Compensation Management in HRM: Classification, Methods, Current Trends, Determinate?

What is Compensation Management in HRM?

Compensation refers to all forms of financial benefits received by an employee from the employer arising from the employment. Compensation is one of the important motivating factors for employees. Compensation is also known as rewards received by an employee. Compensation is the economic value for human labor and effort.

Organization attains objective value for human labor and effort. Organization attains objective through employee's physical and mental involvement that is why appropriate and timely compensation should be managed to them. Compensation must be based upon the nature and type of job to be performed, employees, qualification, skill, effort, experience, expertise in the relevant field and working hours. On one hand, the lack of appropriate compensation will dissatisfy employees, on the other hand, unnecessary compensation will imbalance the financial position of an organization. Thus, well managed and scientific compensation system has to be implemented by organizations. Compensation policy need to be able to attract, retain and motivate capable, dedicated and honest employees. Compensation must be based on cost effective, market value, demand and supply of labor market, inflation and economic status of the organization.

In conclusion, we can say that a financial and non financial reward provided by an organization to the employees through their employment relationship is known as compensation. It is an extrinsic reward which is provided by an organization based upon its policies, rules and regulations. It includes basic wage and salary, incentive, bonus and other facilities. Economic status of organization, market provision of compensation, demand and supply in labor market, contribution, qualification and experience of employees, etc. has to be considered while making compensation provision. It should be able to attract, motivate and retain capable, eligible, honest and experienced employees within the organization.

Classification of Compensation in HRM:

Compensation can be divided into two parts as financial compensation and non financial compensation.

1. Financial compensation:

Compensation is the form of financial rewards is known as financial compensation. This will improve the economic condition of employees. Financial compensation can further be divided into two parts as:

i. Direct Compensation:

It refers to the direct cash payment made by an organization to the employees. Basic wages and salary, commission, bonus etc are considered as direct compensation. Direct compensation can be basic pay and merit pay. Pay based on the working hour is known as base pay. It can be hourly, weekly, monthly. Merit pay is based on the performance of an employee. It is an addition to the basic pay received by the best performer.

ii. Indirect compensation:

This type of compensation does not improve the economic status promptly. Indirect compensation comprises of facilities received by employees. Under this, financial reward is not provided to the employees immediately. Employees receive such benefits as a result of continuing their employment in the organization. It includes paid vacation, holidays, leaves; lunch break and bereavement leave on the death of a relatives, etc. Some more benefits are pension, gratuity, insurance payment, provident fund, medical care etc; executive benefits like free newspaper, phone payments, transportation facility, accommodation, etc.

2. Non Financial Compensation:

Besides the financial compensation, all those elements that are raised due to the employment in the organization is known as non financial compensation. In another words, all types of facilities or services received by an employee is known as non financial compensation. Non financial compensation can be divided into following two groups as:

i. Job satisfaction compensation:

All types of self satisfaction received by job performance is known as job satisfaction compensation. Satisfaction received from performing the challenging task, responsibility as per the choice and interest of an employee, opportunities of participating in making policies, career development opportunities, opportunities of recognition etc. are job satisfaction compensation.

ii. Environment compensation:

Satisfaction related to work environment is known as environment compensation.

Satisfaction derived from office location, well furnished office room, sophisticated equipment, standard tools, clean and hygienic work environment, open and spacious work place, warm work place, facilitated work place, flexible time etc. are known as environment compensation.

Determinate of Compensation in HRM:

There are various factors that affect on the compensation determination which are known as determination of compensation. Some of them are discussed below:

i. Legal consideration:

Government law and regulations impact the compensation. They issue policy and guidelines regarding the compensation determination. Government stipulate minimum wages, overtime rates, benefits and facilities that employees must provide to the employees. Likewise, the taxes imposed by the government also determine the compensation.

ii. Cost of living:

Cost of living refers to the minimum expenses required to fulfill employees basic needs like foods, shelter, clothing, health, education etc. Thus, the cost of living has to be considered while determining the compensation provision. Basically, the cost of living goes on increasing and in such situation, compensation also has to be revised accordingly. Compensation has to be changed with the change in inflation.

iii. Labor market:

Labor market is the source of labor or employees. There is change in the demand and supply of labor in the market. If the supply of labor is more than the demand, employees are easily accessible. In this situation, low rate of compensation does not hamper in the availability of employees. However, in the situation when the demand of labor exceeds the supply, the level of compensation will have to be raised higher from the previous level.

iv. Labor union:

Labor union raises the voice for the well being and benefits of employees. They pressurize the employer for the increment in compensation. Thus, employer has to set the compensation with the consent of employees or union. However, while doing so, organization should not make economic burden to the organization.

v. Competition pay:

Competition laid by other competitor companies also determines the compensation level. If the compensation isn't competitive then, the capable, experienced and productive employees will be attracted towards other better paying organization and leave the current organization. Thus, the competitive level of compensation is also one of the determinants of compensation.

vi. Job evaluation:

All of the jobs are not equally important and challenging. Some job required highly qualified, experienced and skilled employees while other don't. Thus, all employees are not required to be paid at the same level. Employees who does challenging job will be dissatisfied if all of the employees receive same level of compensation. Even at the same level of job, risks, challenges and relevancy of job may differ. So, compensation has to be determined on the basic of job evaluation.

vii. Compensation policy of the organization:

Each organization has fixed standard and policy for compensation determination. The policy of organization influences the compensation. They determine considering the level and position, nature of the job, working hour and experience required by employees while determining the compensation. Policy serves as a guideline for formulating compensation plan. Thus, the compensation policy of the organization is an important determinant of compensation.

viii. Financial position of organization:

Generally, organization with sound financial position determines higher level of compensations while the firm with weak or poor financial position determines lower level of compensation. Possible growth in the future is also considered while determining the financial position. Once the compensation level is set, it is hard to reduce the level. So, the level of the compensation has to be increased gradually rather than increasing drastically.

Methods of Establishing Compensation in HRM:

There are various methods of establishing employee compensation. Among them, some of the important one are discussed as under:

1. Job analysis:

Job analysis information about jobs, workers and required qualification, skill, capability and experience. For this, job description and job specification is prepared in job analysis. Survey, work place study, supervision and discussion with employees are done while doing job analysis.

i. Job description:

Job description is a profile of the job to be performed. It includes job requirements in terms of duties, responsibilities, authority, accountability, working condition etc. This tells about the job's contribution to the organization. This contribution is taken as a base for the compensation determination.

ii. Job specification:

Job specification is a profile of worker's requirements to do the job. It specifies minimum qualification, experience and skills of the employees. This tells about the contribution of an employees and tells about the compensation she/he get in a competitive market. This is considered as a basis of compensation determination.

2. Job evaluation:

Job evaluation system determines the value of each job to be performed in an organization. Through job evaluation, position and the job performed by each of the position are comparatively evaluated. This will tell about the constitution of each job in the organization. In fact, this system specifies the relative worth of each job and ranks them in a hierarchy. This will help to determine the relative worth of one job in relation to other jobs within the organization. To be more specific, job evaluation system rates the job. Considering the duties and responsibilities, working conditions of the job, skills and efforts required for the job serves the basis for rating the job. Under the job evaluation method, following methods are used to determine the compensation.

i. Job ranking method:

Under this method, all the information regarding the job are collected. Qualification, skills, challenges, difficulties, complexities, importance, contribution etc. are taken as a base to rank the job from simplest to the most complex. Important and challenging jobs are kept at the highest rank. Each job is compared with others to determine the overall rank. Based upon the challenges and contribution of the job, compensation is determined, which sound fair and scientific.

ii. Job grading method:

Under this method, jobs are categorized into grades, which is a group of different jobs requiring similar skills, efforts and responsibilities. Each job is assigned into a grade. Responsibilities, skills, difficulties and effort are common factors used for assigning the grader.

iii. Factor comparison method:

In this method, the required environment to each job is studied and evaluated which serves the basis for compensation determination. Higher the requirement of these factors for a job, higher will be the compensation and vice versa.

iv. Point method:

It this method, factors are identified for job performance and each factor is assigned predetermined point or score. After having job performance, scores of each employee are totaled. And based upon this score, the compensation is determined instead of total hours spent on working.

3. Compensation survey:

This method collects information from other competing organization and determines the compensation to make it more competitive. Compensation is based on the compensation received by employees working at similar position, qualification, levels of other organization. Based upon this, average compensation is determined and the compensation is set based upon the information generated by survey. Published surveys, consultants and agencies, advertisements and applications, informal communication etc. are the source of data for compensation survey.

4. Job pricing:

Importance of job performance, contribution and required skill, capability qualification and experience required for job performance etc, are analyzed, and evaluated to determine the price of each job responsibility. Based upon this, the compensation structure of whole jobs is prepared. Jobs of similar importance are kept under same grade or rank. Importance and market value of each job is identified. Highly important jobs are highly compensated; lower important jobs are compensated at lower level. The most important point to remember is that jobs of similar importance are compensated equally.

Current trends in Compensation in HRM:

In the current context, different organization are using different methods and techniques in the determination of compensation. At one hand, compensation is being strong factors of employee mobility and at the other hand, financial position of the organization is being weak because of increasing competition and raising compensation. To balance these issues, organization are adopting different tests which form the trends in compensation management. Globalization, diversity, increased level of awareness and creation of unlimited opportunities has forced organization to determine appropriate compensation. New trends are also emerging in compensation management. Some of the important trends in compensation are as under:

1. Skill based payment:

The trend of compensation determination based on skill rather than job performance is increasing in these days. Skills required for the job performance are given more importance by organization and is considered as a basis for compensation. This is a most fair and justified compensation. Employees are motivated to acquire and increase their skill because they are compensated as per their skills. This method emphasizes on the range, depth and skill or capability application.

2. Broad banding:

In this method, employees are categorized into different group based upon the nature of skill, qualification and responsibility while determine the compensation. Minimum to maximum compensation is ascertained to each group and accordingly employees are compensated. Generally, all employees are broadly categorized into three groups professional, management and leadership. After categorizing, minimum and maximum level of compensation will be assigned.

3. Comparable worth:

Under this method, jobs are evaluated and the relative worth of jobs is compared to determine the compensation. Less contributing jobs receive lower compensation and high contribution jobs receive higher level of compensation. For example, women who perform jobs comparable to men get the same level of compensation. Women nurse and male electrician who perform jobs of equal value get identical compensation.

4. Variable pay plans:

The use of variable pay system is increasing. It is based on improving production and sharing of prosperity. Different employees even being on the same level get different level of compensation on the basis of their performance or productivity. This means greater the profitability, greater will be the compensation to the employees.