Compensation Management

If you ask general people what is compensation or what they mean by saying compensation, they may tell you compensation means salary, wages or overtime money paid by any company. Some may also include provident fund or gratuity.  All of them are right though the answer is not complete. Today we will learn about compensation in a broader sense. Lets learn the definition of compensation first.
Compensation management is an integral part of the management of any organization that involves balancing the work-employee relation by providing monetary and non-monetary benefits to employees  in exchange for work performed.Compensation strategy is derived from the business strategy. The business goals and objectives are aligned with the HR strategies. Then the compensation committee or the concerned authority formulates the compensation strategy. It depends on both internal and external factors as well as the life cycle of an organization.
The main objective of compensation management is to reward people fairly, equitably and consistently in accordance with their value to the organization. It helps to determine the relative worth of a job in an organization in a systematic, consistent and accurate manner. Compensation management, also known as wage and salary administration, remuneration management, or reward management, is concerned with designing and implementing total compensation package. It deals with strategies, policies and process required to ensure that contribution of people to the organization is recognized by both financial and non financial means (recognition, learning and development).
Depending on monetary and non monetary benefits financial compensation package are of two types. One is direct compensation or remuneration provided to employees in exchange for their labor and services. It includes the base pay, house rent, conveyance, Differential pay (overtime pay, hazardous duty pay,on call pay, shift differential pay) and variable pay(annual incentives or bonus, lump-sum payments; technical achievement awards, cash profit-sharing plans, gain sharing).
Indirect compensation refers to non-monetary benefits offered and provided to employees in lieu of the services provided by them to the organization. They include pay for time at work (break), pay for time not work (Holiday and Leaves), income protected program (health Insurance, life insurance, retirement Benefits). Non financial compensation includes flexible work time, on job training, work-life balance, development opportunities.
Basic Goals of a Compensation System
• Attract Employees
• Retain Employees
• Motivate Employees
• Compliance with Pay Laws
• Administrative Simplicity
• Cost Effective
Approaches of compensation managementThere is 3P approach of developing a compensation policy centered on the fundamentals of paying for Position, Person and Performance. 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.Drawing from external market information and internal policies, this program helps establish guidelines for an equitable grading structure, determine capability requirements and creation of short and long-term incentive plans.

Components of Compensation System

  • Job analysis
  • Pay Structure
  • Salary Survey
  • Policies and Regulations

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