What is Compensation Management

What is Compensation Management
Reading Time: 6 minutes

Compensation management benefits both the companies and the employees. Offering a competitive compensation package to the employees keeps their morale high and also improves retention. If employees get good incentives and bonuses along with competitive salaries, they like to stay connected with the company.

Benefits and incentives that improve employees’ lifestyles and reduce their stress are highly valued. It makes the workforce values a part of the organization and they like to put more effort into the company. Benefits are also a good tool to express and incorporate company values into the day-to-day culture. For example, the opportunity to work remotely shows that organization trust their staff and care about their work-life balance.

Also Read: Employee Compensation And Benefits- A Complete Guide


What is Compensation Management?

Compensation management is planning and administering financials of what employee receives in exchange for their effort.
Compensation is the money and other benefits that employee receives from the employer in exchange for their services. The composition of this monetary and non-monetary set of rewards for employees’ efforts varies and can comprise many things.
The compensation package offered to the employees is crucial because it is a major cost to the company. Compensation management is the process of ensuring top talent is on board.
HR is responsible for the compensation management to keep the salary and the benefits competitive to attract the top talent from the market. Data from internal and external markets need to be analyzed to come up with the right package. Total compensation has to be considerate of the cost of living in different regions and various demographic factors.


Benefits of Compensation Management

  • It helps to keep the salaries and benefits package competitive
  • Adopts to the changes in the market and attracts top talent
  • It also helps in smart bonuses and pays hikes to the existing employees
  • Keep employees motivated to give their best effort
  • Improves retention and reduces turnover of the employees
  • The right compensation management also helps to motivate particular behavior
  • Save the cost of multiple and expensive recruitments
  • Inspire people to take initiative and bring in creativity at work.
  • Compensation management indirectly leads to increased revenue
  • It also helped to keep up with the post-pandemic employee preferences
  • Keeps the organization compliant with government regulations


Factors Affecting Compensation Management

The compensation management process has many factors that can improve a company’s ability to attract top talent.

Goals and Objectives

The design of the compensation package is based on business strategies. HR leaders assess the requirement of the staff depending based on the requirement of the organization. For example, the compensation package to hire new people will differ from the one that has to be offered for the retention of an experienced person who played a key role in important projects for the compensation.


The HR leaders often use compensation as one of the tools to motivate and help them to raise their ability to do their work better. To make effective compensation they may combine various direct compensation and indirect elements to reward employees for their work.

Compensation Policy

Employee compensation policies are designed to ensure pays employees in return for their work. The policies must adhere to the minimum wage regulations by the government authorities as well as uphold the values of the organization.

Job role

Compensation packages also vary based on the type of work is expected in the job role. Some roles such as on-field sales


Types of Compensation Management

There are two types of compensation that together forms total compensation

  • Financial Compensation
  • Non-Financial Compensation

Let’s discuss these types in detail


Financial Compensation

Financial compensation are the payments and rewards given to the employees in the monetary form and further divided into direct compensation and indirect compensation.

Direct Compensation management

The direct compensation is majorly the salary paid to the employees for work they did and it also includes benefits like health insurance. The wages, base salary or hourly wage, or any other performance-based payment given to the workforce is a part of direct compensation.
The payments that employees receive consistently at a regular interval are also included in the direct compensation management. Under direct compensation companies provide their employees, with various benefits and perks to keep their morale high and motivate them for better performance in the future. For example, medical benefits, house rent allowances, conveyance as well as vacation allowance. Some of these are described below.

Wage and Salary

Wage and salaries are the prime components of the compensation package for every organization. The term wages is used when the payment of the work is done according to the number of hours worked. Salary is a fixed amount paid to the employees over a specified period. The term is usually used for payment to white-collar employees for their work.


Intensives are the additional payment given to the employees apart from their fixed salaries or wages. The incentive is often linked to individual or team performance. Incentives can be fixed or varies according to various criteria that the company adopts.


Claims are primarily the reimbursement of various bills. These are provided with salary for employees and vary according to type and amount of done by the employee in the particular month. The most common claims are mobile bills, internet charges, medical claims, travel, and accommodation.


Various allowances are given to the employee to raise their quality of life. The allowances can be house rent allowance, dearness allowance, conveyance, and the leave travel allowance.


Indirect Compensation management

Indirect compensation to the employees is primarily comprised of the non-monetary benefits provided by the company. Most parts of the legal obligations of the company towards their employees come under indirect compensation management. Along with the paid leaves and childcare, the various rewards and recognition to keep the employees motivated can also be part of indirect compensation management.

Fringe Benefits

Benefits are the non-monetary payment to the employees. Fringe benefits include multiple elements such as medical care, uniform, insurance, food, accident relief and much more. Other benefits that have an impact for a longer period are pension, provident fund or gratuity. The



The perquisites are given to the executives over their salary. These benefits are primarily targeted to retain the highly talented and experienced employees in the workforce. Some of the perquisites include a vehicle, memberships to clubs, paid vacation, a house as well as various stock option schemes.


Non-monetary Compensation

The benefits are given to the employees which do not have tangible value as the non-monetary benefits. These factors are important to the career and lifestyle of the employees. If a company wants to acquire and retain the top talent in the company for a longer period they need to ensure that employees feel valued and appreciated.
Top talent is ambitious and gives the best performance. They are also keen to join the organization where they can see opportunities to learn and step up higher in the career graph. Including non-monetary benefits such as opportunities to grow in culture and factors like a healthy work culture that recognizes employees’ work has to be part of the compensation management. Recently remote work environment and flexible timing are seen as the most preferred non-monetary compensation is.


Designing a Compensation Package

HR managers have to pay attention to both external and internal factors for effective compensation management. When it comes to the internal factors HR leaders have to decide the compensation not only based on what should be paid to employees but also to come up with the right figure according to the budget. They need to ensure that an employee gets fair compensation that is affordable to the company.
The external factors should be studied to provide the employee with a lucrative compensation package. That includes research on how your competitors are paying to employees in a similar role, how will the cost of living will affect the compensation management as well as the results and analysis of different market surveys. For employees to find the package right for them all these elements are crucial otherwise the company will lose present employees and also face difficulties while acquiring new talent.

Also Read: 4 Social Hiring Trends to Watch Out for in 2022


  • Here are a few quick tips for compensation management
  • Conduct market research to understand the trends in the talent market for various roles
  • Matching a competitor’s offer is not enough to attract top talent and make the compensation package lucrative.
  • Follow the trends for the benefits and perks that employees keep in consideration as deciding factors
  • Balance the compensation with the right mix of monetary and non-monetary components.



Right employees are essential for the growth of the organization. An effective compensation is a tool that gives you the ability to get the top talent onboard. As compensation is the primary reason for employees to work in a job it is also a primary motivating factor. To get it right you have to include the right perks and benefits to make it competitive. HR also needs to be conscious of the company’s budget while designing a package along with the market research. The compensation management helps to get the best performers in the workforce and improves the profits for the company. The same compensation management also ensures the employee retention and takes down one of the major expense of repetitive recruitment.

Related Post

Contact Us

First Name(Required)
Company Name(Required)
This field is for validation purposes and should be left unchanged.

Contact Us

Company Name(Required)
This field is for validation purposes and should be left unchanged.

We value your privacy

We use cookies on our website to provide you with the best experience. If you continue browsing, you consent to our use of these cookies. If you like to know more, take a look at our “privacy policy”.