Nature of Compensation Management

Meaning, Nature, Objectives and Importance of Compensation Management

Table of Content:

Meaning of Compensation

Compensation refers to the remuneration that an employee obtains in return for his services to the organization. Compensation is a broad term that includes everything an employee acquires in return for his work such as salaries,  benefits, allowances,  wages,  and services. Benefits and compensation in HRM refer to the salary, financial, and as well as non-financial benefits provided to the employees at the workplace by the organization. 

Meaning of Compensation Management

Earlier, compensation management was limited to designing, maintaining and sustaining a pay structure, but in the present era, the term compensation management is composed of several activities about job evaluation, market rate analysis, job analysis, pay structure design and maintenance, etc. compensation management refers to the efforts of the organisation, to maintain a competitive compensation structure, keeping in mind the conditions of the local labour market, concerning present and future financial resources of an organisation.

“Compensation management refers to payment systems which determine employee In a nutshell, wages or salary, direct and indirect rewards”

Compensation Management Definition

According to Tapomoy Deb, “Compensation management is a system of compensating individuals for the work they perform in such a way that the organisation can attract, retain, and motivate them to perform well keeping in view organisational and market factors”.

Compensation Definition in hrm

According to Dale Yoder, – “Compensation and benefits simply mean paying people for completing the task allocated to them.”
According to Cascio, – “The term compensation signifies paying the direct cash amounts or an indirect amount via providing benefits to employees to strive for higher productivity in the organization.”

Nature of Compensation Management

The nature of compensation management includes:

1) Integral part of HRM: Compensation management is essential for the entire human resource of the organisation. Thus, it has become an integral part of human resource management as it plays a significant role in the proper functioning of HRM. 

2) Challenging Function: Compensation management has a great impact on the objectives established by the organisation. Therefore, it is considered to be one of the most challenging functions of human resource management.

3) Dynamic Discipline: Compensation management is known as a dynamic discipline because it is not only affected by individual factors but business and environmental factors also influence it to a large extent. 

4) Wide Application: Compensation management is not only related to paying the employees but also focuses on motivating them. It also supervises the functions of recruitment, budgeting, monetary forecasting, improving human relationships, computer operations, tax-related laws, etc.

5) Strategic Tool: Compensation management serves as a strategic tool, which increases the competitive level of an organisation and prepares it for the stiff competition taking place in today’s global industries.

Nature of Compensation Management

Objectives of Compensation Management

Compensation management strives to achieve the following objective.

1) To Attract and Retain Employees: The basic purpose of compensation management is to attract and retain talented employees. To attract the workforce from the competitor’s organisations, sometimes premium wages are required to be offered. Finally, a payment system should be as per the demand and supply of labour in the market.

2) To Motivate Employees: Compensation management motivates employees to work hard to improve their productivity as well as that of the organisation. 

3) To Optimise Cost: Compensation management should establish a suitable relationship between performance and compensation because it is not necessary that, if employees are given high wages they will perform better without any valid linkage.

4) To Achieve Consistency: Compensation management aims at maintaining both internal and external equity in compensating employees. Internal equity can be achieved by making payments based on the job specification and employees’ performance on the job whereas external uniformity can be achieved by making payments for a job similar to all organisations. Compensation management also tries to reduce the disparity in compensation of a specific work as related to other organisations.

Elements of Compensation Management

Major elements of compensation management are given below:

1) Job Analysis 

Job analysis is the first step taken by the management in the compensation management process. It includes identifying the nature of the job, duties and responsibilities performed by employees, their accountability towards the organisation, their performance, etc. In simple terms, the characteristics of the job form the basis for the compensation management process.

2) Job Evaluation

The next step in the process of compensation management is the evaluation of different jobs in the organisation. It is the job evaluation that determines the worth of the job. The nature of the work and skills and duties required for a particular job forms the basis for job evaluation. In the job evaluation method, the worth of each job is assessed using various methods such as ranking, grading, paired comparison, factor comparison, etc. These evaluation methods are carried out without any biasness to identify the salary structure of various jobs.

3) Developing the Pay Structure 

The pay structure depicts what an organisation pays to each employee. Organisations can opt for narrow-graded and broad-graded pay structures based on the significance and difficulty level of the job.

4) Wages and Salary Survey

Before setting up a pay scale, the organisation must consider external equity. For this, organisations use the wage and salary survey method. With the help of the wage and salary survey methods, organisations try to gather information from the labour market about the salary given to employees of the same level or performing the same job in a similar industry.

Besides this, information is related to the current wage rate, cost of living, and rates during inflation and deflation. periods, etc., can also be gathered through the labour market. There are two types of survey methods, either the organisation can go to the labour market and conduct the survey or it can purchase the surveys conducted by professional organisations.

5) Job Pricing

Determining pay rates for different jobs in the organisation is known as job pricing. The job evaluation process and wage and salary survey process form the basis for determining the job prices. Before deciding the salary of the employee, the internal worth and external worth of the job should be compared.

While finalising the job prices, the organisation should ensure two things, viz.,

i) Appropriate salary is given to the employees according to the value of the job, and

ii) The efficient performers of the organisation should be rewarded for their excellent performance.

6) Compensation Revision and Control

Since compensation of employees is an expense for organisations and has a great impact on the organisational goals and objectives, thus, a proper and effective method should be employed such as budgeting, performance appraisal, compa-ratio method, etc to determine the cost incurred on the human resource of the organisation and the effectiveness of compensation management.

Among all these methods, budgeting is the most effective method which helps in setting standards to evaluate the expenses incurred in the form of compensation. This method facilitates regulating the financial outflow and aids in HR cost controlling and monitoring.

Importance of compensation management

The importance of compensation management is as follows:

1) Compensation management is crucial to align employee efforts with the aims and objectives of the organisation.

2) It helps in creating and developing a competent and motivated workforce to achieve the set goals and targets of the organisation.

3) It helps to build a positive image of the organisation in society.

4) It eradicates social problems like bribery and theft. This is because if the employees get a sufficient salary to sustain their life, they are less likely to engage in such criminal activities.

5) It increases job contentment in employees and also enhances their commitment level and loyalty.

6) It helps in improving organisational productivity.

7) It aids the organisation to comply with the existing rules and regulations set by the government regarding compensation.

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