Meaning, Objectives of Compensation Plans

Employees work to earn money (wages or salary). This money is broadly termed as compensation. It is the reward they want from management in return for services rendered to the organisation. Compensation or paying employees for their work is an important responsibility of human resource managers. How much compensation a worker wants depends upon his economic needs.

If a man is unemployed and hard pressed, he will be ready to work for lower compensation. If his physiological needs (food, clothing, shelter) are satisfied, he will bargain for better compensation. Good compensation (or pay packet) not only attracts talented employees, it also retains them in the organisation for long run.

“Compensation is a comprehensive term which includes wages, salaries, all other allowances and benefits.” It involves remunerating people for services rendered by them and motivating them to reach the desired level of performance. Compensation may be paid in cash, kind or both.

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.

2. 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.

3. 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.

4. 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.

5. 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.