What is Compensation Management?

Compensation management is the management of an employee’s salary, along with benefits and incentives, if any, based on their position, performance, experience, the allocated budget of the company, and so on. Department managers have to ensure that the employees are getting a fair salary based on their profile.

Importance of Compensation Management

Compensation management, if taken seriously, benefits both the employees and the employer. If a company succeeds in satisfying its employees by providing them a fair and competitive salary, this will help them retain talent and lower the employee turnover rate. When compensated fairly, employees also have more loyalty to the organization and will give better results and performance.

" Compensation Management "

What are the Different Types of Compensation?

There are two major types of compensation: direct compensation and non-monetary (or indirect) compensation.

Non-Monetary Compensation

"Non-monetary" means something that does not involve money. Compensation can be both monetary and non-monetary. Examples of non-monetary compensation can include training and development seminars, career development opportunities, etc.

Direct Compensation

All the monetary compensation which is paid directly to the employee, including salary, bonuses, health and medical benefits, etc., is considered direct compensation. It is paid at regular intervals to the employees.

Indirect Compensation

Indirect compensation includes non-monetary compensation. Examples include health benefits, paid leave, sponsored vacation, and so on.

" Types of compensation "

A compensation package comprises all the monetary and non-monetary benefits that an employee gets from a company, including health insurance, salary, vacation benefits, and more. A compensation package should not be confused with a compensation plan, which is included within the compensation package.

A compensation plan consists of the details about the monetary compensation that an employee gets from his or her employer. It includes details about the incentives, bonuses, and salary that an employee gets from the organization.

Compensation Management Objectives

The primary objective of compensation management is always the retention of employees. Other, secondary objectives are a result of effective compensation management, such as:

  • Administrative efficiency: If employees are satisfied, it reflects in their performance, leading to better administrative efficiency.
  • Low employee turnover rate: The higher the rate of satisfaction of employees, the lower the employee turnover rate.
  • Acquisition of qualified professionals: Employees are a vital resource to an organization. The more competent and qualified a company's employee are, the more successful an organization will be. So it is very important to attract qualified professionals and keep existing employees content so they don’t feel a need to leave the organization in absence of recognition.
  • Ensuring equity: Effective compensation management can ensure equity among employees by providing fair wages.
  • Compliance with government rules: The government has made several rules and provisions to protect the rights of employees, and fair wages are one of them.
  • Clarity of compensation management: All employees, management, etc. should have a clear understanding of compensation management.

Challenges of Compensation Management

  • Existing rate of wages: It may happen that employees in the market are being paid more than the actual worth of the job, which can create a problem in maintaining equity.
  • Union power: Unions, which can make up a great portion of the workforce and thus have significant power, can dominate the wage rates according to their will.
  • Government regulations: Government rules require management to pay a minimum hourly rate of wages to workers working overtime, even if this exceeds their wage limit.
  • International compensation: Employees may have to move abroad due to job requirements, which can make it challenging for management to pay the employees as per international standards.

Prerequisites for Compensation Management

  • Equity: Employees must be paid fairly based on their talent, experience, ability, etc.
  • Security: Compensation should cover the security needs of an employee.
  • Incentives: Compensation should be designed to help motivate employees to work effectively and efficiently.
  • Cost-effectiveness: Compensation should not create a burden on the organization or be inadequate for employees.
  • Acceptability of employees: Employees must understand the compensation criteria and find that they are being paid reasonably.
  • Adequacy: The compensation should be adequate considering the job profile of the employee.

Three Pillars of Compensation Management

The major goal of compensation management is to pay fair wages to the employees, but there are also other or indirect goals, which are described as the pillars of compensation management. These are retention, attraction, and motivation of employees.

  • Retention: When employees are content and pleased with what they are getting from the organization, they rarely think of leaving the workplace and joining any other organization. Strategic compensation management of an organization helps in employee retention.
  • Attraction: An organization that takes care of its employees and offers rewards for the efforts of the workforce has a great reputation in the market, and anyone would like to work in such an organization. So, compensation management, when practiced effectively, helps in attracting great talent and qualified employees to join the company.
  • Motivation: Motivation is something that can make or break an employee. No matter how talented an employee is, if they aren't motivated, they cannot work effectively. This can create costs for the organization to keep such an employee. Compensation management can motivate employees at the workplace and help them increase their productivity. 
" Three Pillars of Compensation Management “


The quality of the human resources of an organization is what decides the success or failure of it, as employees are the ones who manage a company's day-to-day operations. Compensation management is a process designed to satisfy the employees of any organization. Management must employ effective compensation management for the retention and motivation of their employees.

Want more help with your operations management homework?

We've got you covered with step-by-step solutions to millions of textbook problems, subject matter experts on standby 24/7 when you're stumped, and more.
Check out a sample operations management Q&A solution here!

*Response times may vary by subject and question complexity. Median response time is 34 minutes for paid subscribers and may be longer for promotional offers.

Search. Solve. Succeed!

Study smarter access to millions of step-by step textbook solutions, our Q&A library, and AI powered Math Solver. Plus, you get 30 questions to ask an expert each month.

Compensation Management Homework Questions from Fellow Students

Browse our recently answered Compensation Management homework questions.

Search. Solve. Succeed!

Study smarter access to millions of step-by step textbook solutions, our Q&A library, and AI powered Math Solver. Plus, you get 30 questions to ask an expert each month.