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April 16, 2010
Compensation 101: Compensation Definition and Objectives

Compensation is something a lot of people take for granted. It is a major tool of an organization because it helps attract and retain and motivate employees. In a BLR webinar titled "Compensation 101: Essential Secrets and Strategies for HR Professionals," Paul R. Dorf discussed the various components of compensation.

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Compensation has a lot of objectives to accomplish. It can meet specific business objectives and goals. Generally speaking, compensation is a reward for time, skills, effort, and/or knowledge. Basic compensation includes two main components: fixed and variable pay.

Fixed compensation includes base salary, hourly wages and draws. It is very much driven by the competitive marketplace. Variable compensation includes bonuses, incentives and commissions. It varies based on performance or other aspects within the organization.

Dorf outlined some other terms related to compensation which are important to know:

Total Cash Compensation (TCC) is the total of fixed and variable components.

Total Direct Compensation (TDC) is the value of fixed, variable and long-term incentives.

Total Compensation Package (TCP) is the value of fixed, variable, long-term incentives and benefits.

There are four basic objectives of compensation: focusing your employees efforts, attracting quality employees, retaining top performers, and motivating your employees. These objectives can be referred to with the acronym FARM: focus, attract, retain, motivate.

Focus. You can encourage performance on specific objectives by compensating the behaviors you desire.

Attract. If you don't pay a competitive wage, it puts the company at a disadvantage to hire on the open market.

Retain. Low turnover is a goal. You want to keep your top performers.

Motivate. Fair compensation encourages good performance. Though money is not the biggest motivator, it can become a problem if it is too low.

Paul Dorf is the Managing Director of Compensation Resources, Inc. (CRI). CRI ( specializes in providing comprehensive Compensation and Human Resource consulting services. Dorf is responsible for directing consulting services in all areas of executive compensation, short and long term incentives, sales compensation, performance management programs, and salary admin programs.

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