Compensation, by definition, refers to "the monetary and non-monetary benefits received by an employee in return for his or her contribution to the organization." Compensation management is an integral and significant aspect of human resources management because remuneration is the very essence of an employment relationship. We hire people for their services. We in turn must give them what is due and equitable.

But is compensation management just about giving salaries and bonuses?

Surprisingly, in many companies compensation management are accomplished with varying degrees of success. Experience shows that no matter how novel or ingenious one’s approach is, it will not achieve its purpose without the right impetus. Compensation systems, to begin with, are designed with an organization’s strategic goals and business objectives in mind.

Compensation, therefore, is not just the mere calculation of salaries and bonuses for payroll. Although we know that money is a great motivator, it is also a key strategic tool for an organization to influence employees' behavior and strengthen its corporate values and philosophies. Neither is compensation all about money but rather the overall "compensation mix" that will make one’s strategy effective and powerful. 

Needless to say, an organization’s compensation philosophy should be aligned with its overall business strategy, goals, and culture so that there is no disconnect. Otherwise, we will not be maximizing the full power of compensation to help our company succeed. Sometimes, it may even be necessary to explore a combination of monetary and non-monetary elements in a compensation plan.

When designing compensation plans, it is wise to learn from Jim Collins, author of the bestseller Good to Great: Why Some Companies Make the Leap... and Others Don't. Collins and his researchers were perplexed over the question of what makes a company great and why. So several years ago, they began their quest of studying 1,435 companies, looking for those that made substantial improvements in their performance over time. The startling conclusion was that there appears to be no clear pattern to explain success. Executive compensation appears to play no significant role in determining which companies become great either. His findings only bolstered his argument that decisions about whom to pay in the first place are much more important than how much or how.

Interestingly, these findings coincide with Marcus Buckingham’s conclusion in First, Break all the Rules. According to Buckingham, the best managers are those who treat their employees as individuals. This means that as HR managers, we must hire for talent, and hone that talent whether through compensation or by some other incentives into outstanding performance. Come to think of it, the effect is mutually beneficial because employee satisfaction, as Buckingham also found, is also vital information for investors.

"Pay for performance" is another compensation principle crucial to an organization’s survival in the market. As such, it is better to do away with seniority or other paternalistic practices that contradicts this basic principle. Moreover, it has to begin right from the moment when a person is recruited all the way up to his retirement from the company. Performance management must not be limited to performance appraisal but must be integrated in the series of activities that goes in cycle as the one elegantly described in this article.

Overall, both compensation and performance management are key areas where HR professionals can and should make great contributions to their organizations. However, it is important to emphasize again that without a connection to compensation, performance management would simply fail for lacking the element of execution. Understanding this concept and doing it right will help an organization attract and retain top talents needed to achieve business growth and success.--JK