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What is Compensation Management?

Rahul Pandita
Compensation management is one of the most vital aspects of an organization. Ensuring that your top-performers are being paid well in today's competitive market ensures that there is no talent-drain from the organization. Here is a detailed look at the subject.
For a long time, human resource (HR) managers have been analyzing various reasons that make an employee give his 100% to the organization. Companies who have an edge over others in the market have now realized that an effective pay-structure ranks highly when it comes to retaining and recruiting employees.
Compensation management, as the name suggests, implies having a structure in which employees who perform better are paid more than the average performing employees. This encourages top-performers to work harder and helps in building a competitive atmosphere in the organization.
There are numerous critics though, who feel that a compensation strategy to retain employees is a short-term solution and an employee's relationship with a firm does not really mean only monetary gains. But, critics have to accept that companies which pay the highest, more often that not, have the best people working for them.
Compensation is divided into two types, direct management and indirect management. Let us take a look at both of them one by one.

Direct Compensation

Direct compensation comprises the salary that is paid to the employees along with the other health benefits.
These are all the benefits that form a part of your salary structure. These include the basic salary, house rent allowances, medical benefits, city allowances, conveyance, provident funds, etc. It also includes the bonuses, payments for holidays, etc.

Indirect Compensation

Indirect compensation can be thought of as the non-monetary benefits an employee gets from the organization. Rewards and recognitions, promotions, responsibility, etc., are some factors that induce confidence in the employees and motivate them to perform better.
It also instills the faith in them that their good work is being recognized and they can boost their career opportunities if they continue to work harder.
As we have discussed here, compensation management is necessary to retain quality people. Let us check what difference does a good compensation management make to the organization.
  • An ideal structure motivates employees to work hard and improve their productivity.
  • It makes the evaluation of employee performance smoother and transparent so that there is no scope for any favoritism.
  • It adheres to all the labor laws prevalent in the country so that there are no disputes between the management and the employee unions.
  • It reduces employee turnover and helps in creating a great atmosphere to work in the organization.
  • Companies which do not have sound employee compensation management often have employees speculating about their performance appraisals. A sound management ensures that an employee can compute his own compensation receivable.

Incentive Compensation Management

Offering incentives involves rewarding and recognizing high performing employees for their superior performance. For a firm to have sound incentive management, it needs to address issues associated with an incentive plan. The question often arises as how employee incentives should be paid.
Whether the amount of time spent in the office should be set as a criterion for incentives or the achievement of targets is a better option. Whether it cultivates ill-will among those employees who do not get it or does it motivate hard-working people to keep on performing exceptionally.
Most management thinkers feel that incentive is something that should be looked upon as a reward from the organization for putting in the extra efforts. It should not be seen as something that every employee has a right to; otherwise it will lose its importance and the firm might end up rewarding people who have made no real contribution to the organization.
There are various studies that are still going on in the field of employee motivation. Hope the information helps you in getting an insight on compensation management.