Compensation Management

The term “compensation”, as a substitute word for wages and salaries, is of recent origin.

Compensation should be viewed as the strategic management of wages and salaries. Compensation management strives for internal and external equity. Internal equity requires that pay be related to the relative worth of a job so that similar jobs get similar pay. External equity means paying workers what other firms in the labor market pay comparable workers.

The objective of efficiency are reflected in attempts to link a part of wages to productivity or profit, group or individual performance, acquisition and application of skills and so on. It can be achieved through high employment levels and low inflation. It implies that employees will move to wherever they receive a net gain. Market rates as affected by supply, demand, and general movements in pay levels. Salary relativities between jobs within the organization depending on the values attached to different jobs.

To an employee, pay is a primary reason for working. For some individuals, it may be the only reason. For most of us, it is the means by which we provide for our own and our family’s needs. Compensation is also important to organization. It represents a large proportion of expenditure. Compensation is also significant in the operation of the economy.

There are 3 core decisions, those involving pay level, pay structure, and pay system.  Supporting there are 3 other decisions, concerning pay form, pay treatment for special groups, and pay administration.  All the decisions are influenced by a number of environmental and organizational variable. Examples of their variables are the economic, social/cultural, and legal environments; as well as the organization’s structure and workforce.

Compensation decisions are also affected by the dynamics of the particular organization. Employee pay must be consistent within the organization structure. Finally, compensation decisions are affected by the worldwide information highway. The social environment is changing dramatically, following the entry of women into the workforce. Valuing diversity while taking compensation decisions is very important.

Victor Vroom formulated Valence Instrumentality Expectancy (VIE) theory. Valence stands for value, Instrumentality is the belief that if we do one thing it will lead to another, and expectancy is the probability that action or effort will lead to an outcome. An incentive or bonus scheme works only if the link between effort and reward is clear, and the value of the reward is worth the effort.