In very simple terms, compensation is the results or rewards that the employees receive in return for their work.

Compensation includes payments like bonuses, profit sharing, overtime pay, recognition rewards and sales commission, etc.

Compensation can also include non-monetary perks like a company-paid car, company-paid housing and stock opportunities. Compensation is a vital part of human resource management, which helps in encouraging the employees and improving organizational effectiveness.

Objectives of Compensation Policy

The objectives of compensation policy are as follows −

  • Allure suitable staff.
  • Keep qualified personnel.
  • Develop reward structures that are equitable with logical and fair pay relationships between differently valued jobs.
  • Manage pay structures to mirror inflationary effects.
  • Appraise performance, duty, and loyalty, and provide for progression.

Importance of Compensation Management

A good compensation is a must for every business organization, as it gives an employee a reason to stick to the company.

An organization gains from a structured compensation management in the following ways –

  • It tries to give proper refund to the employees for their contributions to the organization.
  • It discovers a positive control on the efficiency of employees and motivates them to perform better and achieve the specific standards.
  • It creates a base for happiness and satisfaction of the workforce that limits the labor turnover and confers a stable organization.
  • It creates a peaceful relationship between the employer and the employees.
  • It excites an environment of morale, efficiency and cooperation among the workers and ensures satisfaction to the workers.