Tools and Techniques for Designing Effective Compensation Systems

Tools and Techniques for Designing Effective Compensation Systems

Adeniji Anthonia Adenike
DOI: 10.4018/978-1-59904-883-3.ch124
(Individual Chapters)
No Current Special Offers


Employees are the most essential resource of an organization. They are vital to a company’s success. Without them, it would seize to exist. Management will probably give employee compensation the first place in their priority list and rightly so. Because the importance that compensation holds for their lifestyle and self-esteem, individuals are very concerned that they be paid a fair and competitive wage. Organizations are concerned with pay not only because of its importance as a cost of doing business, but also because it motivates important decisions of employees about taking a job, leaving a job, and performance on the job. Hence, one of the most vital factors for attraction, motivation, and retention amongst the employees is the compensation system, policies, and review philosophies of any organization. Compensation as a function of human resource management that involves rewarding employees for performing organizational task is one of the most complex functions of the human resource manager. A lot of studies have shown the various components of compensation both for the executives and the employees, but no study has focused on the tools and techniques for designing and implementing effective compensation systems. Therefore, this article will look into these tools and techniques of effective compensation systems. To be able to do this effectively, we will look at the various definitions of compensation in the background to the study, the features of good compensation tools, the rationale for choosing effective compensation tools, and the various compensation tools we have—both intrinsic and extrinsic.
Chapter Preview


The human resource management (HRM) profession and practices have undergone sustainable change and redefinition. Many articles written in academic and practitioner literature have been critical of the traditional HRM function. Unfortunately, in many organizations, HRM services are not providing value but instead are mired down in managing trivial administrative tasks. Where true, HRM departments can be replaced with new technology or outsourced vendors who can provide higher-quality services at a lower cost. This recommendation though somewhat extreme, it follows then that companies need to ensure that their HRM functions of which one of them is compensation management are creating value for the firm. Belcher (1979) states that compensation “is a double input-output exchange between a worker and an employer,” implying the inputs of effort and output of wages to the workers on the one hand and the inputs, productivity, and service on the employer’s side. This connotes that employee’s trade labor and loyalty for financial and non-financial compensation. Compensation includes topics in regards to wage and/or salary programs and structure, merit-based programs, and bonus-based programs including benefits. It can be viewed as a matter closest to the heart of every employee and employer (Banjoko, 2002).

Sesan (2000) admitted that employers/management and employees are in a dependent relationship such that employees have their skills, knowledge, manpower, experience, and information to offer in exchange for rewards from employers that may be financial or non- financial.

Ivancevich (2003) submitted that financial compensation includes pay received in the form of wages, salaries, and bonuses or commissions as well as vacations, insurance, paid sick leave, scholarship payment, and so forth, while non-financial compensation affects an employees motivation, productivity, and satisfaction—this includes; recognition, promotion, praise, and so forth.

Fogleman, McCorkle, and Schwert (1999) considered compensation packages as the total rewards systems that contain non-monetary, direct and indirect elements.

Non-monetary compensation is any benefit an employee receives from an employer or job that does not involve tangible value. These include career and social rewards, such as job security, flexible hours, opportunity for growth, praise and recognition, task engagement, and friendships.

Key Terms in this Chapter

Compensation: Financial and non-financial reward offered to an employee in exchange for work.

Benefit: Indirect compensation aimed at maintaining employees in an organization.

Job Satisfaction: The affective reaction of people to aspects of their work environment.

E-HRM: The planning, implementation, and application of information technology for both networking and supporting of actors in their shared performing of HR activities.

Complete Chapter List

Search this Book: