Management compensation

Compensation Management in HRM can be defined as:

The process of designing, implementing, and administering a company's
compensation and benefits programs to attract, retain, and motivate employees,
while also ensuring internal equity, external competitiveness, and compliance
with labor laws and regulations."
In simpler terms, Compensation Management is about:
Determining how much to pay employees (salary, wages, bonuses)
Providing benefits (health insurance, retirement plans, etc.)
Ensuring fair and competitive compensation packages
Aligning compensation with company goals and performance
Communicating compensation policies and practices to employees
The goal of Compensation Management is to create a compensation and benefits
program that supports the organization's strategic objectives, while also meeting
the needs and expectations of employees.
Different Types of Compensation
There are different types of compensation. Schuler identified three major types of
compensation, which
are mentioned below;
1. Non-monetary Compensation.
2. Direct Compensation.
3. Indirect Compensation.
Non-monetary Compensation
It includes any benefit that an employee receives from an employer or a job that
does not involve
tangible value. Examples are career development and advancement
opportunities, opportunities for
recognition, as well as work environment and conditions.
Direct Compensation
Direct Compensation comprises of the salary that is paid to the employees along
with the other health
benefits.
Money is included under direct compensation. It is an employee’s base wage
which can be an annual
salary or hourly wage and any performance-based pay that an employee receives.
Direct compensation consisting of pay received in the form of wages, salaries,
bonuses, and
commissions provided at regular and consistent intervals.
These include the basic salary, house rent allowances, medical benefits, city
allowances, conveyance,
provident funds, etc. It also includes bonuses, payments for holidays, etc.
Indirect Compensation
Indirect compensation can be thought of as the nonmonetary benefits an
employee gets from the organization.
It includes everything from legally required public protection programs such as
Social Security to health
insurance, retirement programs, paid leave, childcare or moving expenses.
While benefits come under indirect compensation and may consist of life,
accident, health insurance,
the employer’s contribution to retirement, pay for a vacation, employer’s
required payment for
employee welfare as social security.
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.
Objectives of Compensation Management
The basic objective of compensation management can be briefly termed as
meeting the needs of both
employees and the organization.
Employers want to pay as little as possible to keep their costs low. Employees
want to get as high as
possible.
Objectives of compensation management are:
1. Acquire qualified personnel.
2. Retain current employees.
3. Ensure equity.
4. Reward desired behavior.
5. Control costs.
6. Comply with legal regulations.
7. Facilitate understanding.
8. Further administrative efficiency.
9. Motivating Personnel.
10. Consistency in Compensation.
11. To be adequate.
Compensation management tries to strike a balance between these two with
specific objectives:
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 employees compare for workers.
Premium wages are sometimes needed to attract applicants working for others.
Retain current employees
Employees may quit when compensation levels are not competitive, resulting in
higher turnover.
Employees serve organizations in exchange for a reward. If pay levels are not
competitive, some
employees quit the firm. To retain these employees’, pay levels must be
competitive with that of other
employers.
Ensure equity
To retain and motivate employees, employee compensation must be fair. Fairness
requires wage and
salary administration to be directed to achieving equity.
Compensation management strives for internal and external equity.
Internal equity requires that pay be related to the relative worth of a job so that
similar jobs get similar
pay.
External equity means paying workers what comparable workers are paid by
other firms in the labor
market.
Reward desired behavior
Pay should reinforce desired behaviors and act as an incentive for those behaviors
to occur in the future.
Effective compensation plans reward performance, loyalty, experience,
responsibility, and other
behaviors.
Good performance, experience, loyalty, new responsibilities, and other behaviors
can be rewarded
through an effective compensation plan.
Control costs
A rational compensation system helps the organization obtain and retain workers
reasonable cost.
Without effective compensation management, workers could be overpaid or
underpaid.
Comply with legal regulations
A sound wage and salary system considers the legal challenges imposed by the
government and ensures
employers compliance.
Facilitate understanding
The compensation management system should be easily understood by human
resource specialists,
operating managers and employees.
Further administrative efficiency
Wage and salary programs should be designed to be managed efficiently, making
optimal use of the
HRIS, although this objective should be a secondary consideration with other
objectives.
Motivating Personnel
Compensation management aims at motivating personnel for higher productivity.
Monetary compensation has its own limitations in motivating people for superior
performance. Besides
money people also wants praise, promotion, recognition, acceptance, status, etc.
for motivation.
Consistency in Compensation
Compensation management tries to achieve consistency-both internal and
external in compensating
employees. Internal consistency involves payment on the basis of the criticality of
jobs and employees’
performance on jobs.
Thus, higher compensation is attached to higher-level jobs. Similarly, higher
compensation is attached to
higher performers in the same job.
To be adequate
Compensation must be sufficient so that the needs of the employee are fulfilled
substantially.
Pre-requisites for Effective Compensation Management
An effective compensation system should fulfill the following criteria:
1. Adequate: Minimum governmental, union, and managerial pay level positions
must be met by the
compensation system.
2. Equitable: Care should be taken so that each employee is paid fairly, in line
with his/her abilities, efforts,
education, training, experiences, competencies, and so on.
3. Balanced: Pay, benefits, and other rewards must provide a reasonable
compensation package.
4. Secure: Employees security needs must be adequately covered by the
compensation package.
5. Cost-Effective: Pay must be neither excessive nor inadequate, considering what
the enterprise can
afford to pay.
6. Incentive Providing: The compensation package should be such that it
generates motivation for
effective and productive work.
7. Acceptable to all Employees: All employees understand the pay system well
and feel it is reasonable for the enterprise and the individual. the enterprise and
the individual.
Wage Structure
Wage and salary administration is essentially the application of a systematic
approach to the problem of
ensuring that employees are paid in a logical, equitable and fair manner.
Wage: wage and salary are used interchangeably. But ILO defined the term wage
as “the remuneration
paid by the employer for the services of hourly, daily, weekly and fortnightly
employees.” It also means
that remuneration paid to production and maintenance or blue collar employees.
Salary: the term salary is defined as the remuneration paid to the clerical and
managerial personnel
employed on monthly or annual basis. The term salaries / wages can be defined
as the direct
remuneration paid to an employee compensating his services to an organization.
Salary can also be
known as basic pay.
Earnings: earnings are the total amount of remuneration received by an
employee during a given
period. These include salary (pay), dearness allowance, House Rent Allowance,
City Compensatory
allowance, other allowances, overtime payments etc.
Nominal Wage: it is the wage paid or received in monetary terms. It is also known
as money wage.
Real Wage: Real wage is the amount of wage arrived after discounting nominal
wage by the living cost.
It represents the purchasing power of money wage.
Take Home Salary: It is the amount of salary left to the employee after making
authorized deductions
like contribution to the provident fund, life insurance premium, income tax, and
other charges.
Minimum wage: It is the amount of remuneration which could meet the “nominal
needs of the average
employee regarded as a human being living in a civilized society.” It is defined as
the amount or
remuneration “which may be sufficient to enable a worker to live in reasonable
comfort, having regard
to all obligations to which an average worker would ordinarily be subjected to.”
Statutory Minimum Wage: It is the amount of remuneration fixed according to
the provisions of the Minimum Wage Act, 1948.

In today's fast-paced and competitive business landscape, a well-designed

Compensation Management system is essential for organizations to stay ahead of
the curve. By prioritizing fairness, transparency, and employee satisfaction,
organizations can build a positive work culture, drive employee engagement, and
achieve long-term success. Thank you for joining me on this journey into the
world of Compensation Management.