What Is Compensation Management?

What Is Compensation Management?

Compensation Management is an organized practice that involves balancing the work-employee relation by providing monetary and non-monetary benefits to employees. Compensation includes payments such as bonuses, profit sharing, overtime pay, recognition rewards and sales commission.
The compensation strategy is the extremely important piece of the overall HR Strategy to keep the company competitive and successful. On the other hand, the compensation strategy is important to keep the personnel budget under the control and to manage the jobs in the right salary (pay) brackets.

The salaries or bonuses are extremely important for the motivation of employees and managers. Generally, the motivation is not about the compensations, but the compensation should support the general motivation framework in the organization. Even the best managers in the world are not able to keep highly motivated teams, when the compensation strategy is not in line with the job market.

The employees usually know the common levels of salaries in the industry and when the organization is below the median or the average, it has to compensate the difference in other area. But, when the difference is too high, the compensation by a different motivation tool does not work and the employees start to feel demotivated as they receive no equal value for their effort.

Compensation management ensures that people get paid a fair salary based on:
  • Work performance
  • Position
  • Responsibilities
  • Experience
  • Job market
  • Company budget

How is compensation determined?

Many factors go into determining the specific compensation package offered to any given person, including external factors relating to the company’s location and market as well as factors relating specifically to the role and the candidate in question. Some considerations that go into calculating compensation include:
  • What the company can afford to pay
  • Typical salary range for similar roles in the region
  • How much competitors are paying
  • The local cost of living
  • The role—if it is a highly-skilled job, it may require higher compensation
  • The candidate, their qualifications, and their compensation expectations
Whether or not it is appropriate to use incentive compensation management, which is a type of compensation usually used for sales roles in which the person’s compensation is tied to their performance outcomes

What can HR leaders do to ensure effective compensation management?

HR leaders can guide compensation management towards building and implementing successful compensation plans with these methods:

Develop and apply a compensation philosophy. 

A compensation philosophy formally documents the company policies regarding salaries, bonuses, and benefits. It also demonstrates a company’s commitment to transparency. Consistently adhering to a compensation philosophy demonstrates company integrity to employees and job candidates.
Explain the compensation plan. HR can clarify the components of the compensation plan to candidates and new joiners, helping to attract and retain top-notch talent.

Design a robust compensation strategy. 

HR leaders can collaborate with managers and specialists to offer all-inclusive compensation plans as well as generous benefits to improve their people’s quality of life.

Assess the results. 

It’s always helpful to learn from experience. HR leaders can analyze the results of compensation management to see what’s working and what isn’t through a compensation scorecard, which can improve the efficacy of compensation management.

Why should compensation management planning be a part of modern HR strategy?

Compensation management ensures the financial success and wellbeing of employers and employees and makes both happy. Integrating compensation management into a company’s HR strategy helps organizations reward their people with market-range salaries, well-deserved bonuses, and incentives to improve their people’s lifestyles. It also allows employers to show their people that they appreciate them.

Appreciation goes a long way towards making people feel motivated and engaged. It can also inspire people to give back to their employer through increased productivity and high-quality work. All of this leads to a company culture made of happy and enthusiastic people.

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