Compensation Management - Definition, Importance & Process

What is Compensation Management?

Compensation management is a systematic business practice where in the company plans, determines and creates an effective compensation or salary structure & policies for its employees. Compensation management looks to manage the funds being disbursed as a payment for the services which employees provide during their employment. It is an important aspect is business as the company manages the monetary & non-monetary benefits for every job role in the organization.

Importance of Compensation Management

Every employee who joins a company works for a salary or certain perks which they get as a part of the services they provide for the company. This process of managing the compensation & benefits for every corresponding job role is known as compensation management. This is very important as it determines which employee and job position gets what kind of remuneration, perks, benefits etc. Monetary compensation benefits include salary, performance bonuses, sales commission, over time pay etc.

Non-monetary benefits include insurance, loans, car-benefit, house-benefit, stock options etc. The main objective of a good compensation is to reward employees for their work and keep this motivated & satisfied.

Objectives of Compensation Management

It is important that a company has the best workforce if it has to succeed in growing its business. Some of the key objectives of compensation management are as below:

1. Attract Employees

Compensation management is important in attracting new talent to the company by offering the right salary & benefits to the right candidate who can be beneficial for the company.

2. Employee Retention

Retaining existing employees with the adequate monetary as well non-monetary benefits & rewards is a critical component of compensation management.

3. Rewarding Employees

Companies need to recognize and reward employees who perform well to keep them motivated as well as set an example that high performers will get additional value & benefits.

4. Ensure Equity

One of most important objectives is to make sure all employees feel satisfied and the salary at every level is justified with the amount of work being done by them.

Equity leads to employees being satisfied at every job level in the organization hierarchy.

5. Cost Control

Managing the funds is critical else there might be a few cases where some employees are under-paid whereas others are being over-paid for their services.

6. Wage & Benefit Determination

The most critical objective of compensation management is to define the salary & benefit structure of the different job roles and job levels which are present in the company.

7. Legally Compliant

Every country has labor laws which define the minimum salary or benefits which employees must get. Thus, compensation management ensures that every company is legally sound and is compliant to any government policies.

Compensation Management Process

The basic steps involved in a company determining the salary structure for its employees can be defined by the following steps:

1. Analyze & Evaluate the Job

The first step is to analyze the job in terms of the required skills, education, hierarchy, responsibility etc.

2. Survey Wages & Salary

Companies do a thorough research of how much remuneration is paid to employees for a particular job role based on their education, skill, company requirements, competition benchmarking, government policies etc.

3. Define Pay Grade Structure

For every job position and job level, the company must define the minimum and maximum wages that they would be willing to pay to employees.

4. Finalize

Once the pay grade structures are defined, companies must finalize components like salary, bonuses, perks, additional benefits etc.

5. Control & Revise

Compensation management is a continuous and reiterative process and needs constant monitoring and re-evaluation based on demand-supply, job market, competition, skill-sets required etc.

Hence, this concludes the definition of Compensation Management along with its overview.

This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.

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