Objectives of Compensation Management

The basic objective of compensation management can be briefly termed  as meeting the needs of both employees and the organisation. Since both these  needs emerge from different sources, often, there is a conflict between the two.  This conflict can be understood by agency theory which explains relationship  between employees and employers. The theory suggests that employers and  employees are two main stakeholders in a business unit, the former assuming the  role of principals and the latter assuming the role of agents.

Employee Compensation Management

Objectives of Compensation Management

The compensation  paid to employees is agency consideration. Each party to agency tries to fix this  consideration in its own favor. 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 strike a balance between these two with  following specific objectives:

1. Attracting and Retaining Personnel

From organisation’s point of view, the  compensation management aims at attracting and retaining right personnel in the  organisation. In the Indian corporate scene, there is no dearth of personnel at  operative levels but the problems come at the managerial and technical levels  particularly for growing companies. Not only they require persons who are well  qualified but they are also retained in the organisation. In the present day  context, managerial turnover is a big problem particularly in high knowledge-based  organisations.

2. Motivating Personnel

Compensation management aims at motivating  personnel for higher productivity. Monetary compensation has its own  limitations in motivating people for superior performance. Alfie Kohn (an American author and lecturer who has explored a number of topics in education, parenting, and human behavior.) has gone  to the extent of arguing that corporate incentive plans not only fail to work as  intended but also undermine the objectives they intend to achieve. He argues  that this is due to inadequate psychological assumptions on which reward  systems are based. His conclusions are as follows:

  1. Rewards punish people-their use confirms that someone else is in control  of the employee.
  2. Rewards rupture relationships-they create competition where teamwork  and collaboration are desired.
  3. Rewards ignore reasons-they relieve managers from the urgent need to  explore why an employee is effective or ineffective.
  4. Rewards discourage risk taking-employees tend to do exactly what is  required to earn the reward, and not any more.
  5. Rewards undermine interest-they distract both manager and the employee  from consideration of intrinsic motivation.

Notwithstanding these arguments, compensation management can be  designed to motivate people through monetary compensation to some extent.

3. Optimizing Cost of Compensation

Compensation management aims at  optimizing cost of compensation by establishing some kind of linkage with  performance and compensation. It is not necessary that higher level of wages  and salaries will bring higher performance automatically but depends on the  kind of linkage that is established between performance and wages and salaries.  Compensation management tries to attempt at this.

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. Thus, higher compensation is attached to  higher-level jobs. Similarly, higher compensation is attached to higher  performers in the same job. Level of jobs within an organisation is determined  by job evaluation. External  consistency involves similar compensation for a job in all organisations. Though  there are many factors involved in the determination of wage and salary  structure for a job in an organisation which may result into some kind of  disparity in the compensation of a particular job as compared to other  organisations, compensation management tries to reduce this disparity.

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