Compensation and benefits management is the process of managing, analysing and determining the salary, incentives, and benefits given by any organization to their employees in exchange of their work.

What are compensation and benefits?

Whenever the employees receive a job offer, the first thing they look at is the salary offered for their work to be performed. Whatever salary is mentioned in the offer later whether it is hourly or monthly, the candidates see it as the most critical part of any job offer.

Generally, when employees think about compensation, the first thing that comes in their mind is salary. But for several employees, especially the senior employees the compensation and benefit is something more than just the regular pay.

Benefits is the part of compensation which includes indirect pay. Benefits can be like health insurance, stock options, and social benefits which are offered to employees. All of these things are important for any job offer.

The two jobs that offer identical salaries to the employees for the same work may be vary widely in the benefits category, which will made an one way effect for making them a better financial proposition than the other.

Goals of Compensation and Benefits Management

  • Attract employees
  • Retain employees
  • Motivate employees
  • Maximize ROI (Return on Investment)

These goals are achieved by offering broad and competitive compensation plans to the employees within the company budget.

Compensation and benefits management ensures employees should get paid a fair and pertinent salary based on:

  • Work performance
  • Position
  • Responsibilities
  • Experience
  • Job market
  • Company budget

What is compensation management?

Compensation management plays a vital role in HR because it can impact employee retention, the hiring process, company performance, and team management.

Compensation management is the process in which the management analyzes and ensures that the salaries, wages and bonuses given to employees for their work remain appropriate, equitable, and competitive.

If salary, bonuses, and benefits are not managed properly, employees might find much better packages elsewhere. The performance and job satisfaction could decline which can be result in downfall of the business.

Compensation management is responsible for managing the employees data and keeping up with complex benefits administration rules and regulations.

Compensation and Benefits definitions

Compensation and benefits for employees are key part of human resource management.

Employee Compensation:

Compensation is the remuneration awarded to an employee in exchange of their services or individual contributions towards any organization. The contribution can be their time, knowledge, skills, abilities, and commitment to any organization or project.

Compensation consists of both the financial and non financial reimbursement that the organizations pay to their employees in exchange for their work. Simply, compensation maybe defined as the pay given to an employee by an employer as a salary or wages.

Compensation is simply a methodical approach to provide financial value to employees in exchange of work they performed. Wages, salaries and tips are some common forms of compensation.

Employee Benefits:

Employee benefits are non financial rewards provided to employee as a return of their well performed work for the organization.

Benefits are the subset of compensation which covers non monetary form of compensation. It is the non financial part of compensation which includes;

  • Employees allowances
  • Pay raise
  • Paid vacation
  • Achievements and awards
  • Perks and bonuses
  • Social security
  • Health insurance
  • Meal breaks

Types of Compensation and Benefits

Compensation and benefits of employees are divided into two parts;

  • Direct compensation
  • Indirect compensation
Types of compensation and benefits

Direct Compensation

Direct compensation may be defined as the monetary rewards offered and provided to the employees in exchange of their work and the services for the organization.

The monetary benefits include basic salary, conveyance, house rent allowances, medical reimbursements, special allowances, stock options, bonus, provident fund, gratuity, leave travel allowances, etc.

These monetary benefits are given at a regular interval at a definite time.

Indirect Compensation

Indirect compensation is non monetary rewards other than the direct compensation in the form of benefits or perks given to an employee in exchange of their well performed work for the organization..

It includes overtime policy, leave policy, insurance, flexible timing, retirement benefits, paid holidays, job security, best staff award, etc.

Why are compensation and benefits important?

Compensation and benefits in HR play a vital role in encouraging employees and enhancing organizational effectiveness.

Compensation package offered to employees is essential because it is likely to be the primary reason the employees work for them. If companies offer best benefits to the employees than companies can get the desired talent for their success.

Compensation packages with good pay and advantages can help to attract and retain the best employees because the employees want to be associated with the companies which give the job with best benefits. And it gives an employee a reason to stick to the company.

  • Attracting Top Talent

People always want to look themselves in the best possible position financially. So a well designed research on competitor’s compensation and benefits packages is required by any organization to make sure that they also offer a relative packages to their potential employees.

So that they can attract the best candidates for your organization. Because candidates will prefer to go with the organization which will provide them best compensation and benefits plans according to their skills and experiences for the job.

  • Increasing Employee Motivation

When the employees are provided with the proper and suitable compensation than it shows you are valuing them as workers and human beings.

When people feel that they are being valued by the company than they feel better about coming in to work. Overall company morale increased and people are motivated to perform better towards their job and work.

  • Boosting Employee Loyalty

When the employees are being paid well then they feel happy and satisfied. which make them to stay with the company for long which is good for the employee and the organization’s success as well. Proper and suitable compensation is one factor why employees remain with employers.

  • Increasing Productivity and Profitability

When the employees are well compensated, they feel valued which results in increased motivation and loyalty. The good and well designed compensation and benefits plan makes the employees satisfied and happy.

And this happiness improve their performance and willingness to work with the company for a long time. And this results in enhancing the productivity and profit for the organization.

  • Job Satisfaction

Job satisfaction is most valuable factor for an employee to remain in the company for long time. Some time the reason of employee’s job leaving is that he/she is not well compensated according to his/her performance.

Creating the right compensation program leads to stronger job satisfaction. The well designed compensation plan is important for the job satisfaction of the employees because this stronger sense of satisfaction converts into the well performed work which results in company’s success.

Related Posts;

Human Resource Planning (HRP)

Recruitment and Selection of Employees

Training and Development of Employees


Compensation and benefits management is required as it encourages the employees to perform better, show their excellence and also provide growth and development options to the deserving employees. When the proper compensation and benefits are given to the employees than they feel valuable, motivated, secure and satisfied which motivate them to perform better for the success of the organization.