Heneman (2002), states that for human resources compensation is the prime source that enables companies to attract and retain talents, thus the compensation management is a critical component of human resource management and of the entire organization.
The importance of compensable factors, such as knowledge required by position and skills requirements, problem solving and accountability (Jones, Steffy & Bray, 1991) are dictated by the complex decisions that executives should make in order to positively impact company’s recruitment and retention efforts and to reach organizational goals. Therefore, choosing a compensation strategy is one of the main human resource decisions made by any organization. The development of such strategy is highly important because it promotes employee recruitment, retention, motivation and good performance thanks to the set of offerings that a company makes. However, not every organization compensates its employees or uses compensation strategically. While wages and benefits policies are used without strategical intentions, compensations instead are aimed to improve morale, reduce employees’ turnover and help achieve targets within an establishment (Das & Baruah, 2013). However, as stated by Hong, Hao, Kumar, Ramendran and Kadiresan (2012), compensation is not one of the main factors that impact the employees’ turnover despite being a critical factor in reducing managerial turnover. When determining the compensable factors, the developers should consider such policy choices as internal alignment, external competitiveness, employee contributions and the management of the pay system. As internal alignment deals with the pay relationships within the organization, it dictates the level of skills and knowledge that are needed, thus the compensation and benefits programs are granted for the special set of such skills.