Objectives of Sound Compensation Planning

The most important objective of any pay system is fairness or equity. The team equity has three dimensions:

  1. Internal equity: This ensures that more difficult jobs are paid more.
  2. External equity: This ensures that jobs are fairly compensated in comparison to similar jobs in the labour market.
  3. Individual equity: It ensures equal pay for equal work, i.e. each individual’s pay is fair in comparison to others doing the same jobs.

In addition, there are other objectives as well. The ultimate goal of compensation administration (the process of managing a company’s compensation program) is to reward desired behaviours and encourage people to do well in there jobs. Some of the important objectives that are sought to be achieved through effective compensation management are listed below:

  1. Attract Talent: compensation needs to be high enough to attract talented people. Since many firms compete to hire the services of competent people, the salaries offered must be high enough to motivate them to apply.
  2. Retain Talent: If compensation levels fall below the expectations of employees or are not competitive, employees may quit in frustration.
  3. Ensure Equity: Pay should equal the worth of a job. Similar jobs should get similar pay. Like wise, more qualified people should get better wages.
  4. New and Desired Behaviour: Pay should reward loyalty, commitment, experience, risk-taking, initiative and other desired behaviors. Where the company fails to reward such behaviour, employee may go in search of greener pastures outside.
  5. Control costs: The cost of hiring people should not be too high. Effective compensation management ensures that workers are neither overpaid nor underpaid.
  6. Comply with legal rules: Compensation programs must invariably satisfy governmental rules regarding minimum wages, bonus, allowances, benefits, etc.
  7. Ease of operation: The compensation management system should be easy to understand and operate. Then only will it promote understanding regarding pay related matters between employees, unions and managers.

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