Effect of Compensation on Employee Behavior

Compensation refers to the monetary reward given to an employee in return for their services or specific contributions to your business. In layman's terms, compensation is the money an employee earns from his or her employer in the form of a paycheck or wages. In this essay we will discuss about advantages and disadvantages of compensation and how it affects the behavior of employees.

Human resource management defines compensation in these words “employee compensation refers to all forms of remuneration to workers and arising from their employment”. The term “all types of remuneration” in the definition does not refer to non-monetary benefits, but rather to all forms of direct and indirect monetary compensation.

There are many advantages of compensation. Some of them are:

  1. Employee remuneration should be supported.
  2. Increase employee productivity and performance.
  3. Increased employee interest.
  4. Employee fatigue is reduced.
  5. Improve employee morale.
  6. Establish a strong brand picture.
  7. Act as a source of inspiration.
  8. Makes an effect on employee wellbeing and satisfaction.
  9. Maintain quality.


Like advantages compensation has also some disadvantages, which are:

  1. In the workplace, there is an unhealthy degree of competition among employees.
  2. Not tempting enough for workers.
  3. Motivation of employee may not be as per expectation.
  4. Does not contribute to the production of quality.
  5. Work feels insecure in this system.
  6. Financial rewards are some time small and can demoralize sometime if not earned.
  7. Non-financial incentive can be taken as for granted and may also be inappropriate.
  8. Does not differentiate between efficient and inefficient worker.
  9. Requires continuous supervision.


A compensation plan does not always indicate monetary compensation. Flexible insurance, medical care, work-life balance, and employee bonuses are also included. Employees today not only work for the money, but they also appreciate other facets of compensation. A decent remuneration plan guarantees retention - is an essential consideration. A compelling incentive package aids in lowering the company's turnover rate. Employees would be more likely to stay in their employers, which would save money on potential unemployment costs. Also it guarantees inspiration as compensation is the most important motivator for workers to keep pushing themselves to achieve greater heights. It gives them an incentive to keep working hard and pushing on to the next goal.

Employee morale and productivity, on the other hand, may be seriously harmed in the absence of a competitive compensation plan. It can be due to low job satisfaction as employees will feel undervalued and will be dissatisfied with their work. This can trigger disappointment among colleagues and a decline in workplace morale. Also due to low productivity as it is caused by inadequate wages. Employees are less inspired to aspire for success.

Employees are incentivized to cast their sights away from their current job if the incentive versus effort ratio is poor. Employee turnover costs a lot of money to a business (retraining, relocating and time wasted).

Other than money, there are five main factors that will inspire your employees.

  1. Working in a supportive company culture.
  2. Feeling a sense of meaning and intent in their work.
  3. Being praised for their efforts in the workplace
  4. Possibilities for learning and growth.
  5. A clear path for career development


To summarize, compensation packages, according to reports, have a significant effect on an employee's level of commitment. Employees are more happy with their jobs when they are paid well, which motivates them to work harder (especially when compensation is directly related to job performance). Low pay, on the other hand, has been shown in studies to stifle employee morale and success. Compensation has a positive impact on workers as it give work fulfillment, retention as an essential consideration, recruitment in the future and productivity at work.

07 July 2022
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