10 Genius Aspects of Compensation Management You Didn’t Know

Compensation management in hrm simplified


One of the most difficult functions of human resource management(hrm) is of determining rates of monetary compensation. It is not only a duty of the organization but also equally important to both the organization and the employee. It is significant to the organization because wages and salaries constitute the greatest single cost of doing business and it is important to the employer because earning is the only means of economic survival; it is the mean that influence the standard of living, status in society, work as motivational factor, loyalty and productivity.

Compensation management is a process incorporated by employers and top-level managers for a variety of purposes to further the existence of the company. Through compensation management(along with a proper payroll management plan), an ideal plan is developed according to which an employee receives remuneration in return for his or her contribution to the organization. So, employee compensation programs are designed to attract capable employees to the organization, motivate them towards superior performance, and retain their services over an extended period of time. 

Compensation management in hrm is an important aspect of talent management and employee retention. It employs monetary and nonmonetary incentives to attract recruits, minimizes attrition, raises performance, and increases employee engagement. It is in charge of ensuring that salaries and bonuses stay competitive and that benefit packages evolve to meet the demands of the workforce. People in this profession not only deal with data, but they are also interested in learning about the complexities of benefits administration.

 “If you pick the right people and allow them to spread their wings – and put compensation and rewards as a carrier behind it – you almost don’t have to manage them.” — Jack Welch 

Most of us have heard the phrase “compensation” in the context of being paid for the work that we do. The work might be full-time or part-time. What they all have in common is that the “reward” we receive for increasing our energy and time is that we are reimbursed for it.

From the perspective of the employers, the money that they pay to the employees in return for the work that they do is something that they need to plan for elaborately and systematically. Unless the employer and the employee are in broad agreement (We use the term broad agreement as in many cases, significant differences in perception about the employee’s worth exist between the two sides), the net result is dissatisfaction from the employee’s perspective and friction in the relationship. 

Compensation can be thought of as the “glue” that holds the employee and the employer together, and in the organized sector, this is further codified in the form of a contract or a mutually binding legal document that specifies how much should be paid to the employee and the components of the compensation package.

Because this is an introduction to compensation management, the art and science of determining the appropriate remuneration may be the difference between a satisfied and unsatisfied employee.

Though Maslow’s Need Hierarchy Theory places compensation in the middle to lower rungs of the pyramid and other criteria such as work satisfaction and fulfillment at the top, for the majority of employees, earning the correct salary is a motivating factor in and of itself.

As a result, companies must accurately measure the employee’s contribution if they want to get the most out of the person. Compensation is defined as the provision of monetary value in exchange for labor accomplished, and compensation management in hrm is defined as how this is handled through processes, procedures, and systems.

As the module develops, readers will be exposed to various areas of compensation management in hrm, such as compensation management components, compensation kinds, the inclusion of variable pay, the usage of Employee Stock Options, and so on. It is also noted how biased pay management leads to increased turnover.

This is significant since studies have shown that the majority of employees who leave organizations cite inadequate or unbalanced remuneration as the reason for their departure. As a result, compensation management is something that businesses must take seriously if they want to gain a competitive advantage in the labor market.

Considering that the current trend in many sectors (particularly the knowledge-intensive sectors like IT and Services) is to treat the employees as “creators and drivers of value” rather than one more factor of production, companies around the world are paying close attention to how much they pay, the kind of components that this pay includes and whether they are offering competitive compensation to attract the best talent.

In concluding this article, it is pertinent to take a look at what Jack Welch had to say in this regard: As the quote (mentioned at the beginning of this article) says, if the right compensation along with the right kind of opportunities are made available to people by the firms in which they work, then work becomes a pleasure and the manager’s task made simpler leading to all-round benefits for the employee as well as the employer. 

Meaning and Definition of Compensation

In layman’s language, the word ‘compensation’ means something, such as money, given or received as payment for a service. The word compensation may be defined as money received in the performance of work, plus the many kinds of benefits and services that an organization provides their employee. It refers to a wide range of financial and non-financial rewards to employees for their service rendered to the organization. It is paid in the form of wages, salaries, special allowances, and employee benefits such as paid vacation, insurance, maternity leaves, free travel facility, retirement benefits, etc. 

According to Wendell French,” Compensation is a comprehensive term which includes wages, salaries and all other allowance and benefits.” 

Wages are the remuneration paid for the skilled, semi-skilled, and unskilled operative workforce. Salary is the remuneration of those employees who provide mental labor to the employer such as supervisors, office staff, executives, etc. Wages are paid on a daily or hourly basis whereas salary is paid on monthly basis.


Hertzberg’s Hygiene Theory refers to how certain factors are necessary to maintain “Hygiene” or ensure that the employees are not dissatisfied. 

  • These factors alone do not contribute to “quantum” jumps in employee satisfaction. Rather, the absence of these factors makes employees dissatisfied. 
  • The point here is that if fair and just compensation is provided, the employee has the “baseline” requirements met which ensures that he or she is now in a position to go for higher things like job satisfaction and fulfillment.
  • However, if compensation is found to be lacking, the employee might very well be unhappy and dissatisfied with the company leading to attrition and other negative outcomes. 
  • Hence, having the right compensation is the first step in getting the best of employees. 

If we take a look at the components of a compensation management system, we find that employers decide on what is the right compensation after taking into account the following points. 

  1. The Job Description of the employee specifies how much should be paid and the parts of the compensation package.
    1. The Job Description is further made up of responsibilities, functions, duties, location of the job, and other factors like environment, etc.
    2. These elements of the job description are taken individually to arrive at the basic compensation along with the other components like benefits, variable pay, and bonus.
      1. It needs to be remembered that the HRA or the House Rental Allowance is determined by a mix of factors that includes the location of the employee and governmental policies along with the grade of the employee.
      2. Hence, it is common to find a minimum level of HRA that is common to all employees and which increases in proportion to the factors mentioned above.
  2. Job Evaluation is a technique for calculating employees’ net worth by comparing them to suitable remuneration levels for comparable positions in the sector and inside the organization.
    1. The employer’s willingness to pay for the employee is determined by factors such as experience, qualifications, expertise, and the company’s need.
  3. Employers frequently compare jobs across industries and arrive at a specific compensation after taking into account their firm’s specific needs, and in this regard salary surveys and research results done by market research firms on how much different companies in the same industry pay for similar roles.

The compensation components outlined above are the minimum needs for any HR Manager in charge of determining potential workers’ pay.

There are more variables that will be covered in upcoming publications. This article has discussed various ideas related to compensation components, and these concepts are critical for HR experts as well as prospective compensation management professionals seeking a career in the corporate sector.

Before concluding this post, keep in mind that exit interviews have revealed that more than 70% of employees who quit their positions do so because they are unsatisfied with their pay. As a result, while determining employee remuneration, all HR experts and managers must consider this factor.

To take the first component that is common to all packages at all levels (hence the term basic – however, it is not the same for all levels). 

  • Basic pay is the basis on which the compensation package rests. This is the equivalent of the base of the pyramid and the other components are usually fixed as a percentage of the basic pay. It is common to find components like HRA (House Rental Allowance) and Additional Pay as a certain percentage (say 20% or 30%) of the Basic. 
  • There are many companies that have introduced the concept of Variable Pay where this particular component of the compensation is not fixed but is a percentage of the Basic that is paid out according to the performance of the company, group, and individual. Hence, the term performance-linked pay is also used for variable pay. 

If we take the three sub-components of the Variable Pay – 

  1. The company performance-linked pay is as the term implies paid out as a percentage of the Basic that is tied to the performance of the company as a whole. So, if a company performs exceedingly well in the given quarter, then the employee might get a large percentage (say 100% or 150%) of the base of the component. If a company does do not well or does only moderately better, then the employee might get a lower percentage of the base (say 50% or 75%). 
  2. The group performance-linked pay is paid out similarly but the point of reference, in this case, is the performance of the group or the division in which the employee works. 
  3. Finally, the most important sub-component is the Individual Performance Linked Pay which is paid out according to the performance of the employee and hence is entirely tied to the way in which the employee performs as determined by the rating that he or she gets at the end of the performance cycle. 

The rationale for these components is that an employee will be more driven to do well personally, contribute to the group to which he or she belongs, and ultimately, perform well while keeping the company’s overall growth in mind. As a result, these pay sub-components have been intended to motivate employees to perform not just as individuals, but also as team members and, lastly, as responsible employees of the firm. The goal here is to prevent silo-based performance and instead focus on overall performance.

 In the articles to follow, we shall look at how employees can negotiate their compensation by following some tips that we shall provide. 

components in compensation management in hrm

Compensation Management: Other Key Components of Compensation

While working on compensation management, various components are needed to be assessed 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 form the basis of compensation management.

1. Wages and Salary: 

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

2. Allowances:

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. Some of these allowances are as follows: 

●      Dearness Allowance: This allowance is given to protect the real income of an employee against price rises. Dearness allowance (DA) is paid as a percentage of basic pay. 

●      House Rent Allowance: Companies who do not provide living accommodation to their employees pay house rent allowance (HRA) to employees. This allowance is calculated as a percentage of salary. 

●      City Compensatory Allowance: This allowance is paid basically to employees in metros and other big cities where the cost of living is comparatively more. City Compensatory Allowance (CCA) is normally a fixed amount per month, as 30 percent of basic pay in the case of government employees. 

●      Transport Allowance/Conveyance Allowance: Some companies pay a transport allowance (TA) that accommodates travel from the employee’s house to the office. A fixed amount is paid every month to cover a part of traveling expenses. 

3. Incentives and Performance-Based Pay: 

Incentive compensation is performance-related remuneration paid with a view to encouraging employees to work hard and do better. Both individual incentives and group incentives are applicable in most cases. Bonus, gain-sharing, and commissions on sales are some examples of incentive compensation. 

4. Fringe Benefits/Perquisites: 

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


In the previous sections, we looked at the components of compensation and how each is used to assess the relative importance of an employee as far as compensation management is concerned. In this section, we look at some of the factors that determine how much compensation is to be paid out to the employee by looking at the issue from the perspective of the employer. The subsequent article would take a look at how the employee can influence the compensation setting process with negotiation and bargaining. 

From the perspective of the employer, the factors that affect compensation management are: 

  • The Overall Macroeconomic situation wherein the state of the economy of the country where the firm is situated plays a major role in determining the compensation to be paid. For instance, if an economy is booming or is in a high growth trajectory, chances are that the employers would pay the employees more, and conversely, if the economy is in a downward trajectory, chances are that the employers would pay the employees less. We often hear about how because of the recession, salary hikes have been deferred or cut down. This is a direct result of the linkage between firm performance and the performance of the economy. 
  • The Demand for a particular skill weighs heavily on the way in which the employer fixes the compensation for the employee. For instance, premium skills like Consulting and Accountancy are paid more as are the Technology Professionals who might be experts in their chosen field. As discussed in earlier articles, it is the expertise and the relative scarcity of such experts that determines how much the employer is willing to pay. 
  • The Position of the company in the Business Cycle often determines how much the company is willing to offer to the employee. For instance, if a company is a start-up, chances are that the company would pay more because of the need to get the best possible talent into the company. Further, many start-ups give their employees ESOPs or Employee Stock Option Plans wherein the employees can redeem their stocks after the lock-in period. 
  • Finally, the urgency of the firm in filling up the position plays an important role in determining how much the employer is willing to pay the employee, and in many cases, if the time to get on board the employee is less, staffing managers along with the line manager in charge of hiring the employee might decide to pay more because they want the employee to come on board as quickly as possible. 

These are some of the factors that determine the compensation to be paid to the employee from the perspective of the employer. This is not an exhaustive list but an indicative one and as the module progresses, we shall be revisiting some of these factors along with adding additional information. The next article would talk about how employees can negotiate with the employer for better compensation and perks. 

Of course, there are several kinds of negotiations with the employer. For instance, the employee can negotiate at the time of the hiring process or can negotiate at the time of the appraisal cycle. In this section, we consider the strategies available to the employee at the time of the hiring process. 

There are several parts to the employee’s strategy to negotiate with the employer. Some of them are: 
  • Plan and Communicate: The most important part of the employee’s strategy must be to research the compensation trends in the market and then negotiate with the employer based on how much the other companies are willing to pay for a similar role combined with the fact that the company hiring him or her pays for the same role.

    Hence, it is advisable for the employee to keep in touch with compensation trends in the marketplace and also talk to other employees before he or she decides to communicate his or her expectations to the prospective employer.
  • The timing makes the difference: In any negotiation process, time is the key element, and hence timing the negotiation process is important. The best possible option for the employee would be to wait for the company to make an offer and then pitch in his or her expectations about the compensation.

    There is something called overkill which must be avoided and the employee must avoid going overboard. At the same time, the employee must also ensure that he or she does not start the negotiation process early on in order not to lose out on the offer. Hence the timing of the pitch makes all the difference.
  • Consider the Alternatives: When you are deciding about prospective offers, ensure that you make the pitch for your expected compensation level after taking into account all the alternatives and not simply rushing into something that does not value your experience and expertise adequately.

    At the same time, do not harangue the prospective employers though you might have several alternatives available to you. The point to be noted is that different companies react to compensation negotiations in different ways and hence you must play the field according to these points.

Many a time, prospective employees lost out on compensation either because they asked too high or asked too late. At the same time, they should also remember not to coerce employers. The best possible strategy is where you are confident about yourself and your worth as measured by the employer must reflect your own sense of self-worth. When there is a meeting point between these, then you can rest assured that you have arrived at the ideal compensation for yourself.


Have a Plan in Place 

The first element of negotiation is to plan for the process by deciding how much more you want and how much you think the employer is willing to give. The fine art of knowing how much you should ask for and at what point should you strike the deal is something that experienced professionals know and rookies should learn. Without having a clear idea of the target level of compensation that you are aiming for, the negotiation process would turn out to be an exercise in futility. 

Communicate Your Needs

Once you have arrived at a figure that you think you deserve, the next step is to communicate the same to the prospective employer without delay. The important point to note here is that the way in which you articulate your needs is as important as the need to drive a bargain.

For instance, without expressing yourself clearly to the HR manager of the prospective employer, there is little chance that he or she would understand your needs and respond appropriately. Hence, once you have sorted out the target compensation that you want, you should also have a strategy to communicate it to the employer. 

Timing is Everything 

You need to remember that there is something called being too early when you negotiate and too late as well. Hence, the timing of your articulation forms the basis for a successful negotiation. For instance, if you start your demands early on in the hiring process, the prospective employer might stall the process or even put a stop to your hiring.

On the other hand, if you put forward your demands as you are about to join the firm, there is precious little anyone can do about your demands. Hence, you should have a keen eye for when you should communicate your demands. 

The three aspects of having a plan, communicating the need, and then timing it in such a way as to derive maximum advantage are essential to the negotiation process. Of course, there are many firms that do not entertain any sort of negotiation and there are firms that put up the pretense of negotiation when in reality, they do not budge at all. In these cases, it is better to adopt a wait-and-watch policy and make your move once they get into the details of your compensation.

In conclusion, a successful negotiation hinges on the willingness of both parties to hear each other and an ability to arrive at a common denominator in a spirit of accommodation. Hence, do not be overly rigid and at the same time do not give in to the employer totally. 


The IT (Information Technology) sector comprising software and hardware sectors is a sunrise sector in many countries. Despite the fact that the sector has been around since the late 1980s, the sector is considered relatively young and a place for innovation, entrepreneurship, and growth. No wonder many fresh graduates flock to the IT sector after graduation to take up roles that are challenging and stimulating. 

To attract the best talent available, the IT sector designs compensation packages in ways that can be termed innovative and path-breaking as they bundle the basic compensation management components and perks and benefits in novel and unique ways. 

The following points explain some of the ways in which the IT sector deals with compensation management

Innovative Compensation Packages 

A hallmark of the compensation packages in the IT sector is their reliance on non-standard components that are characteristic of the old economy or the traditional sectors. In comparison, the so-called “new economy” companies make it a point to include additional components like variable pay, and performance-linked incentives over and above the base pay that they give out to their employees. With the aura surrounding the IT sector, many employees have come to take for granted the high pay along with the attractive perks and benefits that these companies give. 


The IT sector pioneered the introduction of ESOPs or Employee Stock Options Plans the employees as a means of ensuring that employees take more ownership and responsibility for their work by making them partners in the growth of the company. The rationale for giving stock options to employees is that once they feel a sense of ownership with the company in which they are working, their performance levels go up due to increased motivation and satisfaction that such a practice tends to inculcate in the employees.

Given the fact that most IT stocks zoom ahead in value after the IPO or the Initial Public Offering is announced and retain their valuations well into the company’s existence, IT companies that offer ESOPs are much sought after by many employees. 


 The IT sector provides additional benefits like transportation, medical allowance, and allowances for furnishing one’s house. With an emphasis on all-around welfare as opposed to paying the employees what is the minimum, IT companies ensure that their employees are taken care of well. Many companies in the IT sector are quite liberal in insuring their employees and their families under group medical insurance which provides adequate cover to the employees and their families in case of illness and surgeries as well as accidents and other unanticipated contingencies.

Further, some IT companies go a step further and provide recreational allowances that ensure their employees’ vacation expenses are also taken care of. Given the innovative ways in which IT companies provide for their employees, it is not surprising that this sector ranks among the most preferred employers and the companies that make up this sector is the destination of choice for many a grad fresh out of college. 


Many studies have found that there is a direct causal link between the levels of compensation that a firm pays and the rate of attrition that it has. Attrition can be voluntary and involuntary, where the former is the employee quitting the company out of his or her own volition and the latter is the company asking the employee to quit for several reasons ranging from non-performance to violation of rules and regulations. In this article, we consider voluntary attrition and the linkage between inadequate compensation and attrition.

Low Compensation and Attrition 

The exit interviews conducted by HR professionals to ascertain the reasons behind an employee’s exit usually reveal that low compensation is a major factor behind the employee’s decision to quit the company. Research into the phenomenon of attrition has found that many employees (particularly at the entry and middle management levels) leave companies because they found better compensation management practices at another company.

On the other hand, the senior management personnel quit to take up challenging roles that pay well as well as provide self-actualizing drives. Hence, it can be construed that compensation is a major factor behind an employee’s desire to quit a particular company and join another company. 

Compensation as a Hygiene Factor

Hertzberg’s theory of motivation lists hygiene factors as those conditions when absent cause an employee to be dissatisfied. The point of this theory is that factors like adequate compensation, a congenial working environment, and additional benefits are necessary to motivate the employee and they ought to be present to keep the employee happy.

The absence of such factors makes the employee lose focus and drive and hence the lack of “hygiene” makes it difficult for the employee to continue. 

How to Manage Compensation Expectations

The appraisal time or the time of the year when employees are graded on their performance is usually the time when employees put forth their aspirations and expectations regarding the compensation and other aspects of their job. Hence, the line managers and the HR managers must make it a point to “manage” the expectations of the employees during this period.

The attrition is usually the highest when employees are handed their raise letters that specify how much their compensation is increased. This is because the employees might expect more than what they have been awarded which leads to dissatisfaction. 

Though compensation in recent years has ceased to be the “be all” of employee satisfaction with the nature of work and the responsibilities that an employee has become more important in determining job satisfaction, it still is one of the most important factors behind an employee’s decision to quit a company.

Hence, it is incumbent upon HR professionals and the senior management they devise compensation plans keeping in mind the various factors that drive an employee’s psyche. Only when an employee is satisfied with his or her condition in a company can they perform at the desired levels. 


While the stereotypical image of a CEO enjoying such extravagance is indeed valid to a certain extent, there is more to the topic of executive compensation. For instance, the practice in recent years has been to offer generous packages to executives that include stock options, benefits, and variable pay over and above the basic components.

The point to note is that executive compensation is removed from the compensation packages offered to middle and lower-tier employees as they are in the hierarchy of companies. The reason for this has been the trend of CEOs and executives being vested with more responsibilities as well as an emphasis on holding them responsible for top-line and bottom-line growth.

The gap between CEO and Worker Pay

Among the many causes attributed to the ongoing global financial crisis was the one about flawed incentives and high compensation packages to the executives which resulted in skewed priorities for the executives who were bent on registering profits at any expense and in the process throwing caution to the winds.

It was also pointed out that the gap between the compensation of the CEOs and the lowermost employee was in the ratio of 300: 1 for companies like GE (General Electric) and GM (General Motors) where the CEOs of these companies raked in Millions of Dollars of compensation when compared to the workers who were barely making five-digit salaries. This has spurred a debate over the efficacy of paying executives so much when the end result is not commensurate with the pay.

Compensation Management: Perks And Benefits

While salary is one part of executive pay, the associated perquisites and benefits that executives are granted by the board of directors are another important aspect. Things like paid vacations, children’s education, preferred neighborhood housing, and access to the best clubs and other benefits make the job of executives an aspirational one for many business graduates.

Further, the humungous bonuses offered to the executives (in the range of 100% to 300%) make one wonder whether the stratospheric levels of executive pay are something that needs a rethink by the collective conscience of the corporate world.

The point that this article is making is that while executive compensation needs to be commensurate with the level of experience, the ability to articulate the vision and imbue the organization with a sense of mission, and at the same time the capability to take risks, there needs to be a line drawn somewhere which caps the compensation and packages offered to executives at more earthly levels.

While the intention is certainly not to begrudge the compensation being offered to executives, the incentive system must be more tied to current market realities as is the case with compensation at other levels. Hence, the lessons learned from the recent financial crisis about asymmetric risk and reward systems must not be forgotten in a hurry.

Compensation Management And Globalization

Further, globalization has created a “global village” where people in different parts of the world cannot only participate in global supply chains but also partake in the wonders of cultural exchange and assimilation. This has created aspirational values among large sections of people in developing countries who now demand better compensation at par with their counterparts in the advanced economies of the West. 

Hence, corporates need to be aware of the complexities of the issue of how much compensation and in what form is to be paid to the employees taking into account all the factors 

Given the fact that most companies in the West outsource to countries like China and India because of the cost advantage where lower wages in these countries provide cost savings, the reckoning of higher wage demands and wage parity that occurs because of economic factors might obviate the advantage enjoyed by these countries as far as the outsourcing phenomenon is concerned. 

In this context, it is worth noting that corporates the world over are feeling the pinch of the ongoing global economic crisis and this has led to depressed wages as well as lower hikes for employees in the last two years. Hence, the added challenge of keeping the workforce happy in these gloomy times is something that HR managers must take into account as well.

The globalized workforce that participates in the global supply chain creates its own set of challenges with many expatriates being paid “hardship allowances” to entice them to work abroad in developing countries.

Further, the native workforce in these transnational corporations earns higher wages than those of the average workers in their countries leading to ethnic tensions and demand for inclusion of the less qualified workers. All these factors need to be addressed by the managers of corporations when they decide on compensation.

Finally, the very real phenomenon of attrition because of poor compensation continues to haunt the corporates, and the challenge of retaining quality workers while retrenching poor performers remains a key imperative for companies. Hence, compensation management has aspects other than those that were discussed so far in this module and this article is meant to highlight some of them.

It is hoped that the world economy recovers quickly and the boom years where workers and corporates were happy working together come back to the advantage of everybody.

Development of Compensation System

The compensation system involves the total rewards that are given to the employees for the labor and services they provide to the organization. Compensation includes direct monetary benefits as well as indirect monetary benefits.

Wages and salaries form the direct financial benefits that an employee receives from his or her company. Besides, wages and salaries, bonuses, and commissions also form a part of the direct monetary benefits including paid absences and other leave benefits, retirement plans, employee insurance schemes, health plans, education benefits, and other such benefits.

A well-defined and balanced compensation system gives the organization the advantage of maintaining internal as well as external equity. It is a powerful tool for attracting employees, motivating them to work in achieving strategic organizational goals, and retaining them in long run. An HR Consulting Firm can provide in-depth analysis and detailed reports on the setting up of a balanced compensation system for the company.

An organization needs to have a clear compensation philosophy that is in line with the strategic goals, objectives, and culture of the organization. Based on the compensation philosophy of the company, the various components of compensation are designed and chalked down in detail.

The Philosophical Aspects of Compensation Management in hrm:

  • Impact of compensation strategy in promoting organizational success.
  • The organization’s stand-in considers the compensation provided as a tool for attracting and/ or retaining employees.
  • Does the organization intend to lead/lag/match the compensation market for the given geographic area and in the concerned industrial sector?
  • How does the organization aim at maintaining internal and/or external equity?
  • How is the employee’s performance linked to wage or salary increases?
  • Following the legal formalities, rules, and regulations of the land.

Compensation detailing comprises identifying positions and setting up wage or salary specifications against each of its position. Also, incentive packages and bonuses, if any, are clearly defined for each of the positions while describing the compensation-related details.

Detailing in compensation management may involve the execution of the following activities :

  • Designing pay scale.
  • Defining bonus and incentive plans.
  • Performing salary surveys.
  • Examining the requirement for wage/salary changes or increase
  • Defining guidelines for change/increase in wage/salary.
  • Elaborate preparation of compensation policy and compensation strategy.

A compensation management study carried out in an organization generally involves the following important elements:

  • Analyzing the current situation and requirements of the organization.
  • Conducting salary/wage surveys and interviews within the organization.
  • Studying the various positions or jobs existing in the organization.
  • Restructuring and redefining the positions, according to needs.
  • Defining the internal worth of the different positions in the organization.
  • Ranking the various positions and jobs in the company.
  • Evaluating the existing base compensation plan of the organization.
  • Identifying and evaluating the market pay structures.
  • Revising the base compensation plan in the organization.
  • Matching the changed compensation package with the current fiscal resources of the organization.
  • Comprehending the impact of pay revisions.
  • Laying down the guidelines of revised pay administration.
  • Preparing an elaborate report on the compensation studies to be submitted to the top management.

Depending upon the requirements of the company, the HR Consulting Firm may take up the necessary aspects required to be considered for the development and/or improvement of the compensation system in the organization, thereby, strengthening the compensation system of the company by making it more equitable and attractive.

Objectives of Compensation Policy:

The objectives of the 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.    

Importance of Compensation Management:

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

An organization gains from a well-structured compensation management solution in the following ways-

  • It tries to give a 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 specific standards.
  • It creates a base for the happiness and satisfaction of the workforce that limits 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 by 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 for the workers.


The compensation package is one of the most significant decisions of modern Human Resource Management since it is carrying great influence as a maintenance factor as well as a means for employee motivation also. Therefore organization needs to pay attention to Wage and Salary Administration in order to maintain organizational efficiency for maintaining and motivating employees.

There are some of the major considerations in compensation management based on which it can go for compensation determination like demand and supply of skill, organizational ability to pay, prevailing market rate, employees productivity, cost of living, trade union’s bargaining power, demand for a salary increase by employees, job requirements management attitude, psychological and social factors, and legislative considerations. But at the same time, employees must also exercise caution against the cheating tricks used by HR while negotiating compensation and its terms.

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