The Importance of Compensation Plan in an Organization

Importance of Compensation Plan

Compensation Plan

Compensation Plan

Compensation plays a critical role in aligning employee behavior with business objectives. Since the industrial age, the four Ms of business management i.e. Man, Material, Machine and Money are said to contribute to the business’s success. Among these, man has been considered to be the most important factor contributing to organizational effectiveness and efficiency.

Attributes such as lateness, absenteeism, unsafe actions, alcoholism, drug abuse, poor training, and incompetence can upset the apple cart of business objectives. Efficient employment practices are inevitable towards the sustenance of goals by making sure that this one important factor is set right on the path of productivity. There is no doubt that by employing the right kind of man for the right job can discard the wide space called ineffective business management. However, human elements such as expectations, emotions, ambitions, egos etc. too contribute a fair amount to business success. Thus, a fair compensation system is created in every organization on order to make the most of most important ‘M’ element.

Compensation attributes to all forms of pay and rewards received by employees for their performance, including all forms of benefits, perks, services and cash rewards. It is paramount to acknowledge and announce the total compensation to your employees. This needs to be done so that the significance of what you are putting forth in compensation is clear and hence attracts and retains talent.

Compensation is usually given in the form of monetary rewards that can be either direct or indirect:

compensation plan for employees

DIRECT COMPENSATION Wages & salaries Bonuses Incentives & commission Stock options INDIRECT COMPENSATION Various income protection programs – employee insurance, workers compensation, pension plans Benefits Indirect benefits can be costly, and their value should be disclosed and recognized when discussing about the compensation offered.

When creating an organization’s total compensation program, including compensation design, rules and procedures, it is vital that the HR professionals understand and include what is moreover essential to the business and its objectives.

A variety of elements need to be considered when designing a compensation plan that is also compatible to the employee demographic and budgetary bridles.

The following should be included when designing a compensation plan:

  • Various elements that will embody the total compensation offered to the employees.
  • Comparable and competitive compensation rates within the industry.
  • Compensation needs to be unbiased. There must always be a logical increase in pay when it comes to length of service, job title, skills and abilities required to accomplish the job in a productive manner.
  • An already established criterion that results in a pay increase.
  • A well designed system to measure and control payroll costs.
  • A proper procedure to measure the success of the organization’s compensation program by determining if the compensation results into favorable retention numbers, workforce performance and motivation.

THE PURPOSE OF COMPENSATION IN AN ORGANIZATION: Attract & retain employees Motivate workforce & sustain high morale Meet legal requirements Motivate personal growth

In every organization it is essential to understand the importance of compensation and the flexibility the hiring managers can have in designing a compensation package that can in turn attract, retain and develop a quality talent pool.

Don’t miss out on our post listing Six Different Types of Compensation Plans & Benefits. We’ve picked the most common and most rewarding forms of compensation plans and highlighted their benefits and downsides, so you can decide which one works best for your business needs.

Diana Coker
Diana Coker is a staff writer at The HR Digest, based in New York. She also reports for brands like Technowize. Diana covers HR news, corporate culture, employee benefits, compensation, and leadership. She loves writing HR success stories of individuals who inspire the world. She’s keen on political science and entertains her readers by covering usual workplace tactics.

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