Compensation Mgmt

Compensation Mgmt Introduction

Compensation mgmt is the process of determining, managing and analysing the employee’s remuneration, salaries, benefits and incentives etc.

It is a part of human resource management 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, types of benefits of compensation management. 

Definition Of Compensation Mgmt

Definition of compensation mgmt: Compensation management is referred to the administration of wage 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 Mgmt
Compensation Mgmt

“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.

As 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 correct remuneration/salary/ wage, incentives, for their services. 

Plus, the compensation mgmt involves the different components which build up the process and functioning smoothly.

Components Of Compensation Management

Compensation mgmt is designed to give fair compensation to employees according to their job type and role and responsibilities. So, understanding the concept is divided into components of compensation management. Let’s understand the components of compensation management:  

Components Of Compensation Management
Components Of Compensation Management

Job Description

The very first component of compensation is the job description (JD), which describes the roles and responsibility 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, responsibilities it also tells about the skills required for performing the job. And 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. As the process is done to structure a systematic structure of pay role in an organization. To achieve a rational job, compensation organization tends to compare the similar job with standards of the industry 

Thus the process of job evaluation finishes where the process of job analysis finishes. 

And 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 the human resource branding. As 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, 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 it describes all the rules and regulation, does 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 involved the task of providing compensation to employees which is fair, beneficial and rational towards employees and employer. So, to understand how the compensation work it is divided into two parts. And the purpose and the requirement is different. Here are the different types of compensation in compensation management: 

Types Of Compensation
Types Of Compensation

Direct Compensation

Direct compensations are referred to as financial benefits, which are directly related to the salary and wages. Plus it is in line with the industry standards 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 a primary component of compensation mgmt. It refers to the primary salary which an employee receives before adding any incentives, 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 to the addition to the basic salary which employer provides for providing a safety assurance to the employees. It is given to employees who live on 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, so organization have to pay bills for employees travel for work. But organization 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 allowance 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 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 the support organization provides the bonus to make their employees the festival more enjoyable and annual addition to their salary

Note: A day of bonus is different in different countries like in America bonus is given on new year, in India it is on the Hindu festival Diwali. Similarly, it is different in Australia, 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 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 promotion, holidays, increment etc.


The organization provides different benefits relates to hospitals like- medical insurance, medical bills payments, concessions in selected hospitals etc

For example, the Indian government policy of CGHS provides free medical services for certain problems in specific hospitals. 


Some other non-financial benefits are the insurance benefits, an organization provides different insurances like- life insurance, medical insurance. Plus some companies provide these facilities for employees families as well.

Leave Travel

Also, companies provide leaves 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.


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 are like providing benefits of accommodation while travelling. In such cases, the organization owns some different holidays homes in different locations and provide them to employees at a lower cost for vacation

Flexible Times

Another non-financial benefit in compensation mgmt is providing flexible times to employees. Giving flexible time off leaving and coming to the office provides them time to complete other works. As a result, they can focus on their work.

Leave Policy

In last of the non-financial benefit of compensation mgmt is about 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: 

Objectives Of Compensation Management
Objectives Of Compensation Management

Acquire Qualified Personnel

A very first objective of an organization is hiring talented candidate in future. A company focusing on their compensation management showcase their company as caring and respecting towards their employees. As a result talented job seeks will apply in 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 important to provide benefits to employees.

Ensure Equity

Compensation mgmt is important to ensure the equality of in internal and external environment 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. As 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 specialist, 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 the objectives of compensation management and reasons for an organization to adopt for 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:

Compensation Management Process
Compensation Management Process

Organisation’s Strategy

The very first step for an organization is to define the organization strategy. As every organization strategy depends upon a variety of things which are different in leach organization like-works in different markets, with different products, different level of maturity. So, an organization lay their strategy according to their 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 strategy. To make compensation mgmt effective it is important to create the policy effectively.

Generally, a compensation policy includes basic pay, allowances, benefits, perks at a different level of employment. Most importantly this policy should be linked with the organization 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 includes economic conditions, cost of living, labour union, various labour laws etc.

For example, according to disablement in the workmen’s compensation act employer have to provide the employees with some specific benefits according to the type of disablement.    

Secondly, the internal factors of an organization are the cost, ability to pay, sorority in skills etc needs 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. 

And 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 o evaluate the plan with different factors like internal or external, which are discussed earlier.

In this case of evaluating the plan will bring the results like employees morale, satisfaction, 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:

Benefits Of Compensation Management
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 employees loyalty towards the company. Plus the productivity tends to be higher in satisfied employees.


We all have different kinds of needs. Some of us want money so they work for the company which gives them 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 offer them fair rewards? Rewards which they thought they deserved?

So these were the benefits of compensation mgmt to an organization and employees as well.

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