An Outline of a Compensation System Based on Human Capital Theory

Abstract

The paper presents the identification and definitions of compensation functions from the perspective of human capital theory. The methodology for achieving the objectives of work is based on an alternative human capital model. This model facilitates explicit assessment of employees’ individual human capital based on the achievements of accounting in the area of valuations. The model identifies human capital as aggregated capital related to the costs of living, education and professional experience. Recruiting an employee implies the use of human capital in a business process, which makes employers responsible for offering appropriate compensation – the product of human capital value and the adopted rate of return. Fair base compensation requires the adoption of a rate of return at the level of potential growth. Also, the model offers the methodology for evaluating a bonus compensation fund in relation to the company's financial parameters. It is facilitated by an appropriately formulated production function in additive form. The calculated value of a bonus fund does not distort the company's financial equilibrium. The applied methodology and concepts make it possible to identify the right balance between the four key functions of compensation: cost, income, social and motivating functions.

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