An incentive can be defined as any factor, that can be financial or non financial that accounts for preference or stimulates/enables a specific course of action. It can as well be said to be the bonus paid on successful achievement of performance objectives. Compensation is the art of offering/giving money or something else, which can easily convert to money, for purposes of paying for work done. In general, compensation and incentive can be referred to a compensation package. A compensation package is the value placed on an employee as presented to that employee. Compensation can be categorized into three categories. First, there is non monetary compensation. This is the benefit received by an employee which cannot be tangibly valued. Such can include social and career rewards. Job security, recognition, opportunity for growth, flexible working hours, subsidized housing, magazine subscription, laundry services, elder care, are some of the non-monetary compensations (Berger, 2008). Second, compensation can be direct which is the employee’s base wage/salary expressed as salary or hourly wage as profit sharing bonuses paid based on performance. Finally, compensation can be indirect. The later includes facilities like health insurance, paid leave, moving expenses and child care being provided by the employer.

There is a corporate general consensus insisting on relating pay with performance for effectiveness. This may not necessarily be applicable in sectors such as agriculture where many performance results are dependent on factors beyond organization and employee control. Whichever the compensation used, it should also be fair with the market and not discriminating against some employees (Campbell, 2006). A job evaluation should be conducted in placing a value on employee. In such an evaluation, compensable factors such as experience, education level and job responsibility should be considered. Moreover, employees should be involved when considering their indirect compensation needs such as paid vacation, retirement planning, childcare among others. The HRM officer should regularly review the compensation package from time to time to maintain its fairness, equitability and competitiveness.

Importance of compensation and incentives in HRM practice