What is Compensation Management ?

Earlier, compensation management was limited up to designing, maintaining and sustaining a pay structure, but in present era the term compensation management is composed of a number of activities pertaining to job evaluation, market rate analysis, job analysis, pay structure design and maintenance, etc. In a nutshell compensation management refers to the efforts of the organisation, to maintain a competitive compensation structure, keeping in mind the conditions of local labour market, with respect to present and future financial resources of an organisation.

Definition of Compensation Management 

According to I. Kessler :
"Compensation management refers to payment systems which determine employee wages or salary, direct and indirect rewards".

According to Tapomoy Deb :
"Compensation management is a system compensating individuals for the work they perform in such a way that the organisation is able to attract, retain, and motivate them to perform well keeping in view organisational and market factors".

Objectives of Compensation Management 

Compensation management strives to achieve the following objectives : 

1) To Attract and Retain Employees : 
The basic purpose of compensation management is to attract and retain the talented employees. In order to attract the workforce from the competitor's organisations, sometimes premium wages are required to be offered. Finally, a payment system should be as per the demand and supply of labour in the market.

2) Te Motivate Employees : 
Compensation management motivates employees to work hard in order to improve their productivity as well as that of the organisation.

3) To Optimize Cost : 
Compensation management should establish a suitable relationship between performance and compensation because it is not necessary that, if employees are given high wages they will perform better without any valid linkage.

4) To Achieve Consistency : 
Compensation management aims at maintaining both internal and external equity in compensating employees. Internal equity can be achieved by making payment on the basis of job specification and employees' performance on the job whereas external uniformity can be achieved by making payment for a job similar to all organisations. Compensation management also tries to reduce the disparity pertaining to compensation of a specific work as related to other organisations,

Nature of Compensation Management

Nature of compensation management includes :

1) Integral Part of HRM : 
Compensation management is essential for entire human resource of the organisation. Thus, it has become an integral part of human resource management as it plays a significant role in proper functioning of HRM.

2) Challenging Function : 
Compensation management has a great impact on the objectives established by the organisation. Therefore, it is considered to be one of the most challenging functions of human resource management.

3) Dynamic Discipline : 
Compensation management is known as dynamic discipline because it is not only affected by individual factors but business and environmental factors also influence it to a large extent.

4) Wide Application : 
Compensation management is not only related to paying the employees but also focuses on motivating them. It also supervises the functions of recruitment, budgeting, monetary forecasting, improving human relationships, computer operations, tax related laws, etc.

5) Strategic Tool :
Compensation management serves as a strategic tool, which increases the competitive level of organisation and prepares it for the stiff competitions taking place in today's global industries.

Major Elements of Compensation Management

Major elements of compensation management are shown in figure : 

1) Job Analysis : 
Job analysis is the first step taken by the management in compensation management process. It includes identifying the nature of job, duties and responsibilities performed by employee, their accountability towards the organisation, their performance, etc. In simple terms, characteristics of the job form the basis for compensation management process.

2) Job Evaluation : 
The next step in the process of compensation management is evaluation of different jobs in the organisation. It is the job evaluation which determines the worth of the job. The nature of the work and skills and duties required for a particular job forms the basis for job evaluation. In the job evaluation method, worth of each job is assessed using various methods such as ranking, grading, paired comparison, factor comparison, etc. These evaluation methods are carried out without any biasness in order to identify the salary structure of various jobs.

3) Developing the Pay Structure : 
Pay structure depicts what an organisation pays to each employee. Organisation can opt for narrow graded and broad graded pay structure on the basis of significance and difficulty level of the job.

4) Wages and Salary Survey : 
Before setting up of a pay scale, it is compulsory for the organisation to consider external equity. For this, organisations use wage and salary survey method. With the help of wage and salary survey method, organisations try to gather information from the labour market about the salary given to the employees of same level or performing same job in similar of industry.
Besides this, information related to current wage rate, cost of living, rates during inflation and deflation periods, etc.. can also be gathered through labour market. There are two types of survey methods, either the organisation can go to the labour market and conduct the survey or it can purchase the surveys conducted by professional organisations.

5) Job Pricing : 
Determining pay rates for different jobs of the organisation is known as job pricing. Job evaluation process and wage and salary survey process forms the basis for determining the job prices. Before deciding the salary of the employee, the internal worth and external worth of the job should be compared.
While finalizing the job prices, organisation should ensure two things, viz.,: 
  • Appropriate salary is given to the employees according to the value of the job, and
  • The efficient performers of the organisation should be rewarded for their excellent performance.

6) Compensation Revision and Control : 
Since compensation of employees is an expense for organisations and has a great impact on the organisational goals and objectives, thus, a proper and effective method should be employed such as budgeting, performance appraisal, compa-ratio method, etc. to determine the cost incurred on the human resource of the organisation and the effectiveness of compensation management.
Among all these methods, budgeting is the most effective method which helps in setting standards to evaluate the expenses incurred in the form of compensation. This method facilitates in regulating the financial outflow and aids in HR cost controlling and monitoring.

Importance of Compensation Management 

Importance of compensation management is as follows :
  • Compensation management is crucial to align employee efforts with the aims and objectives of the organisation.
  • It helps in creating and developing a competent and motivated workforce in order to achieve the set goals and targets of the organisation.
  • It helps to build positive image of the organisation in the society.
  • It eradicates social problems like bribery and theft. This is because if the employees get sufficient salary to sustain their life, they are less likely to engage such criminal activities. 
  • It increases job contentment in employees and also enhances their commitment level and loyalty.
  • It helps in improving the organisational productivity. 
  • It aids the organisation to comply with the existing rules and regulations set by the government regarding compensation.

Theories Related to Compensation Management 

There are three main theories that are used by human resource professionals when developing compensation management plans :

1) Reinforcement Theory :
It is similar to that of ope-rant conditioning. If a person is rewarded for a particular behavior, he or she is more likely to perform those actions again. One when he did something that made his parents or teachers happy and he was rewarded in some way. The probably think about a time, positive reaction motivated him to do the same actions again because he would anticipate getting the same or a similar reward. 

2) Equity Theory : 
It suggests that employees' actions will be changed based on their perception of how they are paid in comparison to their co-workers. For example, if Joe and Billy work for same number of hours and have the same type of job and a similar level of work experience, Joe would expect to be paid fairly and about the same salary. However, if Joe discovered that Billy was paid more than him, then his productivity will probably decrease so that he is only working up to the level that is fair based on his new perception of his compensation.

3) Agency Theory : 
It attempts to use pay in order to get the different interests of people involved with the company to become one in the same. There are many categories of people within a company and each has their own set of priorities : 
  • Employees wish to have a safe workplace, to be paid fairly based on their level of effort and may be even share in company's profits, if the company is successful (After all, the company could not make profits without employees). 
  • Management seeks to increase the productivity of employees and to be paid fairly based on their level of expertise within the organisation.
  • Stockholders want the company to maximize profits by reducing costs (including labour expenses), while increasing the value and reputation of the company.
As it can be can be seen, the priorities of each group can be indirect conflict. The agency theory of compensation management can make it a priority to maximize productivity, performance and the reputation of the company; so that employees, management and stockholders all ultimately have the same goals.