Monday, April 19, 2010

“Compensation Management” – Prof.M.S.Rao

What is Compensation Management?

Compensation management is all about the remuneration received by the employee for rendering his/her services to the organization. It includes both financial and non-financial aspects. Compensation helps in motivating the employees thus enhancing organizational excellence and effectiveness.

Compensation is paid depending on the capability and eligibility of the employees and also it involves both internal and external factors. For instance, the internal factors such as the remuneration paid to other employees within the organization and also the external factors such as prevailing packages offered by other companies in the market. That is paying as per the market and industry standards.

The basic components of compensation include basic salary, short term and long term incentives, employee benefits and perquisites. Compensation differs from country to country although basically certain aspects remain the same.

Types of Compensation:

Compensation is divided into direct and indirect compensation. Under direct compensation falls basic wages and salaries such as variable pay, incentives, dearness allowance, house rent allowance, city compensatory allowance etc. Under indirect compensation falls two areas such as fringe benefits and perquisites. Provident fund, medical, health and group insurance etc further fall under the category of fringe benefits. Company car, furnished house and other miscellaneous aspects fall in the group of perquisites. We shall look at various types of compensation precisely.

Strategic Compensation:

Strategic Compensation deals with the packages provided to the employees keeping long term goals and objectives of the organization in view. It also emphasizes potential of the employee.

Executive Compensation:

Executive compensation is all about the compensation paid to the senior executives. It is a special package wherein it contains salary, employee stocks options, bonuses, and other monetary benefits.

Employee Stock Ownership Plans (ESOPs):

It is a type of compensation where the employees are offered shares for rendering services. In some cases, there will be lock-in period where the employees are not allowed to sell their stocks up to certain period of time. Several companies are adopting this compensation to motivate their employees who feel proud of being associated and partnered with the organization.

Factors Influencing Compensation:

There are several factors that influence compensation such as ability of the employers to pay, job requirement, cost of living, prevailing market package, productivity, profitability and demand and supply of man power at that particular point of time. When we look at the ability of the employers, they usually look from multiple perspectives such as specified skills, eligibility, capability and suitability of the employee, experience and specialized expertise and other aspects are taken into account.


Compensation must motivate the employees to contribute their best and it must be fixed as per their needs and aspirations and should be based on their merit. There is need for innovative tools and techniques and strategies in compensation management that customize the individual needs of the employees for ensuring better productivity and performance at the workplace.

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