- An organization designs and implements a compensation system to focus worker attention on the specific efforts the organization considers necessary to achieve its desired goals. However, if rewards are to be useful in stimulating the desired behavior, they must also meet the demands of employees whose behavior their intended to influence.

Thus, poor compensation management practices can have negative effects on performance. The compensation system of an organization includes anything that an employee may value and desire that the employer is willing and able to offer in exchange. This includes compensation and non-compensation components.

Many employees consider base pay to be the most important part of the compensation program, and it's therefore a major factor in their decision to accept or decline a job. Wages are paid on an hourly basis, whereas salary is based on a time period, like a week, a month, or a year. A salary is paid regardless of the number of hours worked.

Variable pay, or incentive pay, is pay for performance. And it commonly includes items such as piecework in production and commissioned sales. Benefits are indirect compensation that provides something of value to an employee. Common benefits include things like health insurance and long term or short term disability or life insurance and retirement savings options.

The first three compensation components-- base pay and add-ons and incentive pay-- are known as direct compensation. For profit businesses, we want to design a mix of compensation and non-compensation components that provide us with the best productivity return for the money we spend.