Compensation Management – Meaning, Importance and Objectives

Compensation management refers to the organisation’s efforts to sustain a competitive compensation position within its local labour market, given current and anticipated future financial resources. Compensation management functions within the context of the organisation’s environment, culture, business and human resources strategies. It consists of a number of processes that are concerned with job evaluation, market rate analysis, job analysis, designing and maintaining pay structures, paying for performance, skills and competence, and performance management, and also the procedures needed in order to manage these processes.

Objectives of Compensation Management

(1) Attracting and Retaining Personnel – From organisation’s point of view, the compensation management aims at attracting and retaining right personnel in the organisation. Pay levels must respond to supply and demand of workers in the labour market since employees compete for wages. Premium wages are sometimes needed to attract applicants who are already working for others.

(2) Motivating Personnel – Compensation management aims at motivating personnel for higher productivity.

(3) Optimising Cost – Compensation management aims at optimising cost of compensation by establishing some kind of linkage with performance and compensation. It is not necessary that higher level of wages and salaries will bring higher performance automatically but depends on the kind of linkage that is established between performance and wages and salaries.

(4) Achieving Consistency – Compensation management tries to achieve consistency – both internal and external – in compensating employees. Internal consistency involves payment on the basis of criticality of jobs and employees performance on jobs. External consistency involves similar compensation for a job in all organisations. Though there are many factors involved in the determination of wage and salary structure for a job in an organisation which may result into some kind of disparity in the compensation of a particular job as compared to other organisations, compensation management tries to reduce this disparity.

Importance of Compensation Management

1. Compensation plays a pivotal role in effective management of human resources, which is crucial to the competitive advantage of organisations. Importance of compensation management is as follows –
2. It is essential for integrating employee efforts with organisational goals and objectives.
3. It is part of sound people management framework for recruiting, selecting, socialising, performing, developing, and maintaining a capable and motivated workforce.
4. It has social implications as poorly paid employees are likely to indulge in social unrest and undesirable activities.
5. It is management tool for controlling and directing employee’s productive energies for improving organisational competence and performance.
6. It helps in generating a talent pool.
7. It helps in creating better brand equity through increased employee communications with customers, professionals, and society at large.
8. It helps in maintaining compensation costs of an organisation efficiently.
9. The shareholders, business analysts, and stakeholders, are satisfied with compensation levels, and see the organisation as a good investment.
10. It helps in making compliance of government regulations on compensation.
11. It helps in improving work and organisational efficiency due to enhanced employee commitment.
12. It helps in providing job satisfaction to employees.