Here is a complete guide to creating perfect Compensation Management Plans in Human Resource Management.

Compensation Management plans are a strategic part of HRM. They help the company retain its employees by motivating them through monetary or non-monetary perks. These can be in the form of bonuses, incentives, food coupons, stockholding, etc. Since equality between employees has to be maintained, Compensation Management software can simplify this task by acknowledging the right employee behavior with the right set of rewards. This helps in easy budget allocation for compensation purposes and works in the direction of the company goals. In any firm, the optimum use of employee data leads to the correct planning of Compensation Management policies.

One of the key roles, the Human Resource Management department plays in a firm, is employee retention. If the firm wants to get better outcomes or reward its employees for a job well-done, it needs to compensate the employees well enough. This makes them feel that their work experience with the firm is worthwhile. Managing a proper compensation strategy can lead to retaining talent and attracting the cream employees.

In any competitive industry, Compensation Management requires a structured plan and a unique approach according to the needs of its employees. According to research conducted on Deloitte, a Fintech giant, about 70% of the total hiring cost is dedicated to compensation management.

Compensation Management: An Important Part Of HRM

Compensation Management is the sector of Human Resource Management that looks into the planning, structuring, and controlling of the benefits of the employees. These can be monetary such as overtime pay, bonus, sales commission, profit sharing, etc., or non-monetary such as company-granted housing, a car, or apart in the company’s stockholding.

These perks encourage the employees to improve the overall effectiveness of the company. The compensatory policies and packages of the company are the attractive factor for which the employee might choose to work for the firm. The HRM department conducts surveys to understand if the wages are fair and if the compensation structure can keep up with the daily expenses and inflation and still leave the employee with some savings. It also reflects the company's work culture and values.

Key Objectives of Compensation Management

A functional compensation management policy is an asset for both, employers and employees. A work force that receives a fair salary proper incentives and effective benefits, tend to stay with the company for a longer period and give better performance. This also helps them to keep their morale high.

A recent Glassdoor survey says that increasing pay by 10% ensures an employee retention hike of 1.5% for an internal job posting.

Some important benefits of an effective Compensation Management System are:

  • Employee Retention - The professionals try to put their best efforts towards the success of the firm. They like to be associated with a company that has strong compensation policies.
  • Productivity - It ensures effective resource management to maintain high productivity.

  • Equity - It ensures fair, equal, and impartial rewards for everyone. The pay equity should match internally among professionals and externally amongst their competitors. Employers need to keep their eyes peeled for making sure the employees are getting paid what they deserve. This is especially true for companies supporting hybrid work culture and flexible working hours.
  • Budgeting - It helps the company to stay in line with the budget while giving out competitive salaries. The Compensation Management in HRM can efficiently monitor the budget for labor costs and strategize their compensation policies.

  • Legality – It allows the employers to comply with the Central, Federal, orState laws that control the rights of the employees towards benefits and rewards against their contributions. This also helps in highlighting any discrepancies and inequalities in pay or benefits towards any employees.

Compensation Management Software: The Tool

A big company means a huge work force and this huge workforce brings along with it, a high volume of data.Handling huge chunks of employee data and manually applying compensation policies is a waste of time and effort. Here is where Compensation Management Software steps in. It is a software committed to organizing and planning budgets and strategies for creating prime compensation packages and policies.

The objective of Compensation Management Software in HRM is to

  1. Build packages that can efficiently compensate for work done by the employee.
  2. Work on the set compensation protocols of the company.
  3. Make optimum use of the employee data being provided.
  4. Create dashboards for managing salaries, showcase merit indicators and create reports on individual compensation data for each employee.
  5. View and customize compensation plans and policies, plan salary hikes, bonuses, and rewards.
  6. Equalize the compensation factor sand work according to the budget.
  7. Provide easy access to up-to-date employee information regarding tenure, salary, and performance for all stakeholders on a single dashboard.
  8. Creating comparative salary benchmarks which bring international currency and local currency under the lens of equity.

There are many vendors which sell Compensation Management Software as an independent solution or as an integral part of the Human Resource Management Software Suite.

Some Performance Management Software available in the market helps in the active tracking of employee performance. This software can be bought with the Compensation Management solution as an add-on. The idea here is to link employee performance and compensation on a common platform, making it easy for the HR department to arrive at decisions in real time.

What Is The Compensation Management Software Market Like?

The global economy is keen on making decisions based on data for the automation of pay-grade management and employee retention strategies. Hence, these also become the main reason for the rising market of Compensation Management Software.

MNCs across the globe are looking for a centralized solution to manage and retain talent through good compensation strategies. Compensation Management Software and Solutions allow employers to plan bonuses, rewards, and promotions for their professionals. Therefore, it is important for software vendors to provide high-end user satisfaction.

Large-scale industries hold a greater share of the market for Compensation Management Software than small and medium enterprises (SMEs). This is because large industries have the efficiency to invest more in IT. They also have operations and deployments in multiple locations across the globe with a larger employee base.

Compensation Management Software can be deployed based on 2 modules:

  1. On-site module
  2. Cloud module

Currently, the cloud module is grabbing more attention as it offers easy scalability and around-the-clock service without investing in hardware.

The sectors which majorly contribute to the Compensation Management Software Market are:

  • Retail
  • Banking and Finance
  • Information technology
  • Healthcare
  • Education
  • Government sector
  • Manufacturing

On A Final Note

Modern HR Leaders work with the approach of implementing Information Technology to simplify their work and take effective decisions based on high-quality data. A good Compensation Management Software in HRM, enables its users to define their goals and objectives.

It helps them manage effective budgeting processes. A strong vendor-client relationship requires a proper understanding of the objectives and good communication. With this HR leaders can take control of good compensation strategies within a workable timeframe.


  1. Should a compensation plan depend on the age or level of education of the employee?

Yes, employees of higher caliber would expect to be compensated accordingly. Also, it is a good idea to invest in employees who would like to work on a long-term basis.

  1. What is the difference between compensation and base pay?

Base pay is the basic salary an employee receives without any tax deductions or added compensations. The total compensation is calculated over and above the base pay by including all forms of bonuses and rewards received by the employee.

  1. What are fringe benefits?    

They are supplementary benefits other than money, which support the employees by providing support where it is needed the most. Examples: hospitalization, health insurance, medical relief, recreation, etc.

Find out how Compport can help you manage all your Compensation Management process, book a demo today!

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