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The Need Of Compensation Management Business Essay

Paper Type: Free Essay Subject: Business
Wordcount: 2425 words Published: 1st Jan 2015

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Compensation administration is one of the most important areas of human resource management because sound compensation policies, programmes and their effective execution are essential to procure, maintain and develop the human resource of the organization to get effective result from them. It involves the selection, designing, development and direction of programmes designed to implement compensation or incentive policy through financial rewards. { Beach has defined wage and salary administration as follows: “wage and salary administration refers to the establishment and implementation of sound policies and practices of employee compensation. It includes such areas as job evaluation, surveys of wages and salaries, analysis of relevant organizational problems, development and maintenance of wage structure, establishing rules for administering wages. Wage payments, incentives, profit sharing, wage changes and adjustments, supplementary payments, control of compensation costs and other related items”. The traditional concept of wage and salary administration emphasized on only determination of wage and salary structures in organizational settings.} In simple words, “compensation administration is a systematic procedure for establishing a sound compensation structure.”


Meaning of compensation: Compensation may be viewed as a system of reward that motivates an employee to perform better.

The term compensation is used to mean employees’ gross earnings in the form of financial rewards and benefits as part of employment relationship.{ In terms of personnel management, compensation is viewed as cash and other gains which obtained by an worker for giving their services to his superior. Compensation management, also referred as wage and salary management, remuneration management, or reward management, is concerned with designing and implementing total compensation package or salary structure. }

Compensation may also be viewed as

(a) A system of rewards that motivates employees to perform the assigned task,

(b) A tool used by organizations to foster the values, culture and the behavior they require, and

(c) An instrument that enables organizations to achieve their business goals.


“Compensation means something, such as Cash, which gets as a payment for providing service by any employee to their employers. Compensation may be defined as money received in the performance of work, plus some non -monetary gains which are provided by the organizations to their employees.”

{“Compensation includes direct cash payments, indirect payments in the form of employee benefits and incentives to motivate employees to strive for higher levels of productivity”}

– Cascio

“Compensation is the remuneration gets by an employee in exchange of hisher work which they do for the organization. It involves balancing the work employee relation by providing monetary and non- monetary gains or incentives to employees.”


Mainly compensation can be divided into two parts:

(1) Monetary compensation and

(2) Non- Monetary compensation.

Monetary compensation includes Direct compensation and Indirect compensation.

The direct compensation is used to describe remuneration in terms of money usually cash and consist such elements like as basic pay, dearness allowance, overtime pay, extra shift allowance, incentive, bonus, profit sharing bonus and commissions, etc.

Indirect compensation or fringe benefits refer to such gains like as provident fund, pension scheme, medical and health insurance and sick leave and various other benefits and perks.

Non- Monetary compensation consists praise and recognition and satisfaction of employees from the organization for their performance.


The main motive of compensation management is to fulfill the needs of both employees and the employer. {The employers want to pay as little as possible to keep their costs low. Employees want to get as high as possible}. The compensation management tries to balance between these two with following specific needs:

{1. Attracting and Retaining Personnel: From organization’s point of view, every organization wants new talent and skill from outside ,for this purpose the compensation management targeted at attracting and retaining right human resource at right place in the organization time to time.

2. Motivating Personnel: Compensation management targeted at motivating human beings or employees for higher productivity. Compensation can be designed or planned to inspire or encourage people through financial and non- financial compensation.

3. Optimizing Cost of Compensation: Compensation management targeted at Optimizing cost of compensation by maintaining relation between performance and compensation of every employee.

4. Consistency in Compensation: Compensation management tries to obtain consistency in both internal and external for remunerating employees. Internal consistency consist payment on the basis of criticality of jobs and employees’ performance on jobs. External consistency involves similar remuneration for a job in all organizations}.


The important or primary objective of establishment of a strong compensation policy is to maintain an impartial compensation structure.

Its substitute objective is the establishment and maintenance of an impartial labour-cost structure, for right balancing of contradictory human interests so that the satisfaction of employees and employers is maximized and conflicts minimized.

A sound compensation system tries to achieve these objectives:

(a) For employees:

(1) Employees are received remuneration as per the requirements of their jobs, i.e., highly skilled employees are received more compensation than low skilled employees according to job requirements. This removes inequalities.

(2)Fair compensation policy gives the chances of removes or minimized favouritism (which creeps in when wage rates are assigned)

(3)Compensation policy may be changed as per the requirement of job responsibility and lines of promotion wherever are applicable.

(4)Employee’s spirit and encouragement are increased because of compensation programme can be explained and it is based upon facts.

(5)Compensation policy helps to increase or maintain the living standard of an employee.

(b) To employers:

(1) They can systematically plan for and control their labour costs.

(2) In dealing with a trade union, they can explain the fundamentals of their compensation programme because it is based upon a regular analysis of job and remuneration facts.

(3) A compensation administration minimized the conflicts between employer and employee and impartiality among all the employees.

(4) It enhances an employee’s spirit and encourages him for their work which helps to increase productivity and profitability.

(5) It attracts skilled employees by make sure about adequate payment for all the jobs.


{To fulfill the objectives of compensation management, it should be move on as a process. This process has various steps as under:}

Establish a compensation policy

Setting of organizational criteria about compensation

Analysis of government policy

Joint consultation with trade union

Deciding fringe benefits

Design and implementation of compensation policy

Evaluation and Review

Establish Compensation Policy: {Compensation policy is plagiarized from organizational strategy and its policies applied by human resource management at all levels of organization. To make compensation management work more effective, the organization should clearly specify its compensation policy, which must consist the basis for determining basic salary, incentives and other fringe benefits and various types of perquisites to various levels of employees. The policy should be related with the organizational system of beliefs on human resources and strategy. Besides, this there must be stress on Job Analysis and Evaluation. }

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Setting of Organization’s Criteria: Organization’s overall criteria {is the first step of the total human resource management process including compensation management. Companies engage in different types of market/product having different level of maturity}, adopt different methods of different compensation plans according to employee’s performance. Thus, {it can be seen that organizations follow different methods in different market situations and adjust their compensation} criteria and contents with these methods. {Cascio has observed that in viewing the compensation from strategic point of view,} the companies do the following:

1. They recognize remuneration as a fundamental {control mechanism that can be used flexibly by the management to attain business objectives.

2. They make the compensation system as a constitutional part of strategy formulation.

3. They incorporate compensation considerations into strategic decision-making processes, such as those that consist planning and control.

4. They view the company’s performance as the ultimate criterion of the success of the strategic compensation decisions and operational remuneration programmes.}

Analysis of Government policy: Compensation plan is always formulated through several factors, like external and internal, which affect the Functioning of personnel management system.} External factor includes status of labour market, cost of survival, degree of economic development, social factors, impact of trade unions and various labour laws dealing with compensation management in government policy whereas internal factors consist organizational paying capacity and working conditions to employees, seniority, talent, etc. These factors may be evaluated through compensation survey. }

Joint consultation with trade union: After analyzing the government policy president of personnel department consult all over the plan with the representative of trade union.

Deciding fringe benefits: Fringe benefits are also set by the personnel department as per the level of job and their performance.

It includes: Meal facility, Pick and Drop facility, Medical facility, Insurance facility etc.

Design and Implementation of Compensation Plan: After analysis of above steps, {the organization become competent to draft its compensation policy by integrating base compensation with provision of wage/salary increase over the period of time,} various incentive plans, benefits and perquisites. Sometimes, these are determined by external party, for example, {pay commissions for Government employees as well as for public sector enterprises. After drafting the compensation policy it should be communicated to all the employees for putting it in implementation stage.

Evaluation and Review: {In every organization Compensation management must be evaluated and reviewed the compensation plan time to time. It is affected by a several factors like employee satisfaction level and spirit or in terms of outcomes variable like maximized productivity. The evaluation of compensation plan must be done in this sprospect.} If it does not work, there should be review of the plan to give it a new picture.



The functions and responsibility in a compensation programme involves essentially three aspects:

(1) The determination of wage rates and wage structure,

(2) Maintaining the rationality of wage structure, and

(3) Determining methods of wage payment.

A wage structure is a body of wage rates differentiated by difficulty or degree of responsibility of work in an organization. The wage rate is for a job rather than compensation to an individual.

`Equitable’ wage structure or `internal equity’ implies that wage differentials reflect the degree of difficulty. In other words, the differences in wage rates for jobs correspond to differences in the evaluated contents of jobs.

The wage payment is determined by `Job evaluation’. It is a systematic method of evaluating each job in relation to other jobs in an organization. It is a major method of ensuring equity in the internal rates for jobs.

In view of the complexity of factors, there is a need to define and develop the compensation function in an organization and determine its location and working. The functions and responsibilities of a compensation programme will be as follows:

To formulate the compensation plan.

To establish job evaluation program.

To determine or establish the criteria for wages and salary.

To analyze the governmesnt rules and regulation regarding the


To make polices for the compensation and update that policy time to time.

To make policies for promotions.

To make the policies for increasing the salary.

To maintain the records of all employees of the organisation.

To promote the team work.

To make the performance appraisal system.

To promote the value and culture system in the organization policy.

To help the management for training and development programs.

The function should be operated by someone who has specialized knowledge and skill in compensation programmes. To ensure the effectiveness of the functionary, a coordinating committee should be constituted so that ultimately the objectives of a compensation programme can be achieved.


Q1. Explain the concept and meaning of compensation?

Q2. Discuss the role and importance of Compensation in an organisation.

Q3. Describe the various steps of compensation management process in detail.

Q4.What is the basic purpose behind the establishment of a sound Compensation administration system in the organizations?

Q5.What is the management responsibilities regarding the compensation management programme?


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