Compensation Management

Chapter: 01. Introduction

Compensation
Compensation is reward for services. Compensation is the value of work of the employees according to the
agreement between employer and employee. Compensation is given by the employer and received by the
employees. So a mutual understanding must be present between the parties. Compensation refers to a wide
range of financial and non-financial rewards to employees for their services rendered to the organization. It
is paid in the form of wages, salaries and employee benefits such as paid vacations, insurance maternity
leave, free travel facility, retirement benefits etc., Monetary payments are a direct form of compensating
the employees and have a great impact in motivating employees. Compensation is the total pay an employee
receives when working. This includes a traditional salary, such as an hourly wage or annual pay. It also
includes the value of all benefits, such as insurance plans, tuition assistance and bonus pay.

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Objectives of Compensation
Compensation has some important objectives. To achieve these objectives a well-conceived compensation
scheme or plan may be established. These objectives are mentioned in the following points:
1. To Be Legal
It must get approval from the govt. or top management in the organization. An effective compensation
always complies with the laws. In this way, employer is also saved from the legal problems.
2. To Be Adequate
Compensation must be sufficient so that needs of the employees are fulfilled substantially. If the
compensation system is well planned, the workers will be satisfied and the workers' union will have nothing
to be unhappy and this will create harmony and peace in the organization.
3. To Be Motivational
Compensation must increase the level of motivation and job satisfaction of the employee. One of the most
important reasons for compensation is to increase the efficiency of the employees. It plays vital role in the
motivation of the employees.
4. To Be Equitable
Compensation policy should be declared in such a way so that no discrimination can be shown. One of the
important reasons for making compensation plans is to establish equity. It refers to increasing the wages of
the employees who are paid low and eliminating inequalities in the organization. For this, concept of equal
work for equal pay should be followed.
5. To Provide Security
Employees must have guarantee of getting wages or compensation regularly without any brake. Employees
may quit when compensation levels are not competitive resulting in higher turnover.
6. To Be Cost Benefit Effective
The organization must have a balance between cost for giving compensation and benefits to be accrued
from the employees. If there is a proper compensation plan, then the employees will get the amount of
wages they deserve. They will neither be under-paid nor over-paid. In that case, employees will not switch
the job and organization will remain in a healthy financial condition.

Compensation Management
The act of distributing some type of monetary value to an employee for their work by means of the
company’s policy or procedures. The ultimate goal is to reward the right people to the greatest extent for
the most relevant reasons. Compensation management is the process of managing, analyzing, and
determining the salary, incentives, and benefits each employee receives. Compensation management is a
crucial part of any talent management and retention strategy. Creative compensation includes monetary and
non-monetary benefits companies can employ to boost engagement and productivity, reduce attrition, and
attract top talent. Compensation management is typically carried out by HR professionals, who are
responsible for ensuring that salaries and bonuses remain competitive and benefits change with the needs
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of the workforce. The HR leaders in this role must gather and analyze internal and external salary figures,
demographic and economic statistics and other relevant information. They are also keen to understand the
complexities of benefits administration.

Importance of Compensation Management

1. Establishing a Fair and Equitable Remuneration
Effective compensation management objectives are to maintain internal and external equity in remuneration
paid to employees. Internal equity means similar pay for similar work. In other words, compensation
differentials between jobs should be in proportion of differences in the worth of jobs. External equity
implies pay for a job should be equal to pay for a similar job in other organizations. Payments based on jobs
requirements, employee performance and industry levels minimize favoritism and inequities in pay.

2. Attracting Competent Personnel

A sound wage and salary administration helps to attract qualified and hardworking people by ensuring an
adequate payment for all jobs. For example IT companies are competing each other and try their level best
to attract best talents by offering better compensation packages.

3. Retaining the Present Employees

By paying competitive levels, the company can retain its personnel. It can minimize the incidence of quitting
and increase employee loyalty. For example employees’ attrition is high in knowledge sectors which force
the companies to offer better pay to retain their employees.

4. Improving Productivity
Sound wage and salary administration helps to improve the motivation and morale of employees which in
turn lead to higher productivity. Especially private sectors companies’ offer production linked
compensation packages to their employees which leads to higher productivity.

5. Controlling Cost
Through sound compensation management, administration and labour costs can be kept in line with the
ability of the company to pay. If facilitates administration and control of pay roll. The companies can
systematically plan and control labour costs.

6. Improving Union Management Relations

Compensation management based on jobs and prevailing pay levels are more acceptable to trade unions.
Therefore, sound wage and salary administration simplifies collective bargaining and negotiations over pay.
It reduces grievances arising out of wage inequities.

7. Improving Public Image of the Company

Wage and salary programme also seeks to project the image of the progressive employer and to company
with legal requirements relating to wages and salaries.

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8. Improving Job Satisfaction
If employees would be happy with their jobs and would love to work for the company if they get fair rewards
in exchange of their services.

9. Motivating Employees
All have different kinds of needs. Some of them want money so they work for the company which gives
them higher pay. Some of them value achievement more than money, they would associate themselves with
firms which offer greater chances of promotion, learning and development. A compensation plan that hits
workers’ needs is more likely to motivate them to act in the desired way.

10. Increasing Self-Confidence

Every human being wants his/her efforts to get acknowledgment. Employees gain more and more
confidence in them and in their abilities if they receive just rewards. As a result, their performance level
shoots up.

Differences between Intrinsic Rewards and Extrinsic Rewards

Intrinsic Rewards Extrinsic Rewards
1. These are internally felt by the employees on 1. These are directly being provided by the
being engaged in certain activities or task. organization for performing certain job.
2. These are intangible. 2. These are tangible in nature.
3. These are usually under the control of the 3. The firm directly controls these rewards.
individuals receiving the same.
4. Job satisfaction, personal growth, status etc. are 4. Incentives, pay, promotion etc. are the example
the example of these rewards. of these rewards.

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Types of Compensation
According to DeCenzo and Robbins compensation is of three types. These are:
1. Intrinsic vs. Extrinsic compensation
2. Financial vs. Non-Financial compensation
3. Performance-based vs. Membership

Forms of Pay
Total Returns

Total Compensation Relational Returns

Recognition and Status

Cash Compensation Benefits Job security
Learning Opportunity
Base Pay Income Protection Challenging work
Merit Pay Allowances
Short Term Incentives Work life Balance
Long Term Incentives
1. Total Compensation
Total compensation returns are more transactional. They include pay received directly as cash and indirectly
as benefits. Programs to pay people can be designed in a wide variety of ways and a single employer
typically uses more than one.

A. Cash Compensation
i. Base Pay
Base pay is the cash compensation that an employer pays for the work performed.

ii. Merit Pay

Periodic adjustments to base wages may be made on the basis of changes in what other employers
are paying for the same work, changes in the overall cost of living or changes in experience or skill.

iii. Short term Incentives

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 Incentives tie pay increases directly to performance which are given for short period of time.

iv. Long term Incentives

Long term incentives are intended to employee effort on multi year results. Typically they are in the
form of stock ownership or options to buy stock at specified, advantageous prices.

B. Benefits
i. Income Protection
Income protection programs are legally required. Medical insurance, retirement programs, life
insurance and saving plan are common benefits.

ii. Allowances
Allowances often grow out of whatever is in short supply. Housing, transportation allowances etc.
are the part of allowances.

iii. Work life balance

Programs that help employees better integrate their work and life responsibilities include time away
from work, access to services to meet specific needs and flexible work arrangements.

2. Relational Returns
Relational returns includes recognition and status, employment security, challenging work and
opportunities to learn. Other relational forms might include personal satisfaction from successfully facing
new challenges, teaming with great co-workers, receiving new uniformities and the like.

3 P’s Approach to Compensation Management

There are 3P approach of developing a compensation policy centered on the fundamentals of paying for
Position, Person and Performance. Drawing from external market information and internal policies, this
approaches helps to establish guidelines for an equitable grading structure, determine capability
requirements and creation of short and long-term incentive plans. The 3P approach to compensation
management supports a company’s strategy, mission and objectives. It is highly proactive and fully
integrated into a company’s management practices and business strategy. The 3P system ensures that human
resources management plays a central role in management decision making and the achievement of business
goals.

➢ Paying for Position

➢ Paying for Person
➢ Paying for Performance

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Because it is so important to employees, the issue of pay deserves to be clearly addressed. In spite of their
hesitance, managers are capable of dealing with this sometimes difficult issue in a professional and effective
manner. By keeping the following basic points about pay in mind, they can address virtually any pay-related
topic with the employees in a professional and productive manner.

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