A Guide to Compensation Management in 2023

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When we hear the word ‘compensation’, our mind quickly runs towards salary. However, salary is merely a part of the compensation package. The HR department is the one that develops the compensation packages for the employees of an organization. They are in charge of continuous compensation management throughout the company.


So, why exactly do we need to ‘manage’ the employee compensation? Is it relevant enough for the employees? Aren’t they satisfied with their salary component since they haven’t switched ships? And if one is set to manage compensation, what are the challenges that one would face? And what objective does compensation management serve?


Let us find out!


What is Compensation Management?

Compensation Management is the process of managing the compensation of the employees of a company to ensure that their compensation, both monetary and non-monetary, are fair and appropriate as per the industry standards.


Compensation management also includes the development and implementation of compensation packages for the employees. It deals with the deployment of organizational policies, programmes and practices related to employee compensation. It ensures that the employees are compensated fairly in an equitable manner.


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Importance of Compensation Management

The relevance of compensation management lies in the fact that it helps in attracting and retaining talented staff members. It helps in achieving this objective while staying within the predefined budget.


Other major benefits of compensation management include:

  • Keeps the employees motivated to put their best efforts into the success of the company
  • Improves employee productivity by compensating them with rewards and recognition
  • Helps stay within budget while also providing competitive salaries
  • Helps reduce employee turnover by providing incentives and additional benefits.


4 Objectives of Compensation Management

Since we understood how important compensation management is for any company, let us identify the four major objectives that it helps to fulfil:



A good compensation package also includes rewards and recognition that the employee is eligible to receive for their performance and achievements. Human beings love being appreciated for their hard work. With a compensation package that includes an adequate quota for rewards, the employees would be motivated to put their best efforts into completing their daily tasks.



Having a robust compensation management structure also ensures that everyone is treated fairly when it comes to the compensation for their work. It helps in creating a transparent and fair compensation structure for all of the employees in the company. It ensures that there are no partiality or wage gaps when it comes to the employees’ race, ethnicity or gender.



Since employees are the most valuable resources for any organization, HRs take several measures to ensure that they stay longer with the company. With the help of a well-structured compensation plan, HRs can retain the employees whom they groomed to work well with their company. Effective compensation lets the employee stay longer for the non-monetary benefits. It also helps in attracting top talent.



The compensation management plan also considers all of the legal compliances required by law. Hence, it takes care of the legal aspects of employee compensation. Having compensation management software is especially considered to be an added advantage in this case as it would automatically take care of the legal regulations and even highlight any discrepancies while setting the compensation for any designation in the company.


Challenges in Compensation Management

When it comes to compensation management, there are 2 major challenges:


Job market trends

The job market landscape is constantly changing. The HRs are required to continuously keep themselves abreast of the latest developments to ensure that the compensation packages of the company are in sync with the existing job market trends.


Considering the variety of designations as well as the differences in local laws (in the case of multinational enterprises), it becomes quite challenging to keep a tab on all of the market changes. Having a robust compensation management system again helps in this scenario by having the ability to fetch the latest data and parse it to provide meaningful data for HR.


Employee expectations

Another major challenge with compensation management is the gap between the current employee wages and their expectations. Companies try to find the best talent within the most cost-effective range. However, employees wish to get the maximum benefit they can.


Hence, companies are constantly trying to anticipate employee expectations and trying to find innovative payment options to minimize the cost while maximising their employee satisfaction. For example, the current millennial generation prefers additional perks and benefits over a salary raise. However, the older generation would prefer to have an employment pension over a pay raise.


How to develop a Compensation Management Strategy

There are various steps undertaken while developing a robust compensation management plan that helps in making the right decisions and fulfilling its objectives. These steps are:


Compensation Statistics

The first step in developing a compensation management strategy is to understand the job market landscape. HR is required to research the current market trends and understand the salary structure of other companies in the same business domain. However, it is easier said than done since it involves a lot of variables such as industry-wide average salary, cost of living, inflation, etc. It is a vital step since it helps the upper management also understand the job market. It also helps HR to develop a competitive salary structure by allocating a specific budget for employee salaries and associated benefits included in their compensation package.


Salary Structure

Once HR has a good idea of the compensation statistics as well as the compensation plan of the competitors from the same industry, they can start developing a salary structure. They use a variety of approaches to develop the salary structure of a company. It is a crucial component of compensation management planning. Developing a salary structure requires creating pay grades based on the role and its responsibilities, the experience and skill level required. Hence, HRs usually create and place ‘markers’ for salary increments and based on it, the base salary, bonuses, commissions, and other non-monetary benefits are decided.


Job Description

Now that you have a good idea of the job market and has a robust salary structure in place, it is time to develop accurate and clear job descriptions for each role that explicitly state all of the requirements of the position. The job description helps the potential candidates to understand whether the employer is looking for them specifically. It avoids time wastage on unsuitable candidates as they would not approach. Hence, the job description needs to accurately inform the candidate of the experience and skills required, as well as let them know the range of remuneration offered for their work.


Best Practices for Managing Employee Compensation Effectively

Since we have touched upon every theoretical aspect of the compensation management process, let us get to know some practical steps that would help you manage your employee compensation effectively.


Right Budget

The compensation provided to each role should be set based on the market data and the company objectives. It should be fair for both the employee and the employer. It should also specify what percentage of the compensation package should be allocated for the salary and how much should be allocated for additional perks and benefits for each role. The right budget would also take into account the location, experience and skill of the employee and have room for adjustments as required.


Flexible Salary

With the budget is allotted for each role, HR can set an upper and lower limit for the salary provided to each role. This kind of flexible salary provides HR with a range to work on and hence, provide a competitive advantage. It can also help attract a wide variety of candidates and the range can be widened and narrowed based on the current requirements of the role.


Statutory Compliance

Almost all of the countries have salary and pay related laws. HR needs to ensure that their compensation management plan takes into account these laws and abides by all of them. Defying even a single one of wages related laws might lead to expensive lawsuits and even cancellation of business permits for the company. Hence, HRs need to ensure that the company’s compensation management plan is in line with each of these laws.


Compensation Management Software

With the digitalization happening in the HR domain, all modern companies should implement some form of compensation management software. One can either opt for a standalone compensation management system or have it as a part of their Human Resources Management System (HRMS). It will ensure that this process becomes efficient and automated for HR.


Documentation and Review

Once the compensation plan is set in place, make it a point to document it and review it regularly. Since the job landscape changes all the time, your compensation management strategy should reflect these changes correctly. Hence, documenting it would provide other team members with the objectives of implementing each plan while reviewing it would help in keeping it up to date with the latest job market trends.



Compensation management is not rocket science. With a dedicated HR team and some patience, one can develop a compensation management strategy in a month. However, add compensation management software to the mix, and the same plan can be developed within a week. We hope that this guide has been beneficial to anyone developing a compensation management strategy.


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