Compliance Sheba

Compensation Management

“What is compensation?” In very simple terms, compensation is the results or rewards that the employees receive in return for their work.

Compensation includes payments like bonuses, profit sharing, overtime pay, recognition rewards and sales commission, etc.

Compensation can also include non-monetary perks like a company-paid car, company-paid housing and stock opportunities. Compensation is a vital part of human resource management, which helps in encouraging the employees and improving organizational effectiveness.

From a manager’s point of view, the compensation package offered to a company’s employees is essential not only because it costs money, but because it is likely to be the primary reason the employees work for the firm.

Compensation packages with good pay and advantages can help attract and retain the best employees. A quick survey of employees about compensation is likely to expose an expectation that wages are fair and cover basic living expenses, keep up with inflation, leave some money for savings (perhaps for retirement) and leisure, increment over time.

A company’s compensation scheme also informs a great deal about the firm’s values and cultures. Employees often look at what a company pays rather than what it says. In many aspects, people behave as they are rewarded.


A compensation scheme projects what the company expects of its employees. For example, if quality is an essential value, then it should be implemented through some element of the total compensation system.

Objectives of Compensation Policy

The objectives of compensation policy are as follows −

  • Allure suitable staff.
  • Keep qualified personnel.
  • Develop reward structures that are equitable with logical and fair pay relationships between differently valued jobs.
  • Manage pay structures to mirror inflationary effects.
  • Assure that rewards and salary costs handle changes in market rates or organizational change.
  • Appraise performance, duty, and loyalty, and provide for progression.
  • Abide with legal requirements.
  • Maintain compensation levels and differentials under review and control salary or wage costs.

Clearly, managing a firm’s compensation policy is a complex task as it facilitates systematically administered and equitable salaries, reconciles employees’ career aspirations with respect to earnings, aligns employees’ personal objectives with those of the organization, and keeps the firm’s costs under control.

To summarize, compensation management is a synchronized practice that includes balancing the work-employee relation by facilitating monetary and non-monetary benefits for employees.

Importance of Compensation Management

A good compensation is a must for every business organization, as it gives an employee a reason to stick to the company.

An organization gains from a structured compensation management in the following ways −

  • It tries to give proper refund to the employees for their contributions to the organization.
  • It discovers a positive control on the efficiency of employees and motivates them to perform better and achieve the specific standards.
  • It creates a base for happiness and satisfaction of the workforce that limits the labor turnover and confers a stable organization.
  • It enhances the job evaluation process, which in return helps in setting up more realistic and achievable standards.
  • It is designed to abide with the various labor acts and thus does not result in conflicts between the employee union and the management. This creates a peaceful relationship between the employer and the employees.
  • It excites an environment of morale, efficiency and cooperation among the workers and ensures satisfaction to the workers.

In short, we can say that compensation management is required as it encourages the employees to perform better and show their excellence as well as provides growth and development options to the deserving employees.

Types of Compensations

We have learnt about what compensation and its importance is. However, when it comes to an organization, be it private or public, compensations are further divided into the following −

Direct Compensation

It is naturally made up of salary payments and health benefits. The creation of salary ranges and pay scales for different positions within an organization are the central responsibility of compensation management staff.

Direct compensation that is in line with the industry standards facilitates employees with the assurance that they are getting paid fairly. This helps the employer not to worry about the costly loss of trained staff to a competitor.

Indirect Compensation

It focuses on the personal encouragements of each individual to work. Although salary is essential, people are most productive in jobs where they share the company’s values and priorities.

These benefits can include things like free staff development courses, subsidized day care, the chances for promotion or transfer within the company, public recognition, the ability to effect change or bring some changes in the workplace, and service to others.

These are the two types of compensation that need to be managed and have its own contribution in the development of the organization. Moving forward, we will see the different components of compensation.

Components of Compensation

Compensation as a whole is made up of different components that work as an aid for an employee after retirement or in case of some accident or injury. Now we shall see the key elements or components that make compensation.

Wages and Salary

Wages mark hourly rates of pay, and salary marks the monthly rate of pay of an employee. It is irrelevant of the number of hours put in by an employee working in the firm. These are subject to annual increase.


Allowances can be defined as the amount of something that is allowed, especially within a set of rules and regulations or for a specified purpose. Various allowances are paid in addition to basic pay.

Incentives and Performance Based Pay

Incentive compensation is performance-related remuneration paid with a view to encourage employees to work hard and do better.

Both individual incentives and group incentives are applicable in most cases. Bonus, gain-sharing, commissions on sales are some examples of incentive compensation.

Fringe Benefits/Perquisites

Fringe benefits include employee benefits like medical care, hospitalization, accident relief, health and group insurance, canteen, uniform, recreation and the likes.

In recent years, a great deal of attention has been directed to the development of compensation systems that go beyond just money. We can say that all the components of compensation management play a very important role in the life of an employee.

In particular, there has been a marked increase in the use of pay-for-performance (PrP) for management and professional employees, especially for executive management and senior managers. Compensation is a primary motivation for most employees.

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