Compensation Management Process

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

1. Organisation’s Strategy

Organisation’s overall strategy, though not a step of  compensation management 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 strategies and matching compensation strategy and blend of  different compensation methods. Thus, it can be seen that organisations follow  different strategies in different market situations and align their compensation  strategy and contents with these strategies. In a growing market, an organisation  can expand its business through internal expansion or takeover and merger of  other organisations in the same line of business or a combination of both. In  such a growing market, the inputs, particularly human resources, do not grow in  the same proportion as the business expands. Therefore, in order to make the  growth strategy successful, the organisation has to pay high cash to attract  talents. For example, information technology is a fast growing business  presently and we find maximum merger and higher managerial compensation in  this industry. In mature market, the organisation does not grow through  additional investment but stabilizes and the growth comes through making the  present investment more effective, known as learning curve growth. In such a  situation, average cash and moderate incentives may work. The benefits which  have been standardized have to be maintained. In the declining market, the  organisation has to harvest profit through cash generation and cost cutting and if  this cannot be sustained over the long run, the possible retrenchment of business  to invest somewhere else. In such a case, compensation strategy involves cost  control with below average cash and incentive payments.

Compensation Management Process

Cascio has observed  that in viewing the compensation from strategic point of view, the companies do  the following:

  1. They recognize remuneration as a pivotal 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.

2. Compensation Policy

Compensation policy is derived from organisational  strategy and its policy on overall human resource management. In order to make  compensation management to work effectively, the organisation 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 organisational  philosophy on human resources and strategy. Besides, many external factors  which impinge on the policy must also be 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 the latter dealing with qualities and skills  required in job performer. Job analysis also provides base for job evaluation  which determines the relative worth of various jobs in the organisation. The  relative worth of various jobs determines the compensation package attached  with each job.

3. 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 organisation’s ability to  pay and employees’ related factors such as work performance, seniority, skills,  etc. These factors may be analysed through wage/salary survey.

4. Design and Implementation of Compensation Plan

After going through the  above steps, the organisation 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. Implementation of compensation plan  requires its communication to employees and putting this into practice.

5. Evaluation and Review

A compensation plan is not a 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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