Process of Compensation Management

Compensation Management is the strategic process of aligning pay, incentive and benefits of employees with organizational goals and objectives. Compensation is a formidable communication and can be a powerful instrument for change and a major determinant of the culture of an organization.

The process of compensation management is depicted in fig:

The details of each step of compensation management are as under:

  • Business Strategy: The nature of an organization’s strategy is the primary determinant of its compensation strategy. For example, an organization going into expansion will have a different organization strategy and consequently different compensation strategy than an organization, which is not getting into expansion mode. Greater expansion gives rise to a greater need of attracting and retaining high caliber employees in fastest possible time consistent with its human resource needs than an organization not in expansion mode which shall use more objective criteria for compensation increase and bonuses are significantly greater proportion of total compensation than in organizations into expansion mode.



  • HR Strategy: How people in an organization are viewed drives the HR strategy of the organization. Those organizations which view employees as talent investors, would have and HR strategy, built around competitive advantage through people. In such organization’s HR strategy compensation plays a pivotal role and has variety of other business roles. In these organizations, compensation plays a dominate role such as high risk and high return incentive plans and performance –based incentives. While those organizations which consider people to be valuable resources should emphasize HR strategy for attaining strategic goals and objectives of the organization. In such organizations, compensation plays coordinate role in HR strategy for motivating people for achieving business goals. However, organizations which view its employees as factor of production would have an HR strategy that is focused upon implementing decisions of the line management. In these organizations, compensation plays a subordinate role o other human resource systems.


  • Compensation Policy: An organization’s compensation policy and practices, by rewarding desired results, can reinforce employee behavior that realizes its strategic on business objectives. Compensation policy I specified by the organization with focus on creating a flexible, competitive and performance-oriented compensation environment that allows the organization to recruit and manage employees in the face of future challenges. The compensation policy addresses the issues pertaining to the basis of determination of total compensation package keeping in view internal external factors. Internal factors include business strategy, HR strategy and compensation philosophy while external factors include condition of external labour, market (demand versus supply gaps), internal labour market (quality and number of employees available for various roles/ tasks within the organization) Market rate (compensation offered by competitors).


  • Job Evaluation: Job evaluation is a technique of determining the relative worth of jobs within an organization for the purpose of determining appropriate compensation levels for individual jobs elements. Many techniques of job evaluation are available and depending on the requirements of an organization, appropriate techniques can be employed.


  • Design and Implementation of Compensation Systems: Designing and implementing compensation systems involves compensation level, compensation structure and compensation payment system decision. First, compensation level decision determines whether an organization will have a lead, lag or match policy. Compensation decisions made by organizations can significantly impact individual and group level consequences, including performance, skill development, work-related attitudes, and workforce compensation. Second, compensation structure decision determines the minimum and maximum levels of marketplace rate and finally, the division of total compensation amount into fixed and variable compensation. Once these decisions are taken, compensation plans and systems are implemented.


  • Evaluation and Review: Since compensation is a dynamic concept, therefore it must be evaluated in terms of employee satisfaction, morale and productivity indices and suitable review should be made from time to time.

HR-Professionals 12 Compensation 12


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