Compensation Management in HRM- Nature, Objectives and Components

Everyone likes getting being paid. No matter how much it is?? Suppose I give you a hefty amount as salary for your work. You will be happy to do that work. In the HRM Dept, Compensation Management makes happy so many people like you. But Have you ever thought How firm manages the compensation?? How Firm create such happiness?? So Before knowing how Firm manage your Compensation Management through HR, I believe You should know what is a Compensation??

Compensation is what employees get in monetary term by playing their particular role in the firm. These can be in the form of Salaries, Incentives, bonuses etc.

This is the simple meaning of Compensation.

So, What change comes into their meaning when Compensation moves to Compensation Management in HRM ??

In the Compensation Management, here management doesn’t mean to manage but to provide value to the employees or Workers And You might be thinking How to provide value to them??

It’s simple. It is by giving them the salary, wages, incentives and other benefits.

And You also might be thinking Why I am sticking the word HRM with Compensation Management??

It’s because the HR Dept. has to manage Compensation Management. It is in their control that how much salary they have to give.

So, Compensation Management in HRM is to provide value to the Employees, Workers for their contribution to the organization.

I believe Now You are clear about the meaning of Compensation Management.

This meaning was just to make you understand what is Compensation Management in HRM.

So, Let’s Know what Authors say about Compensation Management.

“Compensation Management is a systematic approach to provide monetary value to the employees in exchange for the work performed. It may help to achieve several purposes such as recruitment, job performance and job satisfaction”

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Nature of Compensation Management

Nature of Compensation Management

Nature of Compensation Management is as follows-

  • Basic Pay– Basic Pay includes the money which every Employee/ Worker get by doing their respective job. That is in the form of Wages/ Salaries.
  • Variable Pay– Variable pay are those pays that are not given on a regular basis. These pays are either in the form of performance or special occasions. These are in the form of Incentives and bonuses.
  • Benefits- Benefits are those pays that include other value-added services like Health Insurance, Vacation Pay, Retirement Pension etc.

Objectives of Compensation Mgt.

Objectives of Compensation Management in HRM

There are few objectives of Compensation Management in HRM that are as follows-

  • Attract Talent-  The motive of giving good Compensation is to attract those talents that can give excellent results. This is the utmost objective of a firm.
  • Retain Talent- Just Attracting them once is not enough, we have to retain those talents. That can be done by providing a hike in their salary from time to time or providing incentives according to their performance. This will help them to not shift their job to another company because your Competitors will always be ready to hire them at a good price.  
  • Ensure Equity-  Firm can’t give different salary to the employees having the same skill and experience. If they do that. It can turn into biasness within the employees which can turn into conflict or resign. So, Firm has to ensure equity between the employees.
  • Control Cost- Every Employee wants a good salary but the firm also have to keep in mind their budget. They have to control their cost in such a way so that either it is Employee or Worker both should get the pay which they deserve. That should also caring the firm’s budget.
  • Comply with Legal rules- Firms also have to consider the pay rates which Govt. has decided. These are mostly in the cases of workers. Govt. decides their wage rate which firm has to comply with those rules.
  • Ease of Operation-  Employee Satisfaction is also important as Customer Satisfaction. If Our Employees don’t satisfy with the salary, then the customer can?? The Firm has to do ease in the operation by giving good remuneration.

Components of Compensation Management in HRM


The Components of the Compensation Management in HRM comprises of the following things-

  • Wages and Salaries- Salary and wages are something that provides monetary value to the employees and labourers. But while calculating the wages/ Salary policy, there are three types of wages that are-

a. Minimum Wages- These are those wages which fulfill the basic needs of the labourers. It also preserves the efficiency of the employees. The Minimum wages must provide for some measure of education, medical requirements etc.

b. Fair Wages- These wages are equal to the rate prevailing in the same trade or neighborhood or equal to the dominant rate decided by the govt.

c. Living Wages- These wages are higher than the Fair wages. It includes basic essentials plus extra comforts like Education to Children’s, protection against ill- health, requirements of essential social needs and so on.

  • Incentives- Incentives are monetary benefits that employees get for their outstanding performance. The other name of Incentives is payment by result. These are also defined as the rewards granted according to the variations in achieving the specific target.
  • Fringe Benefits and Services- These are those benefits which employee receives in addition to their remuneration. Fringe, Service Program and hidden payroll are it’s other names. It includes Provident Fund, Health Insurance, Canteen etc.
  • Bonuses- Bonus means to give extra payment to the workers/ employees than their normal wage/ salary. Its main aim is to build the bridge between Actual Wage and the need-based wage.

Bonus Calculations in India

  • A Bonus is calculated at a salary of minimum Rs.2,500 per month.
  • A Bonus is paid at a minimum of 8.33% of the salary of an employee.
  • It has to pay within 8 months from the close of an accounting year.
  • To Claim Bonus, Employee must have work for minimum 30 days till that year.
  • Perquisites- Perquisites are the additional benefits that give to the employee that are Club Membership, Paid Holidays, Furnished House, Company Car etc.
  • Non- Monetary Benefits- These are those benefits which are not in the monetary term but it provides value to the employees. For Example- Comfortable Working Conditions, Job Sharing etc.

Recent Trends in Employee Compensation

Recent Trends

In recent years, so much change has come in salary administration and wage calculations. There are some recent trends in Compensation Management in HRM that are as follows-
These major approaches are-

  • Broadbanding- It is an approach to base pay that receives considerable attention in the business process. It is the compression of the pay grades into small numbers.

The 1996 survey by Hay Management Consultants produced the following list of most common reasons for introducing broadband-
It allows more flexibility in making and administering the pay decisions.

It reduces the problem of a grade drift, common in conventionally grade structures.

More responsibility can be developed against line managers to manage pay within their own departments.

It focuses on the Value Adding tiers within an organization.

  • Pay for Competence- The transaction between the Employer and Employee is of Knowledge, Competence and Skill. Employee’s performance comes to know about their Competence which Employer knows. So, It is required to reward that competency, skill and knowledge.

Acc. To Webster Dictionary, Competence is being defined as “ the state of being sufficient able or qualified.” which shows how much Pay for Competence is required.

  • Team Pay- Team Pay means to reward the small no. of people who are committed to a particular project or mission. In Groups, everyone thinks about their Individual performance, Individual work. But Teams emphasize shared leadership, mutual accountability, and collective work products.

This is all about the Compensation Management in HRM. If You want to get more detailed notes of Human Resource Management including Compensation Management at very fewer prices. Then, Click here.

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Also ReadRecruitment and Selection Process in HRM

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