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What is employee compensation?

How is compensation determined?

Why should your HR have a compensation management strategy?

How can HR manage employee compensation effectively?

HR tech helps manage employee compensation

What is compensation management

Compensation management is the process of ensuring that an organization's pay and benefits programs support the business objectives and provide fair, consistent, equitable pay and benefits to employees.

It encompasses all activities surrounding employee compensation, including designing pay structures, salary administration, managing pay programs, and designing employee benefits.

A well-designed compensation program can improve employee performance, reduce turnover and help attract valuable employees to the organization, as one of the tasks for HR leaders is to ensure employee wellbeing with a suitable compensation policy.

What is employee compensation?

Employee compensation or remuneration is defined as the payment, which includes base pay, mandatory benefits, perks, and other direct and indirect compensation types, that an employer gives their employees for the work they do.

Total compensation encompasses a wide range of elements, including:

  • Wages
  • Base pay
  • Statutory benefits (social security and healthcare benefits)
  • Overtime pay
  • On-call pay
  • Profit sharing
  • Bonuses
  • Stock options
  • Retirement plans
  • Management incentives
  • Health insurance
  • Tuition reimbursement
  • Childcare

How is compensation determined?

Employee salaries and total rewards are determined based on many factors: the value of the job, industry benchmarks, the employee’s experience, demand for a specific profession, and more.

The job evaluation is affected by the number and type of employees needed to accomplish it, the type and extent of training required, the level of skills required to perform the job, and how the work is measured.

The process of determining employee compensation packages for a job involves the following:

  • Reviewing the job description
  • Analyzing how the job is performed
  • Assessing employee performance
  • Determining what benefits are required or available for a specific location or position

Factors that determine compensation

The following factors have the greatest effect on compensation rates:

Skill sets

Some jobs require specific skills that are difficult to develop, especially when a person is in the job for a long period of time. Jobs requiring unique skill sets should receive good compensation. 

When employers assign employees to high-paying jobs, they choose top-talent employees with certain skill sets. Types of compensation for an employee are largely due to his or her specific skill set. 


A company may hire junior employees or look for seniors for specific positions, depending on its current needs and business goals.

Different types of jobs have different requirements for experience. When making a compensation plan for a job, the employers consider the job's level of experience and how much time it will take to learn the new tasks.

Market standards

Compensation management systems should be designed to be competitive and based on market standards. The cost of labor should be the same or less than the cost of labor in your competitors' organizations. 

Types of compensation should be set according to market standards so that employees receive the same level of effort. This helps to eliminate discrepancies in pay.


Some locations have a higher cost of living than others. In some areas, it might be necessary to provide a higher compensation package in terms of salaries and benefits to attract qualified employees. However, employers should refrain from using this as an excuse to pay less money to existing employees.

Supply and demand

The supply of skilled employees and the availability of work is a factor in determining compensation packages. When there is a shortage of qualified employees, the employer might have to pay more money to attract them.

Why should your HR have a compensation management strategy?

Compensation management is an essential element of a successful human resource management process to HR professionals. There are many benefits to having an effective compensation program, as it:

  • Helps organizations attract and retain the best employees
  • Encourages people to stay in their jobs longer
  • Motivates employees to improve performance, customer and job satisfaction, and talent management
  • Enhances employee engagement
  • Provides employees with motivation and a sense of security
  • Improves team morale
  • Reduces turnover and absenteeism
  • Improves employee retention and increases productivity
  • Decreases recruitment costs
  • Minimizes the risk of lawsuits
  • Establishes a healthy work environment for employees, especially in terms of fair treatment and work conditions

How can HR manage employee compensation effectively?

The HR team plays an active role in establishing a performance management strategy through compensation. The following tips provide a useful framework for setting up effective compensation management strategy:

Determine what the job is worth 

Before you decide on types of compensation, determine what an employee is worth. A valuable employee provides extraordinary effort for the organization. He or she demonstrates loyalty and commitment to the success of the organization. 

Consider the value of the job, both in terms of its pay and benefits. Determine if you need to increase an employee's base pay or push up his or her benefits packages.

Determine your values and objectives 

An effective compensation strategy should reflect your organization's values and goals. For example, if you value your employees, Zenefits research states that you should provide them with the best working conditions and competitive salaries. If you have a competitive product or service, pay employees competitively.

Understand your organizational goals 

Review your organization's strategic goals before making compensation decisions. Are you trying to increase employee performance and customer satisfaction? Are you trying to reduce costs? Are you hiring and retaining employees? Do the employees believe their job roles are important and challenging?

HR tech helps manage employee compensation

HR managers should rely on compensation management software to create and manage employee compensation packages and streamline related workflows (like reimbursement approvals or employee benefits administration) and leverage automation available through HR tech to improve the employee experience.

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