Employees receive compensation from a company in return for work performed. While most people think compensation and pay are the same, the fact is that compensation is much more than just the monetary rewards provided by an employer. According to Milkovitch and Newman in Compensation, it is "all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship" The phrase "financial returns" refers to an individual's base salary, as well as short- and long-term incentives. "Tangible services and benefits" are such things as insurance, paid vacation and sick days, pension plans, and employee discounts.
An organization's compensation practices can have far-reaching effects on its competitive advantage. As compensation expert Richard Henderson notes, "To develop a competitive advantage in a global economy, the compensation program of the organization must support totally the strategic plans and actions of the organization." Labor costs greatly affect competitive advantage because they represent a large portion of a company's operating budget. By effectively controlling these costs, a firm can achieve cost leadership. The impact of labor costs on competitive advantage is particularly strong in service and other labor-intensive organizations, where employers spend between 40 and 80 cents of each revenue dollar on such costs. This means that for each dollar of revenue generated, as much as 80 cents may go to employee pay and benefits.
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