Every changing need of the workforce in the organization, dynamic nature of organizational structure, volatile nature of environment and the increased pressure to enhance the performance of the organizations have motivated human resources (HR) leaders to identify and implement effective compensation plans for workforce. This article, therefore, aims to shed light on the role of compensation management on employee’s performance as well as organization’s productivity. Further, it suggests various premises to construct a compensation policy and highlights the importance of compensation management to the organization in this Darwinian world.

Employees are the most important resource of any organization. They are responsible for each and every decision taken, each and every work done and each and every result. They should be managed properly and motivated by providing strategic compensation in order to maintain sustainable talent for the organization. Compensation refers to all the ways in which an organization may reward employees for the services they render. These rewards could include compensation payments and fringe benefits. As HR managers strive to pursue excellence with their recruitment, selection, training, and compensation intervention, it is increasingly important to demonstrate that their comprehensive efforts add value to the organization (Pankaj, 2011). HR managers are always in search of ways to motivate and reward employees of the organization, which in turn will increase their motivation, performance, and productivity level. One primary HR tool that is used to influence motivation and performance level is compensation (Lawler, 1971). As pay is a strong communicator between an organization and its employees, its success or failure can ultimately have great impact on the overall success of the organization (Hill, 1993). Moreover, pay is a powerful communicator of organizational goals and priorities across all levels in the organization; therefore, organizations that expect to be more successful must make employees partners in their success (Schuster and Zingheim, 1993).

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