Compensation management, also known as wage and salary administration, remuneration management, or reward management, is concerned with designing and implementing a total compensation package.
Understand Compensation Management
What is Compensation Management?
Compensation is the human resource management function that deals with every reward individuals receive for performing an organizational task.
The consideration for which labor is exchanged is called compensation.
Compensation is what employees receive in exchange for their work. It is a particular price, that is, the price of labor. Like any other price, remuneration is set where the labor demand curve crosses the labor supply curve.
What is Compensation?
Compensation is referred to as money and other benefits received by an employee for providing services to his employer.
Compensation refers to all forms of financial returns, tangible services, and benefits employees receive as part of an employment relationship, which may be associated with the employee’s service to the employer like provident fund, gratuity, insurance scheme, and any other payment which the employee receives or benefits he enjoys instead of such payment.
According to Dale Yoder, “Compensation is paying people for work.”
“Compensation is what employees receive in exchange for their contribution to the organization.” – Keith Davis.
In the words of Edwin B. Flippo, “The function compensation is defined as adequate and equitable remuneration of personnel for their contributions to the organizational objectives.”
Cascio has defined compensation as follows;
“Compensation includes direct cash payments, indirect payments in the form of employee benefits, and incentives to motivate employees to strive for higher levels of productivity.”
Beach has defined wage and salary administration as follows;
“Wage and salary administration refers to establishing and implementing sound policies and practices of employee compensation.
It includes such areas as job valuation, surveys of wages and salaries, analysis of relevant organizational problems, development, and maintenance of wage structure, establishing rules for administering wages, wage payments, incentives, profit sharing, wage changes and adjustments, supplementary payments, control of compensation costs and other related items.”
Compensation can be in the form of cash or kind. Compensation may be defined as money received in the performance of work, plus the many benefits and services that organizations provide their employees.
Different Types of Compensation
There are different types of compensation. Schuler identified three major types of compensation, which are mentioned below;
Non-monetary Compensation
The non-monetary compensation includes any benefit 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, and work environment and conditions.
Direct Compensation
Direct compensation comprises the salary that is paid to the employees along with the other health benefits.
Money is included under direct compensation. An employee’s base wage can be an annual or hourly wage and any performance-based pay that an employee receives.
Direct compensation consists of pay received in 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 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, and employers’ required payment for employee welfare as social security.
Rewards and recognitions, promotions, responsibility, etc., induce confidence in the employees and motivate them to perform better. It also instills faith in them that their good work is being recognized, and they can boost their career opportunities if they continue to work harder.
11 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;
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 to 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 it may be related to the relative worth of a job so that similar jobs get similar pay.
External equity means paying workers what other firms in the labor market pay comparable workers.
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.
An effective compensation plan can reward good performance, experience, loyalty, new responsibilities, and other behaviors.
Control costs
A rational compensation system helps the organization obtain and retain workers’ reasonable costs. 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 comply.
Facilitate understanding
Human resource specialists, operating managers, and employees should easily understand the compensation management system.
Further administrative efficiency
Wage and salary programs should be managed efficiently, making optimal use of the HRIS, although this objective should be a secondary consideration to other objectives.
Motivating Personnel
Compensation management aims at motivating personnel for higher productivity.
Monetary compensation has its limitations in motivating people for superior performance. Besides money, people also want 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 a payment based on 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 employee’s needs are substantially fulfilled.
7 Pre-requisites for Effective Compensation Management
An effective compensation system should fulfill the following criteria:
Adequate
The compensation system must meet minimum governmental, union, and managerial pay level positions.
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.
Balanced
Pay, benefits, and other rewards must provide a reasonable compensation package.
Secure
The compensation package must adequately cover employees’ security needs.
Cost-Effective
Pay must be neither excessive nor inadequate, considering what the enterprise can afford to pay.
Incentive Providing
The compensation package should be such that it generates motivation for effective and productive work.
Acceptable to all Employees
All employees understand the pay system well and feel it is reasonable for the enterprise and the individual.
7 Importance of Sound Wage Structure
A sound wage policy is to adopt a job evaluation program to establish fair wage differentials based upon differences in job contents.
Besides the basic factors provided by a job description and job evaluation, those that are usually taken into consideration for wage and salary administration are;
1. The organizations’ ability to pay
Wage increases should be given by those organizations which can afford them.
Therefore, companies with good sales and high profits tend to pay higher those running at a loss or earning low profits because of a higher cost of production or low sales.
In the short run, the economic influence on the ability to pay is practically nil.
Regardless of their profits or losses, all employers must pay no less than their competitors and need to pay no more if they wish to attract and keep workers. In the long run, the ability to pay is important.
2. Supply and demand of labor
If the demand for certain skills and supply is low, a higher price will be paid for these skills. The other alternative is to pay higher wages if the labor supply is scarce and lower wages when it is excessive.
Similarly, if there is a great demand for labor expertise, wages rise; but if the demand for workforce skills is minimal, the wages will be relatively low.
3. Prevailing market rate
This is known as the ‘comparable wage’ or ‘going wage rate’ and is the widely used criterion.
An organization’s compensation policy generally tends to conform to the wage rate payable by the industry and the community. This is done for several reasons.
First, competition demands that competitors adhere to the same relative wage level.
Second, various government laws and judicial decisions make adopting uniform wage rates attractive.
Third, trade union encourages this practice so that their members can have equal pay and equal work, and geographical differences may be eliminated.
Fourth, a functionally related firm in the same industry requires essentially the same quality of employees with the same skill and experience. This results in considerable uniformity in wage and salary rates.
Finally, suppose the same or about the same general wages are not paid to the employees as the organizations’ competitors pay. In that case, it will not attract and maintain a sufficient quantity and quality of the workforce.
4. Cost of living
The cost of living pay criterion is usually regarded as an automatic minimum equity pay criterion. This criterion calls for pay adjustments based on increases or decreases in an acceptable cost of living index.
When the cost of living increases, workers and trade unions demand adjusted wages to offset the erosion of real wages.
5. Living wage
The living wage criterion means that wages paid should be adequate to enable an employee to maintain himself and his family reasonably.
However, employers do not generally favor using the concept of a living wage as a guide to wage determination because they prefer to base an employee’s wages on his contribution rather than on his need.
6. Psychological and Social Factors
Psychologically, people perceive wages as a measure of success in life; people may feel secure; have an inferiority complex, seem inadequate, or feel the reverse. They may not take pride in their work or in the wages they get.
Therefore, the management should not overlook these things in establishing a wage rate.
Sociologically and ethically, people feel that “equal work should carry equal, that wages should be commensurate with their efforts, that they are not exploited, and that no distinction is made based on caste, color, sex or religion.”
Management should consider these factors to satisfy the conditions of equity, fairness, and justice.
7. Skill Levels Available in the Market
With the rapid growth of industries’ business trade, there is a shortage of skilled resources. Technological development and automation have been affecting skill levels at faster rates.
Thus the wage levels of skilled employees are constantly changing, and an organization has to keep its level up to suit the market needs.
8 Challenges or Problems of Compensation Management
Even the most rational methods of determining pay must be tempered by good judgment when challenges arise.
The implications of these demands may cause analysts to make further adjustments to compensation.
1. Strategic Objectives
Compensation management is not limited to internal and external equity. It also can be used to further an employer’s strategy. Employee compensation might have been initially anchored by the relative worth of jobs and the prevailing wage rates in the local market.
2. Prevailing Wage Rates
Market forces may cause some jobs to be paid more than their relative worth. Demographic shifts and relative supply and demand relationships affect compensation.
3. Union Power
When unions represent a portion of the workforce, they may obtain wage rates out of proportion to the relative worth of the jobs.
Unions may also limit management’s flexibility in administering merit increases since unions often argue for raises based on seniority and are applied across the board equally.
4. Government Constraints
The government sets minimum wage, overtime pay, equal pay, child labor, and record-keeping requirements. The minimum wage and overtime provisions require employers to pay at least a minimum hourly rate regardless of the job’s worth.
5. Comparable Worth and Equal Pay
Beyond “equal pay for equal work” is the idea of “comparable pay for comparable work” called comparable worth. It requires employers to pay equal wages for jobs of comparable value.
Comparable worth is used to eliminate the historical gap between men’s and women’s incomes.
6. Compensation Strategies and Adjustments
Most organizations have compensation strategies and policies that cause wages and salaries to be adjusted.
A common strategy is to give nonunion workers the same raises given to unionized employees; this is often done to prevent further unionization.
7. International Compensation Challenges
The globalization of business affects compensation management.
Compensation analysts must focus not only on equity but on competitiveness too. The growing globalization of business also means a greater movement of employees among countries.
As employees are relocated, compensation specialists are challenged to make fair adjustments to the employee and the company while keeping competitiveness in mind.
8. Productivity and costs
Regardless of the company or social policies, employers must make a profit to survive. Without profits, they cannot attract enough investors to remain competitive.
Therefore, a company cannot pay its workers more than they give back to the firm through its productivity. The company needs some creative techniques for compensation.
