Compensation Concept in HRM

The literal meaning of compensation is to counter–balance. In the case of human resource management, compensation is referred to as money and other benefits received by an employee for providing services to his employer. Money and benefits received may be in different forms – base compensation in money form and various benefits, which may be associated with employees services to the to the employer like provident fund, gratuity insurance scheme and any other payment which the employee receives or benefits he enjoys in lieu of such payment. Cascio has defined compensation as follows; “compensation includes direct cash payments, indirect payments in the form of employees to strive for higher levels of productivity.”


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 organizational philosophy on human resources and strategy. Besides many external factors, which impinge on the policy, must also taken care of.

Job Analysis and Evaluation

Job analysis provides basis for defining job description and job specification with the former dealing with various characteristics and responsibilities involved in a job and dealing and the latter dealing with qualities and skills required in performer, job analysis also provides base for job evaluation which determines the relatives worth of various jobs in the organization, The relative worth of various jobs determines the compensation packages attached with each job.

Analysis of Contingent Factors

Compensation plan is always formulated in the light of various factors, both external and internal, which affect the operation of human resource management system. Various external factors are conditions of human resource market, cost of living, level of economic development, social factors, pressure of trade unions and various labor laws dealing with compensation management. Various internal factors are organization’s ability to pay and employee’s related factors such as work performance, seniority, skills, etc. These factors may be analyzed through wage/salary survey.

Design and Implementation of Compensation Plan

After going through the above steps, the organization maybe 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 Govt. employees as well as for public sector enterprises. After designing the compensation plan, it is implemented. Implementation of compensation plan requires it’s communication to employees and putting this into practice.

Evaluation and Review

A compensation plan is not rigid and fixed one but is dynamic since it is affected by a variety of factors which are dynamic. Therefore, compensation management should have a provision for evaluating and reviewing the compensation plan. After implementation of the plan, it will generate results either in terms of intervening variables like employee satisfaction and morale or in terms of end-result variable like increase of productivity. However, this latter variable is more important. The evaluation of compensation plan must be done in this light. If it does not work as intended, there should be review of the plan necessitating a fresh look.

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