What Is Compensation In HRM?

When it comes to HRM, one of the most critical aspects of the job is managing
compensation. HRM’s compensation management encompasses pay rates and
benefits to bonuses and commissions. It can be an intricate process, but it’s
pivotal for ensuring that employees are happy and productive. In this blog post,
we will discuss compensation in HRM and everything you need to know about it!

Understanding Compensation in HRM

Compensation in HRM refers to all the monetary and non-monetary rewards an

organisation provides to its employees in exchange for their work. This can
include base salary, bonuses, commissions, benefits and other perks.

Compensation management is designing, administering, and evaluating

compensation programs to ensure they are fair and effective. It can indeed
become a tricky task, as many different factors must be considered.

Some of these include:

 The organisation’s overall business strategy

 The types of jobs and skills required
 Internal equity (how fair the compensation is within the organisation)
 External competitiveness (how much other organisations are paying for similar
positions)
 Budgetary constraints

Once a compensation program is designed, it needs to be administered and

monitored on an ongoing basis. It includes setting up payroll processes, tracking
employee data, and making payments correctly.

Evaluating a compensation program’s effectiveness is essential to ensure it

reaches its desired objectives. It can be achieved through surveys, focus groups,
and data analysis.

What Are The Objectives of Compensation in HRM?

The objectives of HRM in HRM are to ensure that employees are paid lawfully
and equitably for their work and to attract and retain the best talent. A well-
designed compensation system will also motivate employees to perform at their
best and contribute to the organisation’s success.
To achieve these objectives, compensation in HRM must take into account the
following factors:

 The market value of the job

 The skills and experience needed for the job
 The employee’s performance
 The company’s financial health and profitability

Compensation in HRM is a complex topic, but understanding these primary

objectives is an excellent first step in managing compensation effectively. But
what are the significant objectives of compensation in HRM? Let’s discuss them
in detail:

1. Ensure Employees are Fairly Compensated: This is an essential objective of

compensation in HRM. Employees should be paid based on the market value of
their job, as well as their skills, experience, and training. They should also be paid
based on their performance.
2. Attract The Right Employees: Another critical objective of compensation in
HRM is to attract the best talent. To do this, companies need to offer competitive
salaries and benefits packages. HR professionals must also be able to sell the
company’s culture and values to potential employees.
3. Create A Reward Structure: The third objective of compensation in HRM is to
create a reward structure that motivates employees to perform at their best.
This can be done through various methods, such as bonus programs,
commission structures, and stock options.
4. Promote Loyalty: The fourth objective of compensation in HRM is to promote
loyalty among employees. Employees are not just looking for a high salary. They
 also want to feel like they are valued team members and that their work is
paramount to the company.
5. Adhere To Legal Compliance: The final objective of compensation in HRM is to
adhere to all legal compliance requirements. This includes things like minimum
wage laws, equal pay laws, and anti-discrimination laws.

As you can see, several compensation objectives in HRM must be achieved that
can differ according to the organisational structure and business model. But by
understanding these objectives, you can develop a compensation strategy that
meets your organisation’s needs.

What Is Compensation Management And Why Is It Important?

Compensation management is creating and administering compensation
programs that enable an organisation to attract, motivate, retain, and engage
employees. It encompasses financial and non-financial rewards that employees
receive in exchange for their contributions to the organisation.

A well-designed compensation program can help organisations achieve several

strategic objectives, such as attracting and retaining top talent, motivating
employees to achieve high-performance levels, aligning employee behaviour
with organisational goals, and managing labour costs. Compensation has a
critical role in ensuring equity within the workplace by providing employees with
suitable pay for their skills, experience, and level of responsibility.

While compensation is often thought of primarily as wages or salaries, it also

includes other benefits and perks, such as bonuses, commissions, stock options,
and health insurance. When designing a compensation program, organisations
must carefully consider the needs and preferences of their employees to create
a package that will be both tempting and motivating.

Compensation programs should be reviewed regularly to ensure they align with

the organisation’s goals and objectives. With the ever-changing workforce needs,
organisations need to be proactive in their approach to compensation
management.

Also Read: Key Objectives of Human Resource Management

Positive Control On The Efficiency of Employees

A good compensation plan will always have a positive effect on the efficiency of
employees. If they feel that their work is being appreciated and they are getting
paid well for it, they will naturally put in more effort. This will lead to better
productivity and improved bottom-line results for the company.
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Reduced Turnover

Another benefit of compensation management is that it can help to reduce

turnover. Employees who feel pretty compensated are less likely to look for
other job opportunities. This can save the organisation money in the long run by
reducing costs associated with recruiting and training new employees.

Improved Morale

Finally, good compensation practices can also improve morale within the
organisation. When employees feel they are well-treated, they are more likely to
be satisfied with their job and have a positive attitude toward the company. This
can lead to improved customer service and overall satisfaction with the
organisation.

Compensation management is integral to HRM and can significantly impact an

organisation’s success. Organisations can achieve several strategic objectives by
carefully designing and administering compensation programs.
Types of Compensation In HRM

There are four types of compensation in HRM:

 Direct financial compensation

 Indirect financial compensation
 Benefits
 Perks

Direct Financial Compensation:

This is the money that employees earn for their time and labour. It is paid
directly to them, either in the form of an hourly wage or a salary. It entails salary
negotiations between the employer and the employee. The pay scale differs
from organisation to organisation and is usually based on the company’s size,
location, industry, and the employee’s experience and skills.

Type of direct financial compensation:

 Hourly wages
 Salary
 Profit shares

Indirect Financial Compensation

This is the money employees earn in addition to their regular wages or salaries.
Generally, bonuses are given based on an employee’s performance or achieving
specific goals. For example, a salesperson may receive compensation for
meeting or exceeding their sales targets. Commissions are typically paid to
employees who are in sales or customer service positions. They are a
percentage of the employee’s sales or revenue.

Types of indirect financial compensation:

 Bonuses
 Commissions
 Stock options

Benefits

These are non-monetary ways of compensating employees. Benefits are usually

given to employees who work full-time. They are designed to help with health
care costs, retirement, and vacation time. Companies decide which gifts to offer
based on their employees’ needs and wants.

Type of benefits:

 Health insurance
 Retirement plans
 Paid time off
 Employee assistance programs
 Internet reimbursement
 Travel reimbursement
 Relocation assistance

Perks

These are also non-monetary ways of compensating employees. Such benefits

are given to employees to make their job more enjoyable. Perks are usually
given to employees who work full-time. They can include free food, gym
memberships, and transportation reimbursement. Companies decide which
perks to offer based on their employees’ needs and wants.

Types of Perks:

 Company car
 Gym membership
 Free meals
 Transportation reimbursement
 Childcare assistance
 Student loan repayment assistance
 Pet insurance reimbursement
  Employee discounts

Offering a combination of these types of compensation will help you attract and
retain the best employees for your business. When crafting your compensation
packages, be sure to consider the needs and wants of your employees.

What Are the Components of Compensation?

Analysis of Job

It is the first step in designing a compensation plan. Job analysis is the process of
collecting and studying a job’s data to identify its essential tasks, duties, and
responsibilities. This information is used to develop job descriptions and
specifications, which are then used to determine the appropriate pay level for
the position.

Prepare Job Description

The next step is to prepare a job description, which is a document that outlines
the essential duties and responsibilities of a position. This document
communicates the job expectations to potential candidates and helps guide the
selection process. It will include outlining duties, responsibilities, education and
experience requirements, and any special skills or qualifications required.

Job Evaluation

After designing the job description, it is time to evaluate the position to

determine the appropriate pay level. This is done by considering the duties and
responsibilities outlined in the job description and the education and experience
requirements. The goal is to create a compensation plan that is fair and
equitable for all employees.

Compensation Strategy

After completing the analysis and evaluation, it is time to develop a

compensation strategy. The compensation strategy will outline how the
organisation plans to attract and retain talent and how they plan to reward
employees for their performance. This strategy will be based on the goals and
objectives of the organisation, as well as the budget.

Designing Pay Structures

The next step is to design the pay structures. This will involve creating a salary
scale that outlines the range of salaries for each position. The pay structure will
also include any bonuses, commissions, or other available forms of
compensation. Once the pay structures have been designed, they will need to be
approved by the board of directors or shareholders.

Implementing the Plan

The final step is to implement the compensation plan. This will involve
communicating the plan to all employees and ensuring it is followed. It is
essential to monitor the plan regularly to ensure that it is working as intended
and that there are no issues with implementation.

Components of compensation in HRM can be very complex. However, by

breaking it down into these simple steps, you can ensure that you have a well-
designed and fair compensation plan.

Also Read: Role Of Human Resource Management in an Organization

What Are The Challenges With Compensation Management in HRM?

There are a few challenges that organisations face when it comes to
compensation management in HRM. One challenge is making sure that all
employees are compensated fairly. This can be difficult to do because you must
consider many factors, such as experience, education, and job performance. 

Another challenge is ensuring that employees are motivated to stay with the
organisation. This can be difficult because you need to offer competitive
compensation packages that are attractive to employees. Finally, make sure that
the compensation budget is not exceeded. 

Scope For A Career In Human Resource Management

The arena of human resource management is vast and offers a lot of scope for
career growth. There are many positions that you can occupy in an HR
department, ranging from entry-level to senior management.

One of the essential aspects of HRM is compensation. Compensation refers to all

the financial and non-financial benefits that an employee receives in exchange
for their work. This includes salaries, bonuses, commissions, and benefits such
as health insurance and paid time off.

Compensation is a challenging vertical, as there are many ways to approach it.

As an HR professional, it’s your job to understand the different compensation
models and how to apply them in your organisation.
An Ultimate Guide to Developing an
Effective HR Strategy
Human resource is the driving force of a company, and as a result, the HR
department becomes an imperative division responsible for attracting, hiring,
and retaining employees. An effective HR strategy can help a company save
money, time, and resources. Creating and implementing an HR strategy can be a
daunting task. It’s important to remember that HR is one of the most important
aspects of any business – it’s what keeps your employees optimistic and
productive.

This comprehensive HR guide will walk you through the steps necessary to
create and implement an HR strategy that works for your company. We’ll discuss
everything from recruiting new employees to satisfying your current staff. Let’s
get started!

What Is An HR Strategy And Why Is It Important?

HR strategy is a plan of action designed to achieve the HR objectives of an
organisation. It has to be aligned with the business strategy to support the
achievement of business goals.

An effective HR strategy will help to attract, develop and retain the best talent,
which will, in turn, improve productivity and performance. A well-designed
human resource strategy will also help to create a positive work environment
and culture, allowing your employees to achieve the company’s objectives.

There are many benefits to creating a human resource strategy, but some of the
most important ones include:

 Improved organisational performance: By aligning the HR plan with the

business strategy, organisations can ensure that their HR initiatives are focused
on achieving business goals leading to improved organisational performance.
 Increased employee engagement and satisfaction: An effective HR strategy
will result in employees who are more engaged and satisfied with their work,
paving the way for increased creativity and decreased turnover.
 Improved talent acquisition and retention: HR strategies can help you identify
and attract top talent and retain your best employees. By creating a positive
workplace culture and offering competitive benefits, you can encourage your
employees to stick around.
 Reduced costs associated with a turnover: The HR strategy you develop
should help to reduce the costs associated with turnover. When employees
 leave, it can cost your company money in terms of lost productivity, the need to
train new employees, and more.
 Enhanced compliance with HR regulations: HR strategies can help to ensure
compliance with HR regulations by ensuring that these regulations are
communicated to employees and managers and by implementing processes and
procedures to ensure compliance.
 Reduced HR costs: HR can be a significant expense for businesses, so it’s
essential to have a strategy that will help reduce HR costs. One way to do this is
to automate HR processes. By automating HR, you can reduce the time and
money spent on HR tasks.

Want to relish the benefits of Human resource strategy as an HR

professional? Check out our Post Graduate Certificate in Human Resource
Management, where you can learn the ins and outs of HR management and
more. 

Also Read: What is Strategic Human Resource Management? Definition and

Examples

How To Create An Effective HR Strategy For Your Company?

HR strategy is critical to the success of any business. It can be the difference
between a company that flourishes and one that flounders.

Quick Checklist to Prepare An HR Strategy:

SWOT Analysis:

 It should be grounded on a stringent SWOT analysis of the company. A SWOT

analysis examines the company’s strengths, weaknesses, opportunities, and
threats.
  It should aim to maximise the company’s strengths and minimise its weaknesses.
 It should also aim to take advantage of opportunities and minimise threats.

Goal setting:

 It should be linked to business goals.

 It should be specific, measurable, achievable, relevant, and time-bound (SMART)
 It should align with the company’s overall business strategy
 HR goals should be reviewed and updated regularly.

HR policies and procedures:

 HR policies and procedures should support the HR strategy and business

objectives.
 HR policies and procedures should be reviewed and updated regularly.
 HR policies and procedures should be communicated to all employees. 

Steps To Formulate A Successful HR Strategy

HR strategy formulation isn’t a one-time affair. It’s a continuous process that

needs to be revised and updated as your company grows and transforms. Check
out these steps you can take to formulate an effective HR strategy:

Understand The Business Goals And Objectives

The first step is to understand the overall business goals and objectives. You
need to carve out some important objectives of the company that will serve as
the foundation of the strategy. 
What are the company’s overarching goals? What are the specific objectives that
HR can help to achieve? Once you clearly understand the business goals, you can
start aligning HR strategies accordingly.

It is imperative to comprehend all the business goals so that HR strategies can

be formulated to achieve these within the given resources and a stipulated
timeline. Business objectives may change over time, so HR strategies should also
be reviewed and updated regularly.

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Conduct A SWOT Analysis

After ascertaining the business goals, it’s time to conduct a SWOT analysis, the
most crucial step in the journey that will come in handy at every stage. It will
help you understand the company’s strengths, weaknesses, opportunities, and
threats. You can use this information to develop a strategy to help the company
achieve its goals.

Make sure to involve employees in the SWOT analysis. They likely have valuable
insights you can use to develop an effective and productive strategy. Without
SWOT analysis, you may create an HR strategy that doesn’t address the
company’s most pressing needs.

The SWOT analysis results will help you develop HR goals aligned with the
company’s overall goals. For example, if the company’s goal is to increase sales,
your HR goals might be to hire more salespeople or provide training to help
employees sell more effectively.

Conduct a needs analysis

Assess your company’s needs and objectives to determine HR’s role in achieving

them. To do this, you must analyse your company’s HR practices, policies, and
programs. You can use various methods to assess HR, including surveys,
interviews, focus groups, and HR data analysis.

The human resource department can also analyse HR trends inside and outside
the company to identify potential HR strategies. For example, if you’re trying to
reduce employee turnover, you might research HR practices at companies with
low turnover rates.

Need analysis often comes in handy in strong human resource strategy

development as it provides insights into HR gaps – areas where HR can improve.

Evaluate the Skillset of Employees

HR strategy starts with evaluating the skillset of employees who can help to
achieve the goals. Once you clearly understand your team’s skills and
experience, you can begin developing a plan to utilise those skills best. 

It may include training or development programs or simply reassigning tasks to

employees who are better suited for them. Either way, it’s essential to make sure
that your human resource strategy is based on your team’s specific skills and
experience.

There are a few different ways to analyse the skill set of your employees. You
can start by looking at job descriptions and performance reviews. It will provide
a thorough overview of each employee’s skills. You can also conduct interviews
and surveys to get more specific information about employees’ skills.

Perform Gap Analysis

There is no doubt that gap analysis is an integral part of human resource

strategy. IT will help you understand the current state of your HR strategy, what’s
working and what’s not, and where you need to make improvements. Once you
have a clear picture of the gaps in your HR strategy, you can start developing a
plan to close them.

Ask yourself during your gap analysis:

 What HR processes do we currently have in place?

 Are our HR processes aligned with our business goals?
 Do our HR processes support our employees in achieving their objectives?
 Do our HR processes help us attract and retain top talent?
 Do our HR processes improve employee engagement?
 Are our HR processes efficient and cost-effective?
If you find that your HR strategy is not aligned with your business goals, or if it’s
not supporting your employees in achieving their objectives, it’s time to make
some changes.

Develop HR KPIs

HR KPIs are the metrics that help you measure and track progress against your
strategy. To develop HR KPIs, start by looking at your HR strategy and identifying
the key areas you want to measure. Then, choose metrics that will accurately
reflect progress in those areas. Some common HR KPIs include employee
satisfaction, turnover, and training completion.

Once you have selected your HR KPIs, you need to track them regularly. You can
do this manually or using HR software; if you use HR software, set up alerts, so
you are notified when KPIs fall below or exceed certain thresholds.

Monitoring HR KPIs is essential to ensure your HR strategy is on track. Regularly

reviewing HR KPIs can identify problems early and make necessary adjustments
to keep your HR strategy on course.

Focus on Engagement Via Communication

An HR strategy should aim to increase employee engagement by improving

communication. It can be done in several ways, such as:

 Encouraging two-way communication between employees and management.

 Creating channels for employee feedback and suggestions.
 Providing training and development opportunities.
 Supporting employees to share their ideas and suggestions.

By increasing communication, you can create a more engaged workforce that is

more likely to be productive and motivated. It will have a significant influence on
your business’s core. But it will not be a one-time event but an ongoing process
that is regularly reviewed and tweaked as necessary.

Depend on Analytics For Decision Making

HR teams can improve their efficiency and effectiveness by using data to make
decisions. HR professionals need to be able to justify their decisions with data. It
means HR teams must become more analytical in their approach to problem-
solving. HR analytics can help identify issues early on and prevent them from
becoming more significant problems later.
HR teams should also use data to measure the success of their initiatives. Such
information can help HR teams adjust their strategies to better meet their
organisations’ needs.

HR analytics is a powerful tool to help HR teams improve performance.

However, HR analytics is not a silver bullet. HR teams still need to use their
determination and experience to make the best decisions for their
organisations. HR analytics should be used as a supplement to, not a
replacement for, human judgment.

Also Read: Breaking Down The Scope Of Human Resource Management

What Are HR Strategy Best Practices?

There’s no one-size-fits-all answer to this question – the best HR strategy for
your organisation will rely on different factors, including your company’s size,
industry, and HR goals. However, there are a few best practices that HR teams
should keep in mind:

HR professionals must be deeply involved in the process:

HR strategy should not be developed in a vacuum – it must be created through

close collaboration between HR professionals and other key stakeholders.

HR budget and even management buy-in are key imperatives in execution:

A human resource strategy cannot be successful without supporting the HR

budget and management buy-in. Allocate the necessary resources upfront to
avoid execution problems later on.

HR strategy must be tailored to the specific needs of the company:

Never copy another company’s strategy. What is working for one company might
not be relevant for yours. HR strategy must be carefully tailored to the
customised needs of your company.

HR strategy should be reviewed and updated regularly:

Like all business strategies, human resource strategy should be revised and
updated to ensure that it is still relevant and not derailed from its objectives.

The Bottom Line

HR strategy is a crucial part of any business. By developing and implementing an
effective HR strategy, companies can reap several benefits, including improved
employee productivity, engagement, and retention.
While there is no multipurpose Human resource strategy, businesses can use
the tips and advice outlined in this guide to create a tailored HR strategy that
meets their specific needs and goals. With a bit of time and effort, businesses
can develop an HR strategy to help them achieve their desired outcomes.