Compensation Management, its importance and relation with HRM

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Analyzing Compensation Management, its role and importance

What is Compensation?

Compensation is the act of compensating or being compensated for some work done or inconvenience faced by the person. In general, Compensation is something that may be awarded to someone in recognition of some loss or injury. Further, Compensation means reward in monetary or non-monetary form for a service or making up for someone’s loss, damage or injury (Lin, Liang, Chiu & Chen, 2019).

Article Summary

The present article talks about the concept of compensation management in human resource management. There is detailed discussion on the term compensation in generic and HR management. The compensation management not only includes management of the basic pay of employees but also includes management of various other components of compensation management. Duties and responsibilities of compensation are also analyzed in this article in order to evaluate the major responsibilities of the compensation manager. Further, in the last section of this article, the importance of compensation management and key objectives of compensation management are evaluated.


Compensation in a company

From an organization point of view, Compensation is the outcome of the contributions or efforts put in by the employees in order to carry out business processes efficiently (Harris, Karl & Lawrence, 2019). The contribution can be in the form of knowledge, skills, abilities, time and commitment to the project or company. Compensation to employees is much more than their basic pay and includes wages, salaries and other benefits such as commission, tip income, bonus or other non-cash benefits.

Compensation in HR Management

Compensation refers to the remuneration paid to an employee in return of the work performed by him. Compensation includes bonuses, profit sharing, overtime pay, recognition reward and sales commission, and other non-monetary perks etc. From a manager point of view, Compensation is the package offered to its employees to retain them at the workplace (Tao, Xu & Liu, 2020). Additionally, compensation acts as a great factor that helps in motivating the employees for higher productivity and efficiency.

Further, employee compensation decisions are taken on the basis of employees' attitude, productivity and behavior at the workplace. For this, HR managers are responsible to develop fair compensation policies at the workplace. The key components of the fair compensation policy are discussed as follows:

  • Equitable

    The efforts, abilities and training of employees must be fairly paid.

  • Balanced Pay

    There should be reasonable compensation for the efforts put in by the employees (Chand, 2020).

  • Adequate

    Compensation must be appropriate in relation to the work done. The employees should be provided with minimum wages or salaries in order to comply with various laws such as minimum wage acts and policies.

  • Acceptable to the employee

    The employee must be aware about the pay system. Also, the pay system should be reasonable for employees as well for organization.

  • Secure pay

    The employees must feel secure or satisfied with the rewards offered to them.

What is Compensation Management?

Compensation management refers to the act of managing the firm’s compensation policy in order to motivate the employees to do quality work. It is believed to be a complex task as it facilitates systemic administration and equitable distribution of remuneration for work done along with the recognition of employees’ efforts and aspirations (Almadi & Lazic, 2016). In addition to this, compensation management refers to the process of ensuring that the organization’s salaries and bonuses provided to employees are equally competitive.

Objectives of compensation management

The objective of compensation management is to create an equitable system of distribution for equal efforts. The main aim of compensation management is to attract the employees at the workplace and motivate them for higher work efforts to achieve the desired goals. Compensation management also helps in achieving employee job satisfaction which further helps in reducing employee turnover in the organization (Do, 2018). The job satisfaction is achieved only when the employees are satisfied with the reward received by them for their work. The policies of compensation management help in employee retention, improvement of performance of the company and the team management (Gerakos, Ittner & Moers, 2017). Thus, a favorable compensation policy is required to be developed by the HR manager. This is done in consultation with the compensation manager to ensure employee satisfaction at the workplace.

Who is a Compensation manager?

Compensation manager is the person responsible for managing compensation related processes in the organization. The compensation manager plans, develops, researches, establishes and maintains a systematic payout method. These involve understanding the current competitive payout system for its employees.

Duties and responsibilities of Compensation Manager

The duties of a Compensation manager vary from company to company. In large scale organizations, the responsibilities of a compensation manager are not just restricted to determination of pay scale of employees. It may also include job classification or market pay studies (Brooks, 2019). The compensation manager sometimes also works closely with individual managers as well as human resource managers in order to ensure and evaluate fairness of employee compensation. Following points highlight the duties of compensation manager:

  • Researching and developing pay scale structure

  • Ensuring pay scale compliances with the federal laws and regulations

  • Overseeing the distribution of competitive pay to employees

  • Working with managers to develop strategies in relation to promotion and retention of existing employees.

  • Developing an operational budget department wise and its application

  • Overseeing the work of compensation and payroll department

Importance of Compensation Management in HRM

Effective compensation management plays a pivotal role in the management of human resources. Also, compensation administration is one of the most important areas of human resources management as it helps in making compensation policies, programs and their effective execution. Following points highlight the role of compensation management in human resource management:

  • Strategizing objectives

    Compensation management helps in evaluating and developing strategies for deciding wages and other monetary and non-monetary benefits for the employees. It also helps in evaluating wages as per prevailing competitive market rates. Human resource department assesses the decisions regarding union power impact on pay scale structure with the help of compensation management.

  • Complying with Government regulations

    HR managers are responsible to consider various rules and regulations of government while deciding the compensation of employees at the workplace. Also, effective compensation management system helps in complying with various regulations such as minimum wages, overtime pay, equal pay, child labor and other federal regulations (de Guzman Chorny, Raub, Earle & Heymann, 2019).

  • Cost and profit assessment

    Compensation management supports human resource managers by defining the pay scale and other benefits such as employee retirement benefits etc. for employees (Pandey, 2018). With the help of compensation management, the human resource department assesses the cost of employing a person and evaluates its performance on the basis of profitability attained by the use of human capital.

  • Employee retention

    When employees are satisfied by the structure of their pay they automatically feel motivated to work according to the needs of the organization. Thus, compensation management helps in retention of employees at the workplace which is one of the major objectives of the human resource department (Fahim, 2018)

Relationship between Human Resource Management and compensation management

Human Resource Management practices include staffing, performance appraisals, training and development, manpower planning, worker’s management participation and compensation management. It facilitates the development of a performance enhancing system to improve employee management practices and performance of the employees in organization (Delery & Gupta, 2016). On the other hand, Compensation management includes job valuation, wage structure, wage payments, incentives and determination of supplementary payments.

Also, HRM practices include compensation management practices that help to achieve competitive advantage of organization, by defining most competitive and fair pay scales for employees. Thus, compensation management helps in attaining operational efficiency of human resources. The successful application of compensation management helps in facilitating human resource management by motivating employees to get desired goals achieved in an effective manner.


In a nutshell, it is found that compensation management plays an important role in human resource management practices. Compensation management helps in improving the operational performance and efficiency of employees in the organization. The findings of this article provide that the compensation of employees is much more than their basic pay and effective compensation management helps in improving employee performance in the organization.

Further readings


  • Almadi, M., & Lazic, P. (2016). CEO incentive compensation and earnings management. Management Decision, 54(10), 2447-2461. doi: 10.1108/md-05-2016-0292

  • Brooks, A. (2019). What Is a Compensation Manager? A Peek at the Pros Influencing Your Paycheck. Retrieved 19 July 2020, from

  • Chand, S. (2020). Compensation: Meaning, System and Objectives of Compensation. Retrieved 19 July 2020, from

  • de Guzman Chorny, N., Raub, A., Earle, A., & Heymann, J. (2019). The state of child labor protections in 193 countries: Are countries living up to their international commitments?. International Journal Of Sociology And Social Policy, 39(7/8), 609-626. doi: 10.1108/ijssp-12-2018-0229

  • Delery, J., & Gupta, N. (2016). Human resource management practices and organizational effectiveness: internal fit matters. Journal Of Organizational Effectiveness: People And Performance, 3(2), 139-163. doi: 10.1108/joepp-03-2016-0028

Article By:

Micheal Brown

A financial management expert with a relative degree from the University of Melbourne, he is an expert in conceptualising and drafting assignments of management students. Alongside, he invests his valuable time working as a consultant for management firms.

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What is compensation management in HRM?

Compensation management deals with the salary, incentives and various other monetary benefits that are received by the employees. This particular department takes care that all the employees of the organization get fair compensation as per their roles and responsibilities in the company

What is the relationship between Organisation and human resource management?

Human resource management is the department which handles the human resource of the company. It is the division that is accountable for the selection of the right employees that can help to add profit and growth of the organization.

What do you understand by compensation function?

Compensation function is an important HRM function that deals with pay, compensation and rewards offered to employees in exchange for performing various organizational tasks.

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