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What is compensation management and why is important in every company?


Compensation management is vital for employee motivation. Employees who are recognized for the value they bring are more likely to be motivated, loyal and higher performing than those who’re not.

There are different ways that management and HR department can communicate appreciation. It’s important than compensation management policies are in place. Policies that make it clear exactly what the employee is receiving in total reward.

What is compensation management?

Compensation management is defined as “the act of distributing some type of monetary value to an employee for their work by means of the company’s policy or procedures”.

Simply put, it is the paycheck plus any benefits that come with the position. It is without question, 100% critical in the search for and retention of great employees. A great pay package is a serious incentive to not only take a job, but to excel at it. 

What does compensation management have to do with Human Resources?

The success of the HR Department in any company relies heavily on positive employee engagement. HR is responsible for hiring, firing, payroll and benefits. These five matters impact employees more than anything else. Above all, there is perhaps nothing more motivating for employees, than compensation. It recognizes them and reinforces positive feedback through tangible pay raises and perks.

Benefits of compensation management

Compensation management helps ensure that the salaries offered are competitive. If all the data collected tallies with market trends, hiring managers can make an offer to a prospective candidate without low-balling or being too generous.

Employees may find out what their co-workers earn either online or through word of mouth, so it’s important to keep all compensation management practices fair and in line with the market rate. HR can calculate salary increases and bonuses this way too. However, there are critical arguments that denounce basing an employee’s future worth on past performance.

Overall, if your compensation management system is correctly projecting salaries, increases, bonuses, discounts and other perks, then employee retention will stay steady. Happy employees stay put.

Compensation management software

Compensation management software facilitates effective and equitable compensation programs, those that create an engaged and productive workforce.  These packages are typically an enterprise application that calculates, budgets for and maintains employee salaries. Additionally, they provide all of the information you need to know how salaries can change within an existing job role.

However, it’s important not to discount employee potential when calculating salaries. Compensation management software is extremely reliable. It is important to make it work within your company boundaries.

HR usually manage compensation management systems, but they can be accessed by department heads and managers too. Often, compensation management stats are accompanied by employee performance data. This combination helps determine offers, bonuses and annual increases.

Employee benefits and compensation management

Benefits play a major role whether a candidate accepts or passes on a job offer. Employers should consider using employee benefits as part of their compensation management program.

While healthcare differs greatly from country to country, making benefits part of your compensation management plan can help employees stay healthy. The software you invest in should help you keep up-to-date with wellness incentives in the workforce.

Whatever benefits you offer your employees, these can be tracked and compared to the market within a compensation management system. Since benefits play such a huge role in employee well-being, it’s vital for them to make a positive impact.

Compensation management software can also help to encourage employees to take part in wellness programs, which has the potential to lower healthcare costs all around.

Compensation management and payroll

There is a huge difference between compensation management and payroll.

Payroll is the preparation of worksheets and checks which will subtract income taxes and other deductions. It can also be used to keep track of salaries, payouts, wages and budgeting within a company and is a huge cost to most companies. Having accurate records are a must.

Compensation, on the other hand, refers to all pay types (salary included) and benefits that are provided to an employee by an employer. Life insurance, disability insurance, health and dental, and retirement funds are all part of compensation.

Most employers cover a portion of health insurance premiums, and help employees build their retirement fund. These are two great ways to boost employee retention.

Compensation management matters

The size of your business might not matter, but your approach to compensation management does. Smart compensation policies are proven to help businesses expand. This is because they help with the acquisition and retention of high-quality motivated employees.

In fact, compensation management is one of the most effective ways to keep employees happy and focused on achieving personal and business goals. Employers of any size should want to keep and maintain this goal-oriented attitude from employees.

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