Compensation management is one of the primary functions of HR, as it plays a crucial role in attracting and retaining top talent.
What is compensation management?
It is managing and determining an employer’s compensation to the employees in return for their work.
Compensation management involves managing, analysing, and determining the salary, benefits, and incentives paid to the employees. Compensation management plays a crucial role in attracting and retaining top talent. It includes monetary as well as non-monetary benefits. It also increases employee productivity and reduces employee turnover.
Additionally, it ensures that every employee gets paid a fair wage based on industry standards, work experience, company budget, etc.
Key factors affecting compensation management
Here’s a list of key factors that affect compensation management. We have discussed each factor in detail in the next section.
- Productivity of workers
- Ability to pay
- Government policies
- Labour unions
- Cost of living
- Demand and supply of labour
- Industry standards
- Productivity of workers– Productivity-based compensation helps derive the best results. The higher the productivity of employees, the more should be the compensation.
- Ability to pay– If your company has high profitability, you can pay better compensation and retain your employees and vice versa.
- Government Policies– Government also has certain policies to protect employee interests. The employer has to pay the employees as per governmental regulations and provide benefits such as PF, medical insurance, gratuity, and pension.
- Labour Unions– They also play an essential role in ensuring employees get a fair wage. They fight with the employers for the employee’s rights and wage revision.
- Cost of Living– Cost of living also influences compensation to a large extent. An employee based in a city with a high cost of living needs a higher salary and vice versa.
- Demand and Supply of Labour– It is one of the most important factors that affect the compensation of employees. If the demand is more than the supply, the compensation will be higher.
- Industry Standards– No employee would like to join a company whose compensation is below the industry standards. Therefore you need to analyse the standard market rates of different roles and pay your employees accordingly.
Different types of compensation
The types of compensation are broadly classified into direct compensation and indirect compensation. Let us look at them in detail.
It is the monetary benefits provided by the employer to the employees.
- Hourly pay– Hourly pay is the salary paid for each hour of work that the employee does.
- Salary– Salary is the fixed monthly amount that the employer pays to the employee in cash.
- Commission– A monetary reward that is paid based on the performance of an individual. It is generally provided in the case of sales jobs as a fixed percentage.
- Bonus– A bonus is a monetary incentive paid to employees for their good performance. It is paid over and above the employee’s basic salary.
[Suggested Read: Salary Breakup – Salary Structure, Format, Calculation & More]
Indirect compensation refers to non-monetary benefits like paid holidays, insurance, and retirement benefits.
- Insurance– Employers generally provide employees with medical insurance to ensure good health of their employees. If you are an early-stage startup facing difficulties getting employee insurance, check out RazorpayX Payroll. It provides group insurance packages to teams as small as 2!
- Paid holidays– Paid holidays are provided to help employees maintain a work-life balance.
- ESOPs– Sometimes, companies also provide their employees with their shares at a discounted price, offering them an additional opportunity to earn.
[Suggested Read: The Complete Guide to ESOPs (Employee Stock Ownership Plans)]
- Retirement Benefits– Retirement benefits include gratuity, pension, general provident fund, leave encashment, etc.
- Leave travel allowance– LTA or leave travel allowance is the non-monetary benefit provided by the employer to the employee where the employer covers the employee’s travel expenses.
- Relocation expenses– Relocation expenses are the benefits the employer provides in case the job requires relocation to a different city.
Importance of compensation management for HR Leaders
While the list of reasons why you should focus on compensation management is rather long, here are a few main reasons-
- Helps Plan Your Budget– Employee salaries are the highest cost for any startup. Compensation management helps determine the costs beforehand and plan the budget accordingly. It also helps plan increments and other benefits based on industry standards.
- Helps Motivate Employees- Compensation is the key factor influencing an employee’s productivity. A well-paid employee is more likely to work hard for your company and vice versa.
- Reduces Employee Turnover– Giving adequate monetary and non-monetary benefits helps increase job satisfaction and reduce the rate of employee turnover.
- Attracts Best Talent– It not only prevents employees from switching jobs but also helps attract top talent. The best talent always looks for a company with a competitive salary and benefits like insurance, paid time off, leave allowance, flexible benefits, etc.
The huge number of employees makes manual compensation management tiresome and error-prone. The best way to deal with the payroll of a huge number of employees is to use payroll processing software like RazorpayX Payroll.
How is compensation management determined?
In India, compensation determination involves a combination of factors, including market practices, legal regulations, industry standards, and individual performance:
- Job role and responsibilities
- Industry and market trends
- Geographical location
- Company size and financial health
- Experience and expertise
- Education and qualifications
- Performance and contributions
- Legal and regulatory factors (mentioned in the above sections)
- Gender equality and non-discrimination
- Collective bargaining and industry standards
- Benefits and perks
- Inflation and economic conditions
Things to be considered by HR Leaders to ensure effective compensation management
Compensation Management Software – RazorpayX Payroll
RazorpayX Payroll is India’s ONLY fully automated compensation management and payroll software. Here’s how RazorpayX Payroll benefits you-
- Helps manage employees from onboarding to exit
- Auto calculates deductions like PF, ESI, and TDS and files them
- One-click payment of employee salaries
- Provides best-in-class yet affordable health insurance
- Leave tracking along with real-time attendance
- HR management software to access payslips, form 16s, etc.