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Objectives of Compensation Management


The basic objective of compensation management can be briefly termed as meeting the needs of both employees and organization.

Since both these needs emerge from different sources, often, there is a conflict between the two. This conflict can be understood by agency theory which explains relationship between employers and employees.

The theory suggests that employers and employees are two main stakeholders in a business unit, the former assuming the role of principals and the latter assuming the role of agents. The compensation paid to employees is agency consideration.


Some of the objectives of compensation management are:-

1. Acquire Qualified Personnel 2. Retain Present Employees 3. Ensure Equity 4. Reward Desired Behaviours 5. Control Costs

6. Comply with Legal Regulations 7. Facilitate Understanding 8. Further Administrative Efficiency 9. Attracting and Retaining Personnel. 10. Motivating Personnel

11. Optimizing Cost of Compensation 12. Consistency in Compensation 13. Internal Equity 14. External Equity 15. Individual Equity.

Objectives of Compensation Management

Objectives of Compensation Management

If it is very necessary to list the various objectives which can be achieved through Compensation Management and the same have been spelt out below:


1. Acquire Qualified Personnel – Compensation needs to be high enough to attract applicants. Pay levels must respond to supply and demand of workers in the labour market since employers compete for workers.

2. Retain Present Employees – Employees may quit when compensation levels are not competitive resulting in higher turnover.

3. Ensure Equity – Compensation Management strives for internal and external equity which requires that pay is related to relative worth of jobs and is comparable to the workers getting in other firms.


4. Reward Desired Behaviours – Pay should reinforce desired behaviour and act as an incentive for those behaviours to occur in the future.

5. Control Costs – A rational compensation system helps the organization obtain and retain workers at reasonable cost.

6. Comply with Legal Regulations – A sound wage and salary system considers the legal challenges imposed by the Government and ensures the employers compliance.

7. Facilitate Understanding – The Human Resource specialists, operating managers and employees should easily understand the compensation management.

8. Further Administrative Efficiency – Wages and Salary programmes should be designed to be managed efficiently, making optimal use of HRIS.

Sometimes these objectives may conflict with one another and trade-offs must be made between them. These objectives are not the rules, instead these are the guidelines.

Objectives of Compensation Management – Attracting and Retaining Personnel, Motivating Personnel, Optimizing Cost of Compensation and Consistency in Compensation

The basic objective of compensation management can be briefly termed as meeting the needs of both employees and the organisation. Since both these needs emerge from different sources, often, there is a conflict between the two.

This conflict can be understood by agency theory which explains relationship between employees and employers. The theory suggests that employers and employees are two main stakeholders in a business unit, the former assuming the role of principals and the later assuming the role of agents.


The compensation paid to employees is agency consideration. Each party to agency tries to fix this consideration in its own favour. The employers want to pay as little as possible to keep their costs low. Employees want to get as high as possible.

The compensation management tries to strike a balance between these two with the following specific objectives:

(i) Attracting and Retaining Personnel:

From organization’s point of view, the compensation management aims at attracting and retaining right personnel in the organisation. In the Indian corporate scene, there is no dearth of personnel at operative levels but the problems come at the managerial and technical levels particularly for growing companies.


Not only they require persons who are well qualified but also they want to retain them in the organisation. In the present day context, managerial turnover is a big problem particularly in high knowledge based organizations.

(ii) Motivating Personnel:

Compensation management aims at motivating personnel for higher productivity. Monetary compensation has its own limitations in motivating people for superior performance.

Alfie Kohn has gone to the extent of arguing that corporate incentive plans not only fail to work as intended but also undermine the objectives they intend to achieve. He argues that this is due to inadequate psychological assumptions on which reward systems are based. Notwithstanding these arguments, compensation management can be designed to motivate people through monetary compensation to some extent.


(iii) Optimizing Cost of Compensation:

Compensation management aims at optimizing cost of compensation by establishing some kind of linkage with performance and compensation. It is not necessary that higher level of wages and salaries will bring higher performance automatically but depends on the kind of linkage that is established between performance and wages and salaries. Compensation management tries to attempt this.

(iv) Consistency in Compensation:

Compensation management tries to achieve both internal and external consistency in compensating employees. Internal consistency involves payment on the basis of criticality of jobs and employees’ performance on jobs. Thus, higher compensation is attached to higher-level jobs.

Similarly, higher compensation is attached to higher performers in the same job. External consistency involves similar compensation for a job in all organizations. Though there are many factors involved in the determination of wage and salary structure for a job in an organisation which may result into some kind of disparity in the compensation of a particular job as compared to other organizations. Compensation management tries to reduce this disparity.

Objectives of Compensation Management – Objectives of a Sound Compensation Plan

A sound compensation plan seeks to achieve the following objectives:


i. Comply with all appropriate laws and regulations.

ii. Achieve cost-effectiveness for the organisation.

iii. Enable a firm to attract and retain talent. The wage or salary plan must have a built-in incentive to spur people to superior performance.

iv. Easy to operate and execute.

v. Offer internal, external and individual equity for employees –

a. Internal Equity:


Employees want to be treated fairly in all facets of compensation, including base pay, incentives and benefits. Equity is the perceived fairness of the relation between what person does and what the person receives. Internal equity ensures that complex, difficult jobs are paid more.

b. External Equity:

Externally, the organisation must offer compensation that is seen as equitable in relation to the compensation provided to employees performing similar jobs.

c. Individual Equity:

It assures equal pay for equal work, that is each person’s comparison to others performing similar jobs within an organisation.

vi. Lead to performance enhancement for the organisation.


vii. Project a good image of the organisation.

Objectives of Compensation – 9 Important Objectives

Compensation has some important objectives. To achieve, these objectives a well-conceived compensation scheme or plan may be established.

These objectives are mentioned briefly below:

1. To be legally acceptable – In order to be legally acceptable, it must get approval from the Government or top level management in the organization.

2. To be adequate – Compensation must be sufficient so that needs of the employees are fulfilled substantially.

3. To be motivational – Compensation must increase the level of motivation, morale and job satisfaction of the employees.


4. To be equitable – Compensation policy should be declared in such a way that it does not contain any discrimination.

5. To provide security – Employees must have guarantee of getting wages or compensation regularly without any break.

6. To be cost benefit effective – The organization must make a balance between cost for giving compensation and benefits to be accrued from the employees.

7. To attract skilful, talented and knowledgeable employees.

8. To retain the talent, by compensating them adequately.

9. To maintain the employees, for faster progress of the organization.

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