Compensation Mgmt Introduction
Compensation mgmt is the process of determining, managing and analysing the employee’s remuneration, salaries, benefits incentives etc.
It is a part of human resource basics that is used to manage the remuneration of employees for their services and the appreciation of their talent and efforts towards the organization
So, to understand compensation mgmt, we will discuss the meaning, concept definition components, process, and types of benefits of compensation management.
Definition Of Compensation Mgmt
Definition of compensation mgmt: Compensation management refers to the administration of wages or salary, remuneration, benefits and incentives which are provided to employees for their services and to motivate, to increase productivity.
But to understand compensation management, here are the definitions from different authors.
“Compensation is paying people for work.”
– Dale Yoder
“The function compensation is defining as adequate and equitable remuneration of personnel for their contributions to the organizational objectives.”
– Edwin B. Flipp
“Wage and salary administration refers to the establishment and implementation of sound policies and practices of employee compensation.”
Beach has defined wage and salary administration
“Compensation is what employees receive in exchange for their contribution to the organization.”
– Keith Davis
Cascio has defined compensation as follows;
“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.”
What Is Compensation Mgmt?
Compensation management is a part of human resource management that is used to manage remuneration management, compensation management etc. Over the years it has become part of one of the human resource basics.
Employees always want to increase their remuneration for their services. On the other hand, the organization wants to increase motivation. So, compensation mgmt finds the correct balance between both of them.
An effective compensation mgmt not only helps in finding motivated and highly talented employees. Also, it helps the employees to receive the correct remuneration/salary/ wage, and incentives, for their services.
Plus, the compensation mgmt involves the different components which build up the process and function smoothly.
Components Of Compensation Management
Compensation mgmt is designed to give fair compensation to employees according to their job type role and responsibilities. So, understanding the concept is divided into components of compensation management. Let’s understand the components of compensation management:
Job Description
The very first component of compensation is the job description (JD), which describes the roles and responsibilities of a job. As, JD defines all the roles, responsibilities, requirements, functions, duties, environment etc. Such descriptions help in identifying the difficulties and the level of education, experience etc.
Note: JD also helps in identifying all the job families
Job Analysis
Job analysis is the process of identifying the activities involved in the job by their content. In addition to the roles, and responsibilities it also tells about the skills required for performing the job. The process for job analysis involves gathering information about the duties of the incumbent, the nature and conditions of the work, and some basic qualifications.
Job analysis is crucial for first, helping individuals develop their careers, and also for helping organizations develop their employees to maximize talent.
Job Evaluation
It is a systematic process of determining the worth and the value of any job in an organization. The process is done to structure a systematic structure of pay roles in an organization. To achieve a rational job, compensation organization tends to compare similar jobs with the standards of the industry
Thus the process of job evaluation finishes where the process of job analysis finishes.
To do rational evaluation, there are four main techniques:
- Ranking
- Classification
- Factor caparison
- Point Method
Pay Structure
The pay structure is designed to build standardized compensation practices. Commonly a pay structure includes different grades or levels of pay which includes the minimum salary/wage.
The pay structure is designed on the basics of job evaluation. So it determines the job grade and culture.
Moreover, an organization with a uniform and defined pay structure helps in building human resource branding. As a result, it creates an image among job seekers.
Salary Surveys
A compensation mgmt includes conducting surveys to collect market data. Which includes average salaries, inflation indicators, cost of living indicators, and salary budget averages.
When purchasing the results of salary surveys conducted by other vendors, note that surveys may be conducted within a specific industry or across industries as well as within one geographical region or across different geographical regions.
Policies and Regulations
Policies and regulations are one another most important aspect of compensation mgmt as they describe all the rules and regulations, dos and don’ts of an organization. Also, these decibels the functioning and restrictions.
So, it helps the employers to analyse the employees benefit, perk, deductions etc.
So, these were the different components of compensation management.
Types Of Compensation
Compensation mgmt largely involves the task of providing compensation to employees which is fair, beneficial and rational towards employees and employers. So, to understand how the compensation works it is divided into two parts. And the purpose and the requirements are different. Here are the different types of compensation in compensation management:
Direct Compensation
Direct compensations are referred to as financial benefits, which are directly related to salary and wages. Plus it is in line with the industry standards and 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.
Here are the different types of direct compensation which are provided by an employer:
Basic Salary
Basic salary is the basic or primary component of compensation mgmt. It refers to the primary salary which an employee receives before adding any incentives, or allowance. Also, this is the basic salary which employee gets to take home. Motley, it is 40-60% of CTC(Cost to company).
Rental Allowance
Rental allowance in addition to the basic salary which the employer provides for providing a safety assurance to the employees. It is given to employees who live in rental accommodation to lower their tax rates. On the other hand, if the employee accommodation is not rental this allowance is fully taxable.
Medical Allowance
A medical allowance is a fixed allowance that is provided to an employee regardless of any hospital bills or anything. As the medical comes in the very basic things which people require. So, providing these basic security increases employee retention in an organization.
Travel Allowance
Comensationmgmt has to look for different components to develop the ideal compensation structure for every job type. As some job includes fieldwork, organizations have to pay bills for employees’ travel for work. However, organizations have to provide the employee’s allowance to travel to the office and from the office.
Special Allowance
The special allowance will be different in each company, some companies grant these allowances over the completion of some task or duty. Also, this allowance is provided to the employee efficiency.
However, in pay slips given to employees by some companies, any number by the name of ‘special allowance’ is usually the leftover component of the salary.
Bonus
Bonus is an allowance which is provided to employees once a year. It is additional money that is provided by an employer on the most auspicious event of the year. To show support organization provides a bonus to make their employees the festival more enjoyable and an annual addition to their salary
Note: A day of bonus is different in different countries in America bonus is given on the new year, and in India, it is on the Hindu festival Diwali. Similarly, it is different in Australia, the Netherlands, Greece etc.
Leave Travel Allowance
As the name itself suggests, it is an exemption for allowance/assistance received by the employee from his employer for travelling on leave. Though it sounds simple, many factors need to be kept in mind before planning the travel to claim an LTA exemption.
Indirect Compensation
Indirect compensations are the non-financial benefits that are given to employees for their services. Mostly these types of compensation in compensation mgmt are used to increase the employee’s motivation. So here are the different types of indirect compensation in compensation management:
Overtime Policy
Overtime policy states the policy the number of overtime in a particular time, a period which constitutes overtime policy and the overtime compensation. Since in most cases, it includes some additional allowance in salary. But in some cases, it also states some additional benefits like promotions, holidays, increments etc.
Hospitalization
The organization provides different benefits related to hospitals like- medical insurance, medical bill payments, concessions in selected hospitals etc.
For example, the Indian government policy of CGHS provides free medical services for certain problems in specific hospitals.
Insurance
Some other non-financial benefits are insurance benefits, an organization provides different insurances like- life insurance, and medical insurance. Plus some companies provide these facilities for employees’ families as well.
Leave Travel
Also, companies provide leave for travel as well, as to motivate employees. To do so, the organization provides the facilities to travel to boost their motivation and give their employees a break from their routine.
Retirement
Another key factor in human life is planning and saving for retirement. So, to increase employees, security organization focuses on providing retirement benefits which help the employees to feel more secure and motivated.
Holiday Homes
Holiday homes provide benefits of accommodation while travelling. In such cases, the organization owns some different holiday homes in different locations and provides them to employees at a lower cost for vacation.
Flexible Times
Another non-financial benefit of compensation mgmt is providing flexible times to employees. Giving flexible time off to leave and coming to the office provides them time to complete other work. As a result, they can focus on their work.
Leave Policy
In last the non-financial benefit of compensation, mgmt is the policy of an organization regarding taking leave from the office. As it shows how much the organization cares about employees’ wellness.
Objectives Of Compensation Management
Compensation mgmt is not just beneficial for employees it is equally important for the organization. So, here are the objectives of compensation management of an organization:
Acquire Qualified Personnel
The very first objective of an organization is hiring talented candidates in future. A company focusing on their compensation management showcase their company as caring and respectful towards their employees. As a result, talented job seekers will apply to an organization.
Retain Present Employees
Another objective of compensation management is retaining current employees. If an employer does not compensate their employees well (financially and non-financially), employees either won’t feel motivated to work or to stay in an organization. So, it is important to provide benefits to employees.
Ensure Equity
Compensation mgmt is important to ensure equality in the internal and external environments according to the services which employees provide. As it requires to pay equally to industrial value and compensation.
Reward Desired Behaviours
Pay should reinforce desired behaviour and act as an incentive for those behaviours to occur in the future.
Control Costs
Well-set compensation management sets the rational and reasonable compensation for employees in the stage of hiring, which will only constitute the set cost of an organization. As a result, a set amount of money will be spent on the organization.
Comply with Legal Regulations
A compensation mgmt is important for an organization to provide employees with legal regulations regarding the compensation policies. These regulations clear the candidates about the policy. Similarly, it helps the organization to clear the rules and regulations to avoid the conflicts in future.
Facilitate Understanding
Compensation management provides an easy understanding regarding compensation to human resource specialists, managers, employees, administration etc.
Further Administrative Efficiency
Wages and Salary programmes should be designed to be managed efficiently, making optimal use of HRIS.
So here are the objectives of compensation management and reasons for an organization to adopt compensation mgmt.
Compensation Management Process
To achieve the objectives of compensation management an organization follows simple 5 steps. So here are the steps which are followed in the compensation management process:
Organisation’s Strategy
The very first step for an organization is to define the organization’s strategy. Every organization’s strategy depends upon a variety of things which are different in each organization like working in different markets, with different products, and different levels of maturity. So, an organization lays their strategy according to its needs and blends its compensation management accordingly.
For instance, IT is a fast-growing industry with high numbers of mergers. Also, the compensation of managers is high. On the other hand, an industry with a mature market stabilises its growth from the current investment.
Compensation Policy
Afterwards, an organization need to create a compensation policy that is dragged from the organization’s strategy. To make compensation mgmt effective it is important to create the policy effectively.
Generally, a compensation policy includes basic pay, allowances, benefits, and perks at a different level of employment. Most importantly this policy should be linked with the organization’s human resource philosophy, mission and vision of the company. Plus considering external factors like job evaluation, analysis etc
Factor Analysis
Now an organization need to consider several other factors as well like external factors, which include economic conditions, cost of living, labour union, various labour laws etc.
For example, according to disablement in the Workmen’s Compensation Act, employers have to provide the employees with some specific benefits according to the type of disablement.
Secondly, the internal factors of an organization the cost, ability to pay, sorority in skills etc need to be considered.
Designing and Implementation of the Plan
After considering all these factors an organization can consider planning their compensation mgmt plan. Firstly it needs to lay basic salary/wage, the benefits, allowance and perks for a different level of employment.
The implementation of a compensation plan includes communication with employees and bringing the process into practice.
Evaluation and Review
Lastly, it is important to evaluate and review the plan, as the process of compensation mgmt is not fixed or rigid. So, it is important to evaluate the plan with different factors like internal or external, which are discussed earlier.
In this case, evaluating the plan will bring results like employee morale, satisfaction, and productivity levels. So if an evaluation is not satisfactory an organization should review the entire process.
So, these were the steps that are included in the compensation management process.
Benefits Of Compensation Management
A combination mgmt is not beneficial to employees only but they are equally important to an organization. So, here are the benefits of compensation management:
Job satisfaction
Job satisfaction is one of the basic and important aspects of compensation mgmt. As satisfaction of an employee improves employee loyalty towards the company. Plus productivity tends to be higher in satisfied employees.
Motivation
We all have different kinds of needs. Some of us want money so we work for a company which gives us higher pay. Some value achievement more than money, they would associate themselves with firms that offer greater chances of promotion, learning and development. A compensation plan that hits workers’ needs is more likely to motivate them to act in the desired way.
Low Absenteeism
Why would anyone want to skip the day and watch the not-so-favourite TV program at home, if they enjoy the office environment and are happy with their salaries and get what they need and want?
Low Turnover
Would your employees want to work for any other boutique if you offered them fair rewards? Rewards which they thought they deserved?
So these were the benefits of compensation mgmt to an organization and employees as well.
Frequently Asked Questions
What is compensation in management?
Compensation management refers to the administration of wages or salary, remuneration, benefits and incentives which are provided to employees for their services and to motivate, them to increase productivity.
What are the 3 P’s of compensation management?
It outlines the 3P compensation concept of paying employees based on their position, person, and performance.
What is the role of compensation?
A compensation analyst researches both internal and external salaries and benefits. With that data, they help decide the pay of a position, the company’s pay structure and compensation ranges, and when raises are warranted.