct compensation is used to describe the cash received in the form of basic salary, overtime pay, bonuses, sales commissions, etc.
Direct compensation is divided into two components:

• The wage and salary programme, and
• Pay that is contingent on performance (merit increases, bonuses, commissions, etc.)

(ii) Indirect compensation refers to services, incentives or facilities which accrue to workers in addition to their usual wages and salaries. Apart from the direct benefits from employment employees enjoy other benefits usually referred to as welfare services. This include membership of sports and other clubs, etc.