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5 Min. Read

What Is Compensation Management? Definition & Importance

What Is Compensation Management? Definition & Importance

Compensation is one of the most important aspects of an organization. It affects both employers and employees. It's not always clear what compensation management entails. This term might be interchangeable with compensation strategy or management of benefits. For others it means something different. Compensation management is establishing payment strategies that attract, keep and motivate your employees.

This article will clarify what compensation management is and why it's so important.

Here’s What We’ll Cover:

What Is Compensation Management?

The Four Types of Compensation

Why Compensation Management is Important

The Benefits of Compensation Management

Key Takeaways

What Is Compensation Management?

Compensation management is about managing the various types of compensation an organization offers. Compensation managers or business owners are often responsible for this. This includes four major types. These are direct pay, employee benefits, incentive compensation and employee assistance programs. It's important that organizations don't only understand how each type operates. They should also understand why it's important to communicate with employees about compensation.

The Four Types of Compensation

Read on to learn more about the different types of compensation offered by companies.

Direct Pay/Salary

Direct pay refers to how much money an individual earns for working a certain job. This can be hourly or salary work.

Indirect Compensation or Employee Benefits

Indirect pay or fringe benefits are other forms of payment tied to employment. These include health care, retirement plans and paid time off (PTO). Incentive compensation often occurs in sales positions. These individuals earn commissions based on specific goals or targets they must reach.

For example, in the sales realm, an individual might earn $10 for every dollar's worth of product he or she sells. If that person were to sell $100 of product, he or she would earn a $100 commission.

Incentive Compensation

Incentive compensation for individual employees is a form of motivation. It encourages employees to do their best work. Incentive compensation works on a collective level. Groups or teams are rewarded based on how well they perform as a whole. In the example above, the sales team might earn commissions. This is based on how much revenue they bring in as a team. This is as opposed to earning on individual performances.

Here is another example of incentive compensation. A director earns a bonus based on the success of their department.

Employee Assistance Programs (EAPs)

An employee assistance program is a company-sponsored resource. It offers workers behavioural health services and counselling. This helps them deal with personal problems that could impact their work performance.

Here is another example of EAPs in practice. A company offers to pay for an employee's substance abuse treatment. EAPs might also include programs that offer support and financial advice. This helps workers who lack basic necessities such as food or healthcare.

Why Compensation Management is Important

Effective compensation management is important. It helps organizations define the types of compensation they use. It also explains how they reward employees and remain competitive in their industry. It also encourages transparency between an employer and employee. This can build a stronger relationship that's beneficial for both parties.

This means that if things change with compensation decisions, the worker will be notified. An organization that uses proper compensation management must have strong leadership. This means having accurate information about industry standards for pay rates. Organizations should also hire managers who are willing to listen. They must consider employee feedback about their compensation package.

The Benefits of Compensation Management

The benefits of compensation management are many.

An organization can expect a lower turnover rate. If employees feel like they're compensated fairly, they won't feel the need to move. This means that an organization will save money. They'll save on recruiting and training new employees. It also helps keep employee engagement high. 

To be successful with compensation management, organizations should communicate changes. This includes changes in pay rates, bonuses or benefits. This helps employees avoid confusion and misunderstandings. It also keeps job satisfaction high. This is where good leadership skills can come into play. Successful organizations have leaders who encourage transparency in the company's compensation plan. Transparency in this case means communicating with employees. When changes are made to an employee's pay rate, bonus or benefits, the worker should know about it ASAP.

Key Takeaways

This blog post has outlined the importance of compensation management for businesses. There are many benefits to using this type of management. These include lower turnover rates and higher productivity among employees. Always remember transparency when incorporating new payment plans. This is crucial for fair compensation. If you make any changes in pay rates or bonuses, be sure to let your workers know. This helps to avoid misunderstandings about what's happening. Hopefully this article clarifies some important concepts related to compensation management.

For more guides like this one, head to our resource hub.


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