The Critical Role of Effective Compensation Management in the Attainment of Organizational Objectives

Academic Paper, 2015

13 Pages, Grade: 2.63









According to Zorly Sonyucel (2009) Human Resource Management (HRM) is a strategic and coherent approach to the management of an organisation’s most value assets – the people working there who individually and collectively contributes to the achievement of its objectives. Compensation management is one of the critical roles of HRM because it is at the heart of motivating factors why people take up employment. Motivation is the factor that ignites, directs and maintains our behavior (Bratton and Gold, 1999). The importance of economic empowerment to employees are extensively discussed in the content theories of motivation such as Maslow’s hierarchy of needs, Alderfer’s existence, relatedness and growth (ERG) theory, Herzberg’s two-theory factors and McGregor’s Theory X and Theory Y theory. These were also reinforced by the five (5) other principal theories of motivation such as Reinforcement, Goal Setting Theory, Justice Theory, Expectancy Theory and finally Agency Theory.


Dr. G. C. Mohata (2013) considers compensation as a systematic approach to providing monetary value to employee for work performed. Compensation or pay system is one of the most important tools used by organisations to entice, keep and encourage employees to contribute in ways that support organizational objectives. The components of a compensation package include salaries, allowances, insurance, pension savings, paid leave, health insurance, recreation etc. The major determinant of compensation package is the organizational strategy, while some organisations may have a very high financial package with few other non-financial incentives, other organisations may have low pay, but a generous health, insurance, retirement and other benefits. Compensation therefore represents the total package of rewards both monetary and non-monetary benefits enjoyed by employees. One of the few critical things I learnt in this course is that compensation practices are effective when they are aligned with the broader HR strategy.

Some of the foundational steps necessary for determining an effective compensation package include pay surveys within and outside the industry, determining the pay level strategies such Meet, Lag or lead the market. Other consideration include job-based or skilled-based and understanding of the labour laws and government regulations on wages, equal pay laws, etc. Charles Wong (2012) identified Skill-based compensation, Competency-based compensation, and Time-based compensation. Finally, determining the proportionate of the compensation package that will be “Base Pay” and At-risk Pay” depending on the strategic objectives of the organisation. Base pay is the compensation provided for time worked within specified period and is not dependent on performance. Base pay provides a security nets for employees whereas individual and group incentives provide reward for high performance. There are two broad categories of employees’ benefits i.e. legally required benefits (minimum wage, workers’ compensation, pensions, medical expenses insurance, loss of job etc) and discretionary benefits (paid leave, study leave with pay, health care-plan, retirement, housing scheme, scholarship scheme, social club registration, etc) that extend beyond what is legally required.

In an Article by HR Wale (2010) “Reward Management” some of the common individual incentives are reward for high performers, commission for sales person, a large commission for making a sale, piece-rate incentives commissions, merit pay increases and merit bonuses. As part of the measures to encourage team work organisations are increasingly adopting group based incentives such as team bonus, gain sharing plans, profit sharing and stock plans. Team incentives are linked to group performance rather than individual performance and it most effective where the team being measure is small and performance easily ascertainable.

In goal-based team reward organisation agreed to provide a reward if the team meet specific objective, for example sales target, completion of a project within certain period, cost reduction to certain level, etc. on the other hand, Discretionary team bonus provides payment when high performance is observed but no goal is set to achieve specific outcome.


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The Critical Role of Effective Compensation Management in the Attainment of Organizational Objectives
Organisations & HR Management
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critical, role, effective, compensation, management, attainment, organizational, objectives
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Kabiru Olatunde Afuwape (Author), 2015, The Critical Role of Effective Compensation Management in the Attainment of Organizational Objectives, Munich, GRIN Verlag,


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