Introduction

Compensation is the Human Resources Management

function that deals with the every type of reward individuals
receives in the exchange for performing organizational
tasks. It is the major cost of doing the business for many
organizations. It is the chief reason why some individuals
seek employment. Financial compensation is either direct or
indirect. The direct financial compensation consist of
the person receives in the form of wages, salaries, bonuses or
commissions etc. Indirect compensation consists of the like
praise, self-esteem, recognitions, motivation, productivity,
(Benefits and Welfare).
 A competitive compensation and benefits package is key to a
company’s ability to attract and retain top talent.
 Cont
Compensation means
• The term compensation as a substitute word for wages and salaries, is of
recent origin. Wages is now considered as a cost factor. Therefore,
strategic management of wages and salaries is very important for
organizations. It has become imperative for organizations to balance the
cost of compensation and employee motivation (for retention) to survive
in a competitive world.
• Employee compensation is a better term than employee benefits or wages
or salaries. What the employee provides the employer is a labor service,
usually known as work.
• The total of all rewards provided employees in return for their services is
called compensation.
 Cont
• Compensation is what employees receive in exchange for their
contribution to the organization.
Compensation is a systematic approach to provide monetary & non

monetary value to employees in exchange for work performed.

• The word compensation may be defined as all forms of financial
returns, tangible ;services and benefits that an employee receives in
his/her tenure of employment.
• From the employers’ perspective, therefore, the compensation consists
of all payments (in kind or in cash) and all contributions to employees’
social security, pension, insurance etc.
 COMPENSATION MANAGEMENT
• Compensation management is the act of providing monetary
value to an employee for the work they do by means of a
company process or policy. Some types of compensation include
salary, bonuses, and benefit packages. Companies use
compensation management in order to find, keep, and motivate
employees to do quality work.. In the past, the compensation
issue was often confidential and governed by individual
employer’s preference and choice. However, in today’s
competitive world, compensation issues are more transparent.
 COMPENSATION MANAGEMENT
• Different scholars in different countries, have
defined the world compensation from different
perspectives. Globally, almost every country
views compensation as a measure of justice.
Also, some countries (particularly developed
ones) consider compensation as a means of
 Objectives of Compensation
• The objectives of compensation or wages can be classified under four
broad categories – equity, efficiency, macro-economic stability and
optimum allocation of labor.
1. Equity : The first category is equity, which may take several forms. It
includes income distribution through narrowing of inequalities,
increasing the wages of the lowest paid employees, protecting real
wages (purchasing power ) and the concept of equal pay for work of
equal value. Compensation management strives for internal and
external equity.
 Objectives of Compensation
2. Efficiency : It is often closely related to equity, because two concepts
are not antithetical. The objectives of efficiency are reflected in attempts
to link a part of wages to productivity or profit, group or individual
performance acquisition and application of skills and so on.
3. Macro-economic stability – It can be achieved through high
employment levels and low inflation. For instance, an inordinately high
minimum wage would have an adverse impact on levels of employment.
4. Efficient allocation of labor : The efficient allocation of labor in the
labor market implies that employees will move to wherever they receive
a net gain.
 Objectives of Compensation
• Other Objectives of Compensation

1. Acquire Qualified Personnel : Compensation needs to be high enough to attract

applicants. Pay levels must respond to the supply and demand of workers in the
labor market since employers compete for workers. Premium wages are sometimes
needed to attract applicants already working for others.
2. Retain Current Employees : Employees may quit when compensation levels are
not competitive, resulting in high turnover.
3. Attracting and Retaining Personnel
4. To increase or maintain morale.
5. To determine basic wage & salary.
6. To reward for job performance
7. Reduce turnover and encourage company loyalty.
 Compensation Components
• There are four components for compensation:-

1. Wages

2. Salary

3. Incentives

4. Fringe Benefits

• Wages:

Wages are the most important component of compensation and

these are essential irrespective of the type of organization. Wage is
referred to as remuneration to workers.
 Compensation Components
• Salary:

Salary refers to as remuneration paid to white-collar employees including

managerial personnel. It is the compensation to an employee for service rendered on a
monthly or annual basis.
• Incentives:

Incentives are the additional payment to employees besides the payment of

wages and salaries. Often these are linked with productivity, either in terms of higher
production or cost saving or both. These incentives may be given on individual basis or
group basis.
 Compensation Components
• Fringe Benefits:

• Fringe benefits include such benefits which are provided to the

employees either having long-term impact like provident fund,
gratuity, pension; or occurrence of certain events like medical benefits,
accident relief, health and life insurance; or facilitation in performance
of job like uniforms, Canteens, recreation, etc.
• Perquisites: These are normally provided to managerial personnel
either to facilitate their job performance or to retain them in the
organization. Such perquisites include company car, club membership,
free residential accommodation, paid holiday trips, stock options, etc.
 Compensation System
Consist of
Indirect Direct
Protection Programs Base Pay
Medical Insurance Salary
Life Insurance Wage
Disability Income Merit Pay
Pension
Social security
Cont..
Indirect Direct
Pay For Time Not Incentive Pay
Worked Bonus
Vacations Commission
Holidays Piece Rate
Sick Leave Profit Sharing
Jury Duty Stock Option

Shift Differential
Cont..
Indirect Direct
Services And Deferred Pay
Perquisites Savings Plan
Recreational Stock Purchase
Facilities Annuity
Car
Financial Planning
Low-Cost or Free

Meals
Compensation Management Process
• COMPENSATION MANAGEMENT PROCESS:

1. Organization’s strategy,
2. Compensation policy,
3. Job analysis and evaluation,
4. Analysis of contingent factors
5. Design and implementation of compensation plan
6. Evaluation and review.
Compensation Management Process
• Organizations Strategy:

• Organization’s overall strategy though not a step of compensation

management is the starting point in the total human resource
management process including compensation management.
• Companies operating in different types of market/product having
varying level of maturity, adopt different strategies and matching
compensation strategy and blend of different compensation methods.
Compensation Management Process
• Compensation Policy:

• Compensation policy is derived from organizational strategy and its

policy on overall human resource management.
• In order to make compensation management to work effectively, the
organization should clearly specify its compensation policy, which must
include the basis for determining base compensation, incentives and
benefits and various types of perquisites to various levels of employees.
• The policy should be linked with the organizational philosophy on human
resources and strategy. Besides, many external factors which impinge on
the policy must also be taken care of.
Compensation Management Process
Job Analysis and Evaluation
• Job analysis provides basis for defining job description and job
specification with the former dealing with various characteristics and
responsibilities involved in a job and the latter dealing with qualities
and skills required in job performer.
• Job analysis also provides base for job evaluation which determines
the relative worth of various jobs in the organization.
• The relative worth of various jobs determines the compensation
package attached with each job.
Compensation Management Process
Analysis of Contingent Factors:
• Compensation plan is always formulated in the light of various factors,
both external and internal, which affect the operation of human
resource management system.
• Various external factors are conditions of human resource market, cost
of living, level of economic development, social factors, pressure of
trade unions and various labor laws dealing with compensation
management.
• Various internal factors are organization’s ability to pay and
employees' related factors such as work performance, seniority, skills,
etc. These factors may be analyzed through wage/salary survey.
Compensation Management Process
Design and Implementation of Compensation Plan:
• After going through the above steps, the organization may be able to
design its compensation plan incorporating base compensation with
provision of wage/salary increase over the period of time, various
incentive plans, benefits and perquisites.
• Sometimes, these are determined by external party, for example, pay
commissions for Government employees as well as for public sector
enterprises.
• After designing the compensation plan, it is implemented.
Implementation of compensation plan requires its communication to
employees and putting this into practice.
Compensation Management Process
• Evaluation and Review:

• A compensation plan is not a rigid and fixed one but is dynamic since it is
affected by a variety of factors which are dynamic.
• Therefore, compensation management should have provision for evaluating
and reviewing the compensation plan.
• After implementation of the plan, it will generate results either in terms of
intervening variables like employee satisfaction and morale or in terms of
end-result variable like increase of productivity.
• However, this latter variable is more important. The evaluation of
compensation plan must be done in this light.
• If it does not work as intended, there should be review of the plan
necessitating a fresh look.