Objectives of Compensation Management :

The objectives of compensation or wages can be classified under four broad categories – equity, efficiency, macro-economic stability and optimum allocation of labor.

1) Equity: The first category is equity, which may take several forms. It includes income distribution through narrowing of inequalities, increasing the wages of the lowest paid employees, protecting real wages (purchasing power) and the concept of equal pay for work of equal value. Compensation management strives for internal and external equity. Internal equity requires that pay be related to the relative worth of a job so that similar jobs get similar pay.

2) Efficiency: It is often closely related to equity, because two concepts are not antithetical. The objectives of efficiency are reflected in attempts to link a part of wages to productivity or profit, group or individual performance acquisition and application of skills and so on.

3) Macro-economic stability : It can be achieved through high employment levels and low inflation. For instance, an inordinately high minimum wage would have an adverse impact on levels of employment.

4) Efficient allocation of labor: The efficient allocation of labor in the labor market implies that employees will move to wherever they receive a net gain. Such movement may be From one geographical location to another or from one job to another (within or outside an enterprise). The provision or availability of financial incentives causes such movement. For example, workers may move from a labor surplus or low-wage area to a high wage area. They may acquire new skills to benefit from the higher wages paid for skills. When an employer’s wages are below market rates, employee turnover increases. When it is above market rates, then employer attracts job applicants. When employees move from declining to growth industries, an efficient allocation of labor due to structural changes take place.

Other Objectives Of Compensation Management:

Acquire Qualified Personnel: Compensation needs to be high enough to attract applicants. Pay levels must respond to the supply and demand of workers in the labor market since employers compete for workers. Premium wages are sometimes needed to attract applicants already working for others.

Retain Current Employees: Employees may quit when compensation levels are not competitive, resulting in high turnover.

Reward Desired Behavior: Pay should reinforce desired Behaviors and act as an incentive for such behavior to occur in the future. Effective compensation plans reward performance, loyalty, experience, responsibility and other behaviors.

Control Costs: A rational compensation system helps an organization obtain and retain workers at a reasonable cost. With effective compensation management, workers might be over-paid or under-paid.

Comply with Legal Regulations: A sound wage and salary system considers the legal challenges imposed by the Government and ensures the employer’s compliance.

Facilitate Understanding: The compensation management system should be easily understood by human resource specialists, operating managers and employees.

Further Administrative Efficiency: Wage and salary programmes should be so designed that they can be managed efficiently.

Principles of Compensation Formulation: The main factors affecting wage or compensation levels within an organization are – external relativities, salary and individual worth.

External relativities: Market rate as affected by supply, demand and general movements in pay levels.

Individual worth: The value of the individual’s performance to the organization.

Determinants of Wage Rates: Wage rates are either the products of market forces (supply and demand). In the United States, market forces determine wage rates. In Japan, seniority is still the dominant factor for wage determination. Several countries, including have enacted a statutory minimum wage rate that fixes the price of certain kinds of labor. While market forces determine the wage rate in most developed countries, workers often negotiate their wage rate in most developed countries, workers often negotiate their wage rate through collective bargaining wherever Unions are present.