Of all the disciplines in the human resources field, compensation is one of the most complex. Handling compensation issues requires knowledge of employment trends, the value of experience and credentials for various positions and industries, negotiation skills, company budget and the organization's bottom line. Economic conditions also play an important role in compensation and benefits issues. Addressing compensation issues can range from developing competitive wage scales to weighing the advantage of bonus and incentive payments.

Definition of Compensation

The term compensation means financial payments such as wages and salary paid to employees. Compensation also includes bonus and incentive payments, raises and company stock awarded to employees. Compensation specialists often have knowledge of both compensation and employee benefits. This is one reason why human resources departments sometimes combine compensation and benefits into one departmental function.

Human Resources Budget

It's been argued that human resources budget allocations are too low because HR is not a revenue-producing department. In theory, however, the most valuable resource a company has is its human capital. Consequently, human resources compensation specialists and HR department leaders must sometimes work within limited budget constraints. In addition, justifying budget increases requires proof of return on investment in HR department activities. In "10 Keys to Negotiating Your HR Budget," human resources expert Valerie Grubb says: “You need to be able to demonstrate your ROI. If you can articulate your department’s performance in terms of company goals, it will be much more difficult for the top brass to tear into your budget.”

Salary and Wage Levels

Attracting qualified applicants may depend on your company's ability to offer extremely competitive wages. Employee benefits are important, too, but the base amount is what initially appeals to some job seekers. A company's reputation is also a determinant in whether your company can become an employer of choice. It's likely that competitors' employees and industry experts network with your employees to share information. Candidates want fair wages, not necessarily high wages, especially when a job offer comes with an attractive benefits package. Compensation specialists analyze competitors' wages, labor market trends and employment levels to construct compensation policies.

Bonus and Incentive Pay

Some employers offer annual bonuses or incentive pay based on the individual employee's performance or organizational performance, also called variable pay. Workplace Perspectives contributor Milton Zall defines variable pay plans: "The broadest type of variable-pay incentive programs — company-wide pay-for-performance plans — reward employees on the basis of the entire corporation’s performance. The most widely used program of this kind is profit sharing." The amount of bonuses and incentives is difficult to budget too far ahead if your company is relatively new; however, if you have an incentive program that's structured and adhered to consistently without favoritism and bias, you can accurately project budget requests for bonuses and incentive pay.