Compensation Systems Planning

Heneman and Schwab (1979) defines pay system as follows:

Pay system is the method the organization uses to determine pay raise for individuals which can be computed in terms of the amount of time the employee spends on the job(time-based systems) or his performance or efficiency (performance-based systems). Performance-based systems include individual and group incentive systems, merit systems, commissions, cost-reduction schemes, and profit sharing.

Compensation systems mean the basis and methods of making compensation payments to employees. Effective management of compensation is crucial for the competence and performance of an organization. Compensation is influenced by a number of organizational factors and policies and pays a significant role in employee commitment, motivation, job performance and job satisfaction.

A compensation system seeks to achieve the following objectives:




Attract and retain the right people:

  1. The overall compensation levels should be such that an employee with the necessary qualification can be hired.
  1. Compensation in some critical skill areas should be set different so that people with a different set of qualifications can be attracted and retained.
  1. Compensation should induce the most productive people to join and stay with the organization.
  • Motivate people to work effectively: Working effectively includes both being as productive as possible and tailoring work efforts to meet the goals and objectives of the organization.
  • Allocate employee among jobs: This include compensation that includes the best people to try for advancement as well as inducing people to accept “hard-to-fill” jobs.
  • Communicate system: To describe the criteria for future communication increase so that employees stay highly motivated.
  • Indication of future trends: To describe the criteria for future compensation increase so that employees stay highly motivated.

In meeting compensation goals, organizations are usually subject to the constraint of keeping personnel costs as low as possible.

HR-Professionals 12 Compensation 12


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