Tools and Techniques for Designing Effective Compensation Systems

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.