Concept of Compensation Management

Concept of Compensation Management

Concept of Compensation Management

Compensation means the basic returns that an employee obtains from his/her work. Every organization offers a good compensation to attract and retain the ablest employees on the actual work floor. It is because if the company does not offer an attractive package of compensation, compared to other competitive firms, the efficient employees may leave the firm. Hence, the employees should be compensated adequately. A well-designed job evaluation program helps to determine an appropriate compensation system.

Objective of Compensation

The objective of the compensation function is to create a system of rewards that is equitable to the employer and employee alike. The desired outcome is an employee who is attracted to the work and motivated to do a good job for the employer. Patton suggests that in compensation policy there are seven criteria for effective­ness. Compensation should be:

  • Adequate, Minimal governmental, union and managerial levels should be met.
  • Equitable, Each person should be paid fairly, in line with his or her effort, abilities, and training.
  • Balanced Pay, benefits, and other rewards should provide a reasonable total reward package.
  • Cost-effective, Pay should not be excessive, considering what the organization can afford to pay.
  • Secure Pay should be enough to help an employee feel secure and aid him or her in satisfying basic needs.
  • Incentive-providing, Pay should motivate effective and productive work.
  • Acceptable to the employee, The employee should understand the pay system and feel it is a reasonable system for the enterprise and himself or herself.

Thus, compensation management is the act of distributing some type of monetary value to an employee for their work by means of the company’s policy or procedures. In basic terms, it is paying an employee based on the decided pay and benefits package for the position. The goal of compensation management is to find quality people who perform quality work and then compensate them in order to retain them and reduce turnover rates. Some different types of compensation include salary, overtime pay, commission, bonuses, and benefits packages that might include health and dental insurance, vacation time, and retirement savings.

Compensation may be defined as a package of financial and non-financial benefits that the employee receives for his/her contribution rendered to the organization. It consists of all forms of monetary and non-monetary rewards/pays provided by the employer to the employees for services contributed by them towards organizational objectives. It has two main components- direct financial payments and indirect payments. The direct payments consist of salaries, wages, incentives, commissions, bonuses, etc. Whereas, the indirect payments comprise financial benefits like paid leaves, employee aid insurance etc.

Compensation is a major component of reward which is basically given to the employees in return for their services. It is a package of quantifiable rewards provided to the employees. Hence, the assignment of appropriate/ low-cost compensation is known as compensation management.It will attract, motivate and retain competent employees at work, and this helps to minimize the turnover ratio.


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