Compensation management refers to the organisation’s efforts to sustain a competitive compensation position within its local labour market, given current and anticipated future financial resources. Compensation management functions within the context of the organisation’s environment, culture, business and human resources strategies. It consists of a number of processes that are concerned with job evaluation, market rate analysis, job analysis, designing and maintaining pay structures, paying for performance, skills and competence, and performance management, and also the procedures needed in order to manage these processes.
Compensation Management Process
(1) Analysis of the Job – The first step in the process of compensation management is the analysis of the job. This should be done to determine the content and context of each job, including its duties, responsibilities and accountability. Job description, which is a written form of job analysis, is used as the basis for identifying and studying the characteristics of a job as part of compensation development measure.
(2) Evaluation of the Job – After the jobs have been analysed on the basis of job description statements, the second phase of compensation management involves the assessment of the worth of the jobs from the perspective. An appropriate job evaluation technique is employed for ensuring internal equity in determining the compensation structure for different jobs. Job evaluation is indeed a process of evaluating the worth of the job on the basis of not only its context and content but also the necessary skills and responsibilities required for it. Organisations may employ methods like job ranking, job grading, paired comparisons, factor comparison and point ranking for evaluating the worth of the job.
(3) Developing the Pay Structure – The pay structure determines what an individual is paid. Once the internal relationship among the jobs based on their relative worth has been determined, the organisation determines the pay structure and pay grades for jobs of similar importance and difficulties. The organisation may choose to have either the narrow-graded pay structure or the broad-graded one for compensation administration.
(4) Survey of Wages and Salary – At this stage, an organisation conducts a wages and salary survey in the labour market to gather information about the compensation provided by similar organisations in the industry for similar jobs. The primary goal of conducting a salary survey is to ensure external equity while determining the pay scale of the employees. As part of the salary survey, the organisation may gather necessary information pertaining to the prevailing wage rates for the jobs in the labour market, and also information about the cost of living and inflation. Typically, an organisation has two options in a salary survey. It may either conduct its own survey to know the trend in the labour market or buy the survey results of the professional agencies.
(5) Pricing of the Job – Job pricing refers to the determination of wage rates for jobs within the organisation on the basis of the job evaluation and salary survey. As part of this process, the internal worth of the job is matched with the external worth to determine the price of the job. While finalising the compensation for jobs, the guiding principle should be ‘pay the job and reward the person’. Paying the job means the payment of the right wages for the job depending upon its worth, while rewarding the person refers to rewarding an individual for his efficiency assessed through performance evaluation.
(6) Compensation Revision and Control – In many organisations, employee compensation forms a major portion of the total operating expenses. It is, therefore, necessary to develop an appropriate mechanism for monitoring the labour cost effectively. Organisations may use techniques like budgeting, performance evaluation, and other appropriate ratios like the compa-ratio for determining the efficiency of compensation programmes. Budgeting is an effective technique of controlling the financial expenditures of an organisation. It also helps in monitoring, controlling and coordinating the labour cost of the organisation. Budgets actually set the standards for the organisation in evaluating the financial expenditure-relating employee compensation.