Compensation Planning

29/02/2020 0 By indiafreenotes

Compensation management is the practice of the organization that involves giving monetary as well as non-monetary rewards to the employees, in order to compensate for the time they allocate to their job. The use of compensation management is increasing as organizations have started to realize the need for leveraging its human capital in order to gain a competitive edge in the industry. Compensation management involves “maximizing the return on human capital.”

Benefits of Compensation Management

  • One of the most significant benefits associated with compensation management is that it helps the organization achieve employee satisfaction. A happy employee will be more productive, while contributing to the overall profit of the business. This makes employees realize that they are getting equal returns for the time and effort they are dedicating to the organization. The practice of compensation management exerts a positive impact in the employees by influencing them to perform better and increasing their overall efficiency.
  • This stabilizes the labor turnover rate as employees get compensated for their work at a competitive market rate.  They do not feel the need of leaving the organization. It can then be concluded that compensation management helps increase the loyalty of the employees towards the organization.
  • Compensation management is an important aspect of the job evaluation process. It augments the whole process by setting up standards for the company that are realistic as well as achievable, as far as the compensation practices of the organization are concerned.
  • It is a practice which helps to improve the relationship of the company with the labor union, as it allows the compliance of different labor laws and acts. If the organization is following the compensation practices same as that of the market, there will be no dispute to settle between them and the labor union.
  • It helps the professional growth of employees, as their efficiency increases, when there is a reward present for achieving a certain level of production. This also means that the deserving employees are fairly compensated for the efforts they are putting into their work, thus helping the organization to retain the best talent.
  • Compensation Management is the practice that if followed properly, will turn the organization into a hub of talent. This means that more human capital will get attracted to the company, when they will view the compensation package that it will be offering. Also, the organization must keep in mind that monetary rewards are not something that only derives the motivation of the workforce. The overall compensation package must also include the non-monetary rewards, where the employees should be appreciated for the effort they are putting in their work. Therefore, the organization must ensure that its compensation package is based on monetary as well as non-monetary rewards.

Objectives of Compensation Management

  1. To Attract Top Talent

Rai University states that one of the primary goals of compensation should be to recruit qualified talent. When you have a competitive compensation plan in place, you’ll be better able to attract top industry talent.

  1. To Retain & Reward Personnel

Don’t lose your top talent to your competitors because employees believe that the grass will be greener elsewhere. Find out market values for your employees and pay accordingly. You can also set up pay-for-performance models to drive performance by encouraging associates to reach new goals and push farther.

  1. To Boost Motivation

When structured effectively, your compensation plan can drive motivation across your teams. Employees who know that they’re being fairly compensated for their work feel appreciated and are therefore more likely to stay engaged, committed, and productive.

  1. To Be Compliant

Compensation isn’t just about being fair within the industry; it must also comply with federal regulations, such as the Fair Labor Standards Act. While adhering to standards can complicate your compensation management, it will help protect your company against litigation and ensure fairness across the board for your personnel.

  1. To Maximize ROI

It requires some fine tuning, but compensation management is most effective when you get the biggest bang for your buck. In other words, if you can create a compensation plan that stays within budget while also driving productivity through pay-for-performance and other motivational tactics, you’re creating a plan that’s both equitable for the company and advantageous for hardworking employees.


(i) There should be definite plan to ensure that differences in pay for jobs are based upon variations in job requirements, such as skill, effort, responsibility, working conditions, mental and physical requirements.

(ii) The general level of wages and salaries should be reasonably in line with that prevailing in the labour market. The labour market criterion is most commonly used.

(iii) The plan should carefully distinguish between jobs and employees. A job carries a certain wage rate, and a person is assigned to fill it at that rate. Exceptions sometimes occur in very high level jobs in which the job holder may make the job large or small, depending upon his ability and contribution.

(iv) Equal pay for equal work, i.e., if two jobs have equal difficulty requirements, the pay should be the same, regardless of who fills them.

(v) An equitable practice should be adopted for the recognition of individual differences in ability and contribution.

(vi) There should be a clearly established procedure for hearing and adjusting wage complaints. This may be integrated with the regular grievance procedure, if it exists.

(vii) The employees and the trade union should be informed about the procedure used to establish wage rates. Every employee should be informed of his own position, and of the wage and salary structure. Secrecy in wage matters should not be used as a cover up for haphazard and unreasonable wage programme.

(viii) The wage should be sufficient to ensure for the worker and his family reasonable standard of living. Workers should receive a guaranteed minimum wage to protect them against conditions beyond their control.

(ix) The wage and salary structure should be flexible so that changing conditions can be easily met.

(x) Prompt and correct payments of the dues of the employees must be ensured and arrears of payment should not accumulate.

(xi) For revision of wages, a wage committee should always be preferred to the individual judgement.

(xii) The wage and salary payment must fulfill a wide variety of human needs, including the need for self-actualization. It has been recognized that money is the only form of incentive which is wholly negotiable, appealing to the widest possible range of seekers. Monetary payment often acts as motivation and satisfies interdependently of other job factors.