The Introduction To Compensation Business Essay


Compensation administration is one of the most important areas of human resource management because sound compensation policies, programmes and their effective execution are essential to procure, maintain and develop the human resource of the organization to get effective result from them. It involves the selection, designing, development and direction of programmes designed to implement compensation or incentive policy through financial rewards. Beach has defined wage and salary administration as follows: "wage and salary administration refers to the establishment and implementation of sound policies and practices of employee compensation. It includes such areas as job evaluation, 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". The traditional concept of wage and salary administration emphasized on only determination of wage and salary structures in organizational settings. In simple words, "compensation administration is a systematic procedure for establishing a sound compensation structure."


Lady using a tablet
Lady using a tablet


Essay Writers

Lady Using Tablet

Get your grade
or your money back

using our Essay Writing Service!

Essay Writing Service

Meaning of compensation: Compensation may be viewed as a system of reward that motivates an employee to perform better.

The term compensation is used to mean employees' gross earnings in the form of financial rewards and benefits as part of employment relationship. In terms of human resource management, compensation is referred to as money and other benefits received by an employee for providing services to his employer. Compensation management, also known as wage and salary administration, remuneration management, or reward management, is concerned with designing and implementing total compensation package or salary structure.

Compensation may also be viewed as

(a) A system of rewards that motivates employees to perform the assigned task,

(b) A tool used by organizations to foster the values, culture and the behavior they require, and

(c) An instrument that enables organizations to achieve their business goals.


"Compensation means something, such as money, given or received as payment or reparation, as for a service or loss. Compensation may be defined as money received in the performance of work, plus the many kinds of benefits and services that organizations provide their employees."

"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"

- Cascio

"Compensation is the remuneration received by an employee in return of his\her contribution to the organization. It involves balancing the work employee relation by providing financial and non- financial benefits or incentives to employees."


Compensation can be classified into:

(1) Financial compensation and

(2) Non- Financial compensation.

Financial compensation includes Direct compensation and Indirect compensation.

The direct compensation is used to describe financial remuneration usually cash and includes such elements as basic pay, dearness allowance, overtime pay, shift allowance, incentive, bonus, profit sharing bonus and commissions, etc.

Indirect compensation or wage supplements or fringe benefits refer to such benefits as provident fund, pension scheme, medical and health insurance and sick leave and various other benefits and perks.

Non- financial compensation includes praise and recognition and satisfaction of employees.


The basic need of compensation management is to meet the needs of both employees and the employer. The employers want to pay as little as possible to keep their costs low. Employees want to get as high as possible. The compensation management tries to balance between these two with following specific needs:

1. Attracting and Retaining Personnel: From organization's point of view, every organization wants new talent and skill from outside ,for this purpose the compensation management aims at attracting and retaining right personnel at right place in the organization time to time.

2. Motivating Personnel: Compensation management aims at motivating personnel for higher productivity. Compensation management can be designed to motivate people through monetary compensation.

3. Optimizing Cost of Compensation: Compensation management aims at Optimizing cost of compensation by establishing link performance with compensation.

4. Consistency in Compensation: Compensation management tries to achieve consistency-both internal and external-in compensating employees. Internal consistency involves payment on the basis of criticality of jobs and employees' performance on jobs. External consistency involves similar compensation for a job in all organizations.


Lady using a tablet
Lady using a tablet


Writing Services

Lady Using Tablet

Always on Time

Marked to Standard

Order Now

The basic objective of establishment of a sound compensation administration is to establish and maintain an equitable compensation structure.

Its secondary objective is the establishment and maintenance of an equitable labour-cost structure, an optimal balancing of conflicting personnel interests so that the satisfaction of employees and employers is maximized and conflicts minimized.

A sound compensation system tries to achieve these objectives:

(a) For employees:

(1) Employees are paid according to requirements of their jobs, i.e., highly skilled jobs are paid more compensation than low skilled jobs. This eliminates inequalities.

(2) The chances of favouritism (which creep in when wage rates are assigned) are greatly minimized.

(3) Job sequences and lines of promotion are established wherever they are applicable.

(4) Employees' morale and motivation are increased because a wage programme can be explained and is based upon facts.

(b) To employers:

(1) They can systematically plan for and control their labor costs.

(2) In dealing with a trade union, they can explain the basis of their wage programme because it is based upon a systematic analysis of job and wage facts.

(3) A wage and salary administration reduces the likelihood of friction and grievances over wage inequities.

(4) It enhances an employee's morale and motivation because adequate and fairly administered wages are basic to his wants and needs.

(5) It attracts qualified employees by ensuring and adequate payment for all the jobs.


In order to achieve the objectives of compensation management, it should proceed as a process. This process has various sequential steps as shown:

Establish a compensation policy

Setting of organizational criteria about compensation

Analysis of government policy

Joint consultation with trade union

Deciding fringe benefits

Design and implementation of compensation policy

Evaluation and Review

Establish Compensation Policy: Compensation policy is derived from organizational strategy and its policy on overall human resource management. In order to make compensation management to work effectively, the organization should clearly specify its compensation policy, which must include the basis for determining base compensation, incentives and benefits and various types of perquisites to various levels of employees. The policy should be linked with the organizational philosophy on human resources and strategy. Besides, this there must be emphasis on Job Analysis and Evaluation.

Setting of Organization's Criteria: Organization's overall criteria is the starting point in the total human resource management process including compensation management. Companies operating in different types of market/product having varying level of maturity, adopt different methods of different compensation plans according to employees performance. Thus, it can be seen that organizations follow different strategies in different market situations and align their compensation criteria and contents with these methods. Cascio has observed that in viewing the compensation from strategic point of view, the companies do the following:

1. They recognize remuneration as a fundamental control and incentive mechanism that can be used flexibly by the management to attain business objectives.

2. They make the pay system an integral part of strategy formulation.

3. They integrate pay considerations into strategic decision-making processes, such as those that involve planning and control.

4. They view the company's performance as the ultimate criterion of the success of the strategic pay decisions and operational remuneration programmes.

Analysis of Government policy: Compensation plan is always formulated through various factors, both external and internal, which affect the operation of human resource management system. External factor includes conditions of human resource market, cost of living, level of economic development, social factors, pressure of trade unions and various labour laws dealing with compensation management in government policy whereas internal factors includes organization's ability to pay and employees' related factors such as work performance, seniority, skills, etc. These factors may be analyzed through wage/salary survey.

Joint consultation with trade union: After analyzing the government policy president of personnel department consult all over the plan with the representative of trade union.

Deciding fringe benefits: Fringe benefits are also set by the personnel department as per the level of job and their performance.

It includes: Meal facility, Pick and Drop facility, Medical facility, Insurance facility etc.

Lady using a tablet
Lady using a tablet

This Essay is

a Student's Work

Lady Using Tablet

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Examples of our work

Design and Implementation of Compensation Plan: After analysis of above steps, the organization may be able to design its compensation plan incorporating base compensation with provision of wage/salary increase over the period of time, various incentive plans, benefits and perquisites. Sometimes, these are determined by external party, for example, pay commissions for Government employees as well as for public sector enterprises. After designing the compensation plan, it is implemented which requires its communication to employees and putting this into practice.

Evaluation and Review: Compensation management should have a provision for evaluating and reviewing the compensation plan. It is affected by a various factors like employee satisfaction and morale or in terms of end-result variable like increase of productivity. The evaluation of compensation plan must be done in this aspect. If it does not work, there should be review of the plan to give it a new picture.



The functions and responsibility in a compensation programme involves essentially three aspects:

(1) The determination of wage rates and wage structure,

(2) Maintaining the rationality of wage structure, and

(3) Determining methods of wage payment.

A wage structure is a body of wage rates differentiated by difficulty or degree of responsibility of work in an organization. The wage rate is for a job rather than compensation to an individual.

`Equitable' wage structure or `internal equity' implies that wage differentials reflect the degree of difficulty. In other words, the differences in wage rates for jobs correspond to differences in the evaluated contents of jobs.

The wage payment is determined by `Job evaluation'. It is a systematic method of evaluating each job in relation to other jobs in an organization. It is a major method of ensuring equity in the internal rates for jobs.

In view of the complexity of factors, there is a need to define and develop the compensation function in an organization and determine its location and working. The functions and responsibilities of a compensation programme will be as follows:

To formulate the compensation plan.

To establish job evaluation program.

To determine or establish the criteria for wages and salary.

To analyze the government rules and regulation regarding the


To make polices for the compensation and update that policy time to time.

To make policies for promotions.

To make the policies for increasing the salary.

To maintain the records of all employees of the organisation.

To promote the team work.

To make the performance appraisal system.

To promote the value and culture system in the organization policy.

To help the management for training and development programs.

The function should be operated by someone who has specialized knowledge and skill in compensation programmes. To ensure the effectiveness of the functionary, a coordinating committee should be constituted so that ultimately the objectives of a compensation programme can be achieved.


Q1. Explain the concept and meaning of compensation?

Q2. Discuss the role and importance of Compensation in an organisation.

Q3. Describe the various steps of compensation management process in detail.

Q4.What is the basic purpose behind the establishment of a sound Compensation administration system in the organizations?

Q5.What is the management responsibilities regarding the compensation management programme?