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Importance Of Compensation In Employee Performance

Importance Of Compensation In Employee Performance

|Mar 31, 2021

The salary you receive every month isn’t just a payment for the work you’ve done. It is your compensation based on the value your work has provided to the company. The salary is the reward for your hard work, toil, and contribution towards the company’s betterment.

Whether you are an employee or a boss, proper compensation is important for the company’s growth. When employees are well-paid, they automatically work happily and productively. This also helps companies to improve performance for remote team

Let’s try to understand how compensation affects employee performance.

What Is Compensation?

Compensation is the combo of the salary, wages, incentives, and bonuses an employee receives for the work they do monthly. This amount is usually paid monthly or hourly, depending on the work and the industry. An employee’s salary is determined based on their skills, experience, productivity, contribution, and the value they add to the company.

If you’re a junior-level employee, your initial salary might increase based on your performance. Along with a raise, you can also get promoted to a better position. Your salary will increase accordingly.

What Is Compensation?

Components Of Compensation

An employee’s compensation consists of three main components –

  • Fixed – This is the fixed salary you receive every month for the work done the previous month.
  • Variable – This includes incentives and raises which you receive after fulfilling targets or performing efficiently.
  • Bonuses – This is an amount of money included in your salary once or twice a year as a gift based on the company’s growth. For example, festival allowance.

Types Of Compensation

Based on experience, seniority, and expertise, there are two types of compensation –

  • Executive compensation – This is the salary given to the CEOs, managing directors, board members, chairpersons, and high-ranking officials. An organizational committee decides their payment.
  • Employee compensation – This is the salary paid to all other employees starting from junior level workers to mid-level employees.

What Is A Compensation Strategy?

So, now that you know so much about salaries, you might wonder how an employee gets paid. If you're a new CEO, you must be thinking, "how much should I pay my employees?" or “what will be the right compensation for an employee?” You can answer these questions easily by creating a compensation strategy.

A compensation strategy is a set of rules or guidelines prepared by the big shots of the company regarding payment. It defines the pay position of the company and its current condition in the job market.  A company getting huge clients and entering great partnerships will be able to pay their workers handsomely. On the other hand, a low-performing company won’t be able to do so.

What Is A Compensation Strategy?

This strategy includes pay programs, incentives, non-financial incentives, bonuses, and health benefits for employees. So, this strategy can answer some key questions:

  • How does a company pay its employees compared to other organizations?
  • Does the pay strategy need to be reviewed for some job roles as they are very important for the company’s development?
  • How do employee welfare benefits affect the compensation strategy?

How Important Is Compensation For An Employee’s Performance?

After preparing the compensation strategy, you have to focus on compensations and benefits. You need to understand how compensation affects employee performance. Then, deciding the appropriate compensation will be an easier process.

Employee retention

When you pay your employees well, why will they leave you? Yes, this is true indeed. A company that pays its employees handsomely for their efforts will be able to retain them for a long time. As a company official, you don’t have to hire more employees when your available team is working as hard as they can. This will save you expenses regarding recruitment and employee shortlisting.

If your employees are happy with their salaries, they automatically become more productive and perform better.

Employee retention


Working hard every day can sometimes put you in a rut. It's the motivation that gets you up and running during these times. Thinking about the fat paycheque, you'll receive at the month's end is also great for motivation! Thus, compensation is crucial for keeping employees motivated. It’ll allow them to push past their boundaries and excel in their responsibilities.

This also helps you to motivate your team remotely during this era of hybrid workspaces.


Helps in performance management

When you’re paying employees properly, you will expect certain results. No matter what performance management trend you adopt, salaries will remain the most important factor for evaluating employees. So, if you’ve given someone a raise and they’re still underperforming, you can have a chat with them to make things right.

Job satisfaction

Employees who are paid appropriately for their contributions are likely to be satisfied with their roles. This enhances their efficiency, encourages employee innovation and performance at work. Furthermore, satisfied employees are more loyal to their firms. The company’s revenue increases automatically.

What Are The Other Ways To Improve Employee Performance?

Now, you know how compensation affects employee performance. But you may not know that money may not always enhance an employee’s performance. You also have to provide them benefits, insurance, and a supportive work culture and healthy work environment to be their best self.

Long-term incentives

Apart from incentives for a project, you can give employees options to buy the company’s stock, which will work as long-term incentives.

Long-term incentives

Health and Life Insurance plans

Company-sponsored insurance plans help employees to cover their expenses during an injury or illness.

Retirement benefits

Under this, an amount of money is deducted from an employee’s account and kept in another account. This money is then invested in mutual funds, depending upon the plan. The company also contributes towards this account. After retirement, the entire amount is offered to the employee.


You need to provide sick leaves, vacations, and casual leaves to employees. That'll keep them relaxed and energized for work. 


Expenses for an office tour, relocation, and housing must be provided to employees. Gift coupons and discount vouchers/passes will keep them happy too.


Get new office furniture

Be it an ergonomic office chair or an adjustable standing desk; upgrading modern office furniture can brighten up every employee’s mood.

Summing Up

To run a successful company, you have to understand the importance of compensation and benefits. For getting the most out of your employees, you have to provide them a competitive salary, perks, benefits, and a comfortable office atmosphere. If you need to place a bulk office furniture order, then do it. Happy employees make happy (successful) bosses! 

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