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.
Principles of Compensation Management
(1) Pay Capacity – Organisations should pay their employees as per their financial capacity and capability . If an organisation pays more than its ability , then the organisation may get bankrupt . On the other hand , if the organisation pays much below its ability to pay , then such organisations are unlikely to attract and / or retain competent employees , which will ultimately adversely affect the effectiveness of the organisation .
(2) Equity Considerations – Organisations must compensate their employees according to their qualification , experience , skills knowledge , job responsibilities , and performance . This is called internal equity .
If employees are not paid according to their qualification , experience , skills , knowledge , and performance , it will adversely affect their morale , commitment , and competence . Such organisations are likely to witness low employee productivity , poor quality , high turnover , poor corporate image , etc . Therefore , maintaining a proper and fair difference in employee ‘ s compensation levels in terms of their position , competence , knowledge , and performance is necessary for effective business performance .
(3) Performance Orientation – Compensation should be in commensuration with individual and organisational performance. Employees exhibiting better performance should be compensated at higher level to maintain enhanced performance or output and encourage them to attain excellence .
(4) Non – Discriminatory – Organisations must pay their employees without any discrimination on the ground of race , religion , gender , nationality , and ethnicity . For example , often female employees in India are paid far less than their male counterparts .
(5) Legal Compliance – Organisations must pay as per the relevant laws of the land. For example, in India, the Minimum Wages Act, 1948 stipulates that workers in the unskilled, semi-skilled, and skilled jobs must be paid a minimum wage. This is essential character of any welfare state committed towards the goals of social justice and securing the rights of the employees to atleast minimum standard of living. Therefore, an organisation that does not have the ability to pay even minimum wages to its employees has no right to exist.
(6) Simplicity and Flexibility – Compensation system should be simple to design, understand, and administer. Compensation plans and policies must be flexible to adapt with ease to the changing profile of the workforce, needs of the individual employees, organisational goals, and objectives and labour market conditions. In other words, compensation management must be strategically aligned.
(7) Fosters Employee Development – Compensation should be such so as to motivate employees to acquire, sharpen, and develop their skills and competencies in conjunction with changing technology, innovations, and organisational requirements. Increased differentiation on account of gaps in employee’s skill and competencies acts as a motivator.