Definition of Compensation Management:

In simple terms, compensation is everything that a company offers its employees in return for
their talent and time. When organized the right way, compensation dollars can be strategically
leveraged to reduce turnover, boost employee engagement and attract top talent. The purpose of
compensation management is to make the most of company dollars in a way that rewards
employees for their work.

Why is Compensation Management so important?

1. Compensation management makes a company vigilant. It drives managers to be on the lookout

for star performers who must be given rewards for their efforts, which ultimately decreases the
risk of losing a valuable employee.

2. It is positive reinforcement. Yes, money doesn’t make the world go round and if line managers
are not friendly, helpful and supportive retention is difficult. But cash prizes and consistent
monetary perks in conjunction with a great work environment allow companies to grow by leaps
and bounds through motivated, hard working employees.

3. Compensation management enhances the company’s reputation. When workers are satisfied
with their monetary and intangible rewards, they attract better prospects for vacant positions,
bringing new, fresh talent to the organization.

How a Compensation Management Solution Can Facilitate Employee Recognition?

Money is a motivator; this is something that business leaders have acknowledged for decades.
Recently, however, it’s become increasingly apparent that money alone does not have the power
to engage and retain today’s employees, who seek more ways to feel recognized for their work.

The key, then, is using a compensation management solution that fairly and competitively
rewards contributors for their efforts in a way that illustrates the company’s appreciation for
employees’ dedication.
Employees Want To Feel Valued
Now more than ever, employees want to feel valued for the work they do. Management can
achieve this through a compensation management system that rewards top talent for their above-
and-beyond success. Not only will it make employees feel more appreciated, but it will also
boost performance: according to HuffPost Business, associates who feel valued are more likely
to put forth greater efforts at work.

How to Show Them Their Value

Implementing compensation management software can help you answer these questions for
employees: What qualifies for above-and-beyond performance? What are the company’s
expectations for me, and how will I be rewarded for meeting (and/or exceeding) these criteria?
Having clear performance expectations is critical, according to Entrepreneur. Likewise, the ways
in which performance will be rewarded should also be made 100% clear through the help of your
compensation management solution. That way, employees will have a firm understanding of how
they will be recognized and rewarded for their contributions.

Here are some of the objectives of compensation management

To Attract Top Talent: 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
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.
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.
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.
Componento of Compensation Systems

Compensation systems are designed keeping in minds the strategic goals and business objectives.
Compensation system is designed on the basis of certain factors after analyzing the job work and
responsibilities.

                      

Types of Compensation Management

Compensation provided to employees can direct in the form of monetary benefits and/or indirect
in the form of non-monetary benefits known as perks, time off, etc. Compensation does not
include only salary but it is the sum total of all rewards and allowances provided to the
employees in return for their services. If the compensation offered is effectively managed, it
contributes to high organizational productivity.

1. Direct Compensation

2. Indirect Compensation
Need of Compensation Management

 A good compensation package is important to motivate the employees to increase the

organizational productivity.
 Unless compensation is provided no one will come and work for the organization. Thus,
compensation helps in running an organization effectively and accomplishing its goals.
 Salary is just a part of the compensation system, the employees have other psychological
and self-actualization needs to fulfill. Thus, compensation serves the purpose.
 The most competitive compensation will help the organization to attract and sustain the

Direct Compensation:

Direct compensation refers to monetary benefits offered and provided to employees in return of
the services they provide to the organization. The monetary benefits include basic salary, house
rent allowance, conveyance, leave travel allowance, medical reimbursements, special
allowances, bonus, Pf/Gratuity, etc. They are given at a regular interval at a definite time.

Basic Salary: Salary is the amount received by the employee in lieu of the work done by
him/her for a certain period say a day, a week, a month, etc. It is the money an employee
receives from his/her employer by rendering his/her services.
House Rent Allowance: Organizations either provide accommodations to its employees who are
from different state or country or they provide house rent allowances to its employees. This is
done to provide them social security and motivate them to work.

Conveyance: Organizations provide for cab facilities to their employees. Few organizations also
provide vehicles and petrol allowances to their employees to motivate them.

Leave Travel Allowances: These allowances are provided to retain the best talent in the
organization. The employees are given allowances to visit any place they wish with their
families. The allowances are scaled as per the position of employee in the organization.
Medical Reimbursement: Organizations also look after the health conditions of their
employees. The employees are provided with medi-claims for them and their family members.
These medi-claims include health-insurances and treatment bills reimbursements.

Bonus: Bonus is paid to the employees during festive seasons to motivate them and provide
them the social security. The bonus amount usually amounts to one month’s salary of the
employee.

Special Allowances: Special allowance such as overtime, mobile allowances, meals,

commissions, travel expenses, reduced interest loans; insurance, club memberships, etc are
provided to employees to provide them social security and motivate them which improve the
organizational productivity.

INDIRECT COMPENSATION

Indirect compensation refers to non-monetary benefits offered and provided to employees in lieu
of the services provided by them to the organization. They include Leave Policy, Overtime
Policy, Car policy, Hospitalization, Insurance, Leave travel Assistance Limits, Retirement
Benefits, Holiday Homes.

Leave Policy: It is the right of employee to get adequate number of leave while working with the
organization. The organizations provide for paid leaves such as, casual leaves, medical leaves
(sick leave),

Overtime Policy: Employees should be provided with the adequate allowances and facilities
during their overtime, if they happened to do so, such as transport facilities, overtime pay, etc.

Hospitalization : The employees should be provided allowances to get their regular check-ups,
say at an interval of one year. Even their dependents should be eligible for the medi-claims that
provide them emotional and social security
Insurance: Organizations also provide for accidental insurance and life insurance for employees.
This gives them the emotional security and they feel themselves valued in the organization.

Leave Travel: The employees are provided with leaves and travel allowances to go for holiday
with their families. Some organizations arrange for a tour for the employees of the organization.
This is usually done to make the employees stress free.

Retirement Benefits: The employees are provided with leaves and travel allowances to go for
holiday with their families. Some organizations arrange for a tour for the employees of the
organization. This is usually done to make the employees stress free.

Holidays Homes: Organizations provide for holiday homes and guest house for their employees
at different locations. These holiday homes are usually located in hill station and other most
wanted holiday spots. The organizations make sure that the employees do not face any kind of
difficulties during their stay in the guest house.

Factors Considered in Deciding the Compensation

External Factors

Demand and Supply of Labor

Wage is a price or compensation for the services rendered by a worker. The firm requires these
services, and it must pay a price that will bring forth the supply which is controlled by the
individual worker or by a group of workers acting together through their bunions. The primary
result of the operation of the law of supply and demand is the creation of the going wage rate. It
is not practicable to draw demand and supply curves for each job in an organization even though,
theoretically, a separate curve exists for each job.

Cost of Living
Another important factor affecting the wage is the cost of living adjustments of wages. This
tends to vary money wage depending upon the variations in the cost of living index following
rise or fall in the general price level and consumer price index. It is an essential ingredient of
long-term labour contract unless provision is made to reopen the wage clause periodically
Labour Union
Organized labor is able to ensure better wages than the unorganized one. Higher wages may have
to be paid by the firm to its workers under the pressure or trade union. If the trade union fails in
their attempt to raise the wage and other allowances through Collective bargaining, they resort to
strike and other methods hereby the supply of labour is restricted. This exerts a kind of influence
on the employer to concede at least partially the demands of the labour unions.
Government
To protect the working class from the exploitations of powerful employers, the government has
enacted several laws. Laws on minimum wages, hours of work, equal pay for equal work,
payment of dearness and other allowances, payment of bonus, etc., have been enacted and
enforced to bring about a measure of fairness in compensating the working class. Thus, the laws
enacted and the labour policies framed by the government have an
important influence on wages and salaries paid by the employers. Wages and salaries can’t be
fixed below the level prescribed by the government. class. Thus, the laws enacted and the labour
policies framed by the government have an important influence on wages and salaries paid by
the employers. Wages and salaries can’t be fixed below the level prescribed by the government.
Prevailing Wage Rates
Wages in a firm are influenced by the general wage level or the wages paid for similar
occupations in the industry, region and the economy as a whole. External alignment of wages is
essential because if wages paid by a firm are lower than those paid by other firms, the firm will
not be able to attract and retain efficient employees. For instance, there is a wide difference
between the pay packages offered by multinational and Indian companies. It is because of this
difference that the multinational corporations are able to attract the most talented workforce.

Internal Factors
Ability to Pay
Employer’s ability to pay is an important factor affecting wages not only for the individual firm,
but also for the entire industry. This depends upon the financial position and profitability of the
firm. However, the fundamental determinants of the wage rate for the individual firm emanate
from supply and demand of labour. If the firm is marginal and cannot afford to pay competitive
rates, its employees will generally leave it for better paying jobs in other organizations. But, this
adjustment is neither immediate nor perfect because of problems of labour immobility and lack
of perfect knowledge of alternatives. If the firm is highly successful, there is little need to pay
more than the competitive rates to obtain personnel. Ability to pay is an important factor
affecting wages, not only for the individual firm but also for the entire industry.
Top Management Philosophy
Wage rates to be paid to the employees are also affected by the top management’s philosophy,
values and attitudes. As wage and salary payments constitute a major portion of costs and /or
apportionment of profits to the employees, top management may like to keep it to the minimum.
On the other hand, top management may like to pay higher pay to attract top talent

Productivity of Workers
To achieve the best results from the workers and to motivate him to increase hisefficiency, wages
have to be productivity based. There has been a trend towards gearing wage increase to
productivity increases. Productivity is the key factor in the operation of a company. High wages
and low costs are possible only when productivity increases appreciably.
Job Requirements
Job requirements indicating measures of job difficulty provide a basis for determining the
relative value of one job against another in an enterprise. Explicitly, job may be graded in terms
of a relative degree of skill, effort and responsibility needed and the adversity of working
conditions. The occupational wage differentials in terms of
a) Hardship,
b) Difficulty of learning the job
c) Stability of employment
d) Responsibility of learning the job and
f) Change for success or failure in the work

Significances of Compensation Management

Establish a Fair and Equitable Remuneration

Effective compensation management objectives are to maintain internal and external equity in
remuneration paid to employees. Internal equity means similar pay for similar work. In other
words, compensation differentials between jobs should be in proportion of differences in the
worth of jobs. External equity implies pay for a job should be equal to pay for a similar job in
other organizations. Payments based on jobs requirements, employee performance and industry
levels minimize favoritism and inequities in pay.

To Attract Competent Personnel

A sound wage and salary administration helps to attract qualified and hardworking people by
ensuring an adequate payment for all jobs. For example IT companies are competing each other
and try their level best to attract best talents by offering better compensation packages.
To Retain the Present Employees
By paying competitive levels, the company can retain its personnel. It can minimize the
incidence of quitting and increase employee loyalty. For example employees attrition is high in
knowledge sectors (Ad-agency, KPO, BPO etc.,) which force the companies to offer better pay
to retain their employees.
To Improve Productivity
Sound wage and salary administration helps to improve the motivation and morale of employees
which in turn lead to higher productivity. Especially private sectors companies’ offer production
linked compensation packages to their employees which leads to higher productivity.
To Control Cost
Through sound compensation management, administration and labour costs can be
kept in line with the ability of the company to pay. If facilitates administration and control of pay
roll. The companies can systematically plan and control labour costs.
To Improve Union Management Relations
Compensation management based on jobs and prevailing pay levels are more acceptable to trade
unions. Therefore, sound wage and salary administration simplifies collective bargaining and
negotiations over pay. It reduces grievances arising out of wage inequities.
Increases Self-Confidence
Every human being wants his/her efforts to get acknowledgment. Employees gain more and
more confidence in them and in their abilities if they receive just rewards. As a result, their
performance level shoots up.

COMPENSATION MANAGEMENT: SUCCESS FACTORS

Many of today's senior executives name pay-for-performance as the most critical tool in
achieving the greatest financial results at their companies. But, implementing real, pay-for-
performance is easier said than done. SuccessFactors makes it easy for you to quickly and easily
implement a powerful pay-for-performance strategy. By rewarding great execution, you will
better retain your top talent and drive organizational performance that exceeds all expectations.
Plus, you'll enjoy clearer visibility into individual employee performance when it comes time to
make critical com

True pay-for-performance culture improves retention. Employees who outperform their

peers will be rewarded appropriately, feel valued and happy—and more likely to stay with your
company.

Ongoing compliance. Design your compensation strategy with objective data and communicate
it to managers to stay within allocated budgets and to employees to show the clear link between
compensation and performance expectations.

Budget optimization. Run "what-if" scenarios and instantly see how increasing merit pay to
your best employees would impact your budget.

Cost savings. Eliminate thousands of dollars from your expense column each year by making
sure you're not overpaying low performers. Also, the easy-to-use automated system will save
compensation managers time and money.

Zero error system. Manage your compensation in a secure environment with streamlined
workflows where your data is determined via calculation and eligibility engines—eliminating
privacy breaches and human calculation errors sensation planning decisions.

Factors Influencing Compensation Philosophy

Some of the factors that influence compensation philosophy include present revenue of the
company and expected profits in the future, market value of the jobs for which the company is
hiring, and degree of competitiveness in the types of jobs a company offers. The way an
organization views its employees and its responsibility to those employees’ factors into the
development of a compensation philosophy too. Essentially, many different

elements may contribute to the way an employer determines rate of pay, raises and bonuses. It
may be easy to create a compensation philosophy in some fields. For instance those that require
rising levels of expertise and education usually have set rates, and they may have a salary range
that matches market value prices and that gives employees something to aim for. Hospitals, for
example, can hire employees of numerous types, and clearly compensation will be different for
nurses than it is for doctors or janitors.

Types of Compensation Philosophy

Usually, there are two types of philosophies of compensation rates/wage rates including the
productivity philosophy and purchasing power philosophy.
Productivity Philosophy: which is relates to high wages and low unit cost of production which
assumes:
➢That the employers should provide the best possible tools, machines, goods and buildings etc.,
while the management should apply the latest production technique.
➢That the production should increase without the uses of commensurate physical efforts of
employees while the unit cost of production should decrease leading to lower prices of goods.
➢That the market for goods should expand leading to enhanced sales volume and
➢That the part of resultant enhanced profits should be used to increase the wages of the
employees and remaining can be ploughed back in the business
Purchasing Power Philosophy: makes the following propositions:
➢That the workers should be paid high wages because they form a large proportion of the work
force and are equipped with a higher propensity to consume. It results in expansion of the
economy’s purchasing power supply
➢That effective demand for goods and services produced should enlarge in each establishment
➢That productivity per worker should increase while the unit cost of output should decrease
leading to enhanced profits and
➢That increased wages should be paid from this enhanced income to average the cycle.

Traditional Compensation Approach

For some organizations, a traditional compensation approach makes sense and offers certain
advantages in specific competitive situations. It may be more legally defensible, less complex,
and viewed as more “fair” by average and below average employees. It reflects a logical, rational
approach to compensating employees

Total Rewards Approach

It tries to place a value on individual rather than just the jobs. Widespread use of various
inventive plans, team bonuses, organizational gain sharing programmes, and other designs serves
to link growth in compensation to results.
How to design a compensation plan
Paying your employees competitively and equitably is critical in order to retain top talent. While
we’d like to believe that our employees don’t know what others are making, we would be
woefully mistaken. If an employee perceives that there is a significant pay difference between
his or her position and a similar one, dissatisfaction and turnover will increase—and you may
even have a potential wage claim on your hands. Compensation has a lot of moving parts, so
create a successful compensation plan by focusing on these seven things:
1.Compensation strategy: Your philosophy is important as you compare salaries in the
marketplace. Do you want to pay at the top of your market or somewhere in the middle? Are you
okay being considered one of the lowest-paying organizations?
2. Job descriptions: These don’t have to be long documents, but must explain the key job responsibilities
well so that you’re matching positions properly when you do your market surveys.
3. Formal pay structure: As a compensation pro, you need to be able to explain pay decisions,
and a formal system can help. Whether it’s a system of grades or a documentation of current
positions, a formal system will help you provide consistency to your employees, as well as help
your supervisors and managers become knowledgeable about how the compensation system
works. They are your link to your employees.
4.Exempt/non-exempt evaluation: This is critical regardless of your organization’s size, as the
Department of Labor is now looking more closely to ensure proper employee classification.
Remember that it is job responsibilities—not job titles—that determine the classification.

5.Surveys: Conduct regular surveys to understand where you fall in the marketplace for
compensation. From developing relationships with others in your competitive area to
participating in external salary surveys to administering one of your own, find out what is
considered low pay, average and above average to keep up.

6. New positions: If you have a formal pay structure, make sure you have a process in place to
incorporate new positions within the organization. The Department of Labor wants to see that
you have an effective, consistent, regularly used process for making decisions around the
placement of positions in your salary structure.

7. Incentive plans: If you create incentive plans for your employees, clearly define what
behaviors are rewarded and conduct regular tests to ensure those behaviors are actually being
rewarded. Get creative—they don’t have to be expensive or made up of all cash

DHOW TO DESIGN A
CHOMPENSATION PLAN IN 7
STEPS
ESIGN A COMPENSATION PLAN IN
7 STEPS