Compensation and Incentives in HRM


One of the most difficult functions of personnel management is that of determining rates of monitory compensation. It is not only duty for organisation but also equally important to both the organisation and the employee. It is significant to organisation, because wages and salaries constitute the greatest single cost of doing business and it important to the employer because the earning is the only means of economics survival; it is the mean that influence the standard of living, status in society, work as motivational factor, loyalty and productivity.

Compensation is a tool used by management for a variety of purpose to further the existence of the company. It is a remuneration that an employee receives in return for his or her contribution in the organisation. So, the employee compensation programs are designed to attract capable employees to the organisation, to motivate them towards superior performance and to retain their services over an extended period of time.

Meaning and Definition of Compensation

In layman’s language the word ‘compensation’ means something, such as money, given or received as payment for service. The word compensation may be defined as money received in the performance of work, plus the many kinds of benefits and services that organization provides their employee. It refers to wide range of financial and non-financial rewards to employee for their service rendered to the organization. It is paid in the form of wages, salaries , special allowance and employee benefits such as paid vacation, insurance, maternity leaves, free travel facility , retirement benefits etc.

According to Wendell French,” Compensation is a comprehensive term which includes wages, salaries and all other allowance and benefits.”

Wages are the remuneration paid for skilled, semi-skilled and unskilled operative workforce. Salary is the remuneration of those employees who provides mental labour to the employer such as supervisor, office staff, executive etc wages are paid on daily or hourly basis where as salary is paid on monthly basis.

Objectives of Compensation Planning

The basic purpose or objective of establishing sound compensation is to establish and maintain an equitable rewards system. The other aim is the establishment and maintenance of an equitable compensation structure i.e an optimal balancing of conflicting personnel interest so that the satisfaction of employees and employers is maximised and conflicts minimized, the compensation management is concerned with the financial aspect of employees need, motivation and rewards.

A sound compensation structure tries to achieve these objectives:

  • To attract manpower in a competitive market.
  • To control wages and salaries and labour costs by determining rate change and frequency of increment.
  • To maintain satisfaction of employees by exhibiting that remuneration is fair adequate and equitable.
  • To induce and improved performance, money is an effective motivator.
  • To Employees:
  • Employees are paid according to requirement of their jobs i.e highly skilled jobs are paid more compensation than low skilled jobs. This eliminates inequalities.
  • The chances of favouritism are minimised.
  • Jobs sequence and lines of promotion are established wherever they are applicable.
  • Employee’s moral and motivation are increased because of the sound compensation structure.
  • To Employers:
  • They can systematically plan for and control the turnover in the organization.
  • A sound compensation structure reduces the likelihood of friction and grievance over remunerations.
  • It enhance an employee morale and motivation because adequate and fairly administrative incentives are basis to his wants and need.
  • It attracts qualified employees by ensuring and adequate payment for all the jobs.
  • In dealing with a trade union, they can explain the basis of their wages programme because it is based upon a systematic analysis of jobs and wages facts.
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