Compensation Management is more than just the means to attract and retain talented employees. In today’s competitive labor market, organizations need to fully leverage their human capital to sustain a competitive position. This requires integrating employee processes, information and programs with organizational processes and strategies to achieve optimal organizational results.

Compensation Management is an organized practice that involves balancing the work-employee relation by providing monetary and non-monetary benefits to employees. Compensation includes payments such as bonuses, profit sharing, overtime pay, recognition rewards and sales commission. Compensation can also include non-monetary perks such as a company-paid car, company-paid housing and stock options. Compensation is an integral part of human resource management which helps in motivating the employees and improving organizational effectiveness.

All organizations have a compensation plan, written or unwritten, formal or informal. For some organizations, the purpose of that plan may be merely to meet compliance requirements. For other organizations, the goal of the compensation plan may be to attract qualified employees, to retain those employees, and to motivate employees to direct their efforts towards achieving the goals of the organization. Regardless of the goal, size and complexity of a compensation plan, there are generally many easily-identified elements to any compensation plan.

Importance of Compensation Management

A good compensation is must for every business organization and helps in the following way:

  • It tries to give proper return to the workers for their contributions to the organization.
  • It imparts a positive control on the efficiency of employees and encourages them to perform better and achieve the specific standards.
  • It forms a basis of happiness and satisfaction for the workforce that minimizes the labor turnover and confers a stable organization.
  • It augments the job evaluation process which in turn helps in setting up the more realistic and achievable standards.
  • It is designed to comply with the various labor acts and therefore does not result in disputes between the employee union and the management. This builds up a peaceful relationship between the employer and the employees.
  • It arouses an environment of morale, efficiency and cooperation among the workers and provides satisfaction to the workers.
  • It stimulates the employees to perform better and show their excellence.
  • It provides growth and advancement opportunities to the deserving employees.


Types of Compensations

  • Direct Compensation is typically made up of salary payments and health benefits. The creation of salary ranges and pay scales for different positions within the company are the central responsibility of compensation management staff. Direct compensation that is in line with industry standards provides employees with the assurance that they are getting paid fairly. This helps the employer avoid the costly loss of trained staff to a competitor.


  • Indirect Compensation focuses on the personal motivations of each person to work. Although salary is important, 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 opportunity for promotion or transfer within the company, public recognition, the ability to effect change in the workplace, and service to others.


In recent years a great deal of attention has been directed to the development of compensation systems that go beyond just money. 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. People look for jobs that not only suit their creativity and talents, but compensate them both in terms of salary and other benefits accordingly. Adequate rewards and compensations help in attracting a quality workforce, maintaining the satisfaction of existing employees, keeping quality employees from leaving and motivating them for higher productivity.


Source: – Cite HR