Meaning: - compensation refers to the money and other benefits given to an employee for his services to the organization.
Definition: -“Compensation includes direct cash payment, indirect payments in the form of employee benefits and incentives to motivate employees to strive for higher levels of productivity.”  ………Defined by………….. (Wayne Cascio)

1.            Salaries and Wages: -Wage or salary is an important element in the compensation plan. Wage is the remuneration paid to blue-collar or factory workers and salary is the remuneration paid to white-collar or office employees including management employees. Wages and salaries are normally paid at fixed intervals of time, preferably monthly. The wages and salaries depend on several factors such as: 1. Value of the employee to the organization. 2. Ability to pay by the employer. 3. Skills of the employee. 4. Cost of living. Market rates. 5. Minimum wages fixed by Govt. and so on.

2.            Bonus: - it refers to extra payment over and above salary given to an employee as an incentive. The employees must be given adequate rate of bonus. Normally bonus is paid once in a year. Bonus does motivate the employees to a certain extent to perform better.

3.            Incentives: - The organization may provide additional payment to the employees apart from wages and bonus. The incentives are normally linked to increase in productivity. The incentives may be given on individual basis especially at management level and on group basis.

4.            Special Incentives: - The Company may provide special individual incentives. Such incentives are to be given to deserving employees for giving valuable suggestions, or for special efforts on the part of the employees.

5.            Fringe Benefits: -Permanent or long term employees get extra incentives in the form of fringe benefits. The fringe benefits normally include vacation pay, insurance, pension, provident fund and gratuity. Fringe benefits may also include canteen facilities, transport facilities, recreation, etc.

6.            Perquisites: - Perquisites are the incentives, which are normally paid to management employees. The purpose of perquisites is to perk up the performance of the managers. These include club membership, company car, paid holiday and so on.

7.            Gain Sharing: - A gain sharing plan establishes a historical base period of organizational performance, measures improvements and shares the gains with employees on the basis of some formula. The company focuses on areas like inventory levels, labour hours per unit of product, usage of materials and supplies and quality of finished goods.

8.            Retention Bonus: - Management may resort to retention bonus to retain competent employees. Nowadays, retention bonus is used at all levels in the organization. The need for retention bonus arises when employees think of quitting the job due to organizational changes on account of merger, acquisition and such other corporate changes.

9.            Employee Stock Option Scheme Plan: -Under this scheme company offers certain shares from the new issue to the whole time directors, officers or employees of the company. The company offers the shares at a pre-determined price which is usually less than the price offered to general public. The ESOS must be approved by passing a special resolution in the general meeting. This scheme is open to all permanent employees. However, the option granted to employee is non-transferable

10.          Profit Sharing: - Profit sharing is a system that distributes to employees some portion of the profits of business either immediately or deferred until later profit sharing is based on the mutual interest of both employee and employer. Here the employee becomes interested in the economic success of the company because he stands to gain from it. This fosters team-work.