Earlier, many business organizations did not find the need for spending high level of effort, energy and time on the `Strategy' part of compensation management, as they did in areas like selling and marketing of products and services. One major reason for this is that the results and gains of strategic compensation management are difficult to measure and are intangible. Whereas, the results of the efforts in areas like selling and marketing are comparatively easy to measure. In addition to this, earlier, the economy was manufacturing-based while today's economy is knowledge-based, where manpower is the most important resource. So, with the increasing demand for talented manpower, the missions and the business strategies of the companies are being defined more clearly. Today, it is a necessity to use the compensation management as a strategic tool for the organization.

Designing and managing the strategic compensation system for an organization, is one of the most difficult human resource management functions. There is a possibility of a huge gap between the theory or the concept and the actual practice. The challenge is to bridge this gap. Lawler, Taylor and Mohrman, write in the book Creating a Strategic Human Resources Organization.

An Assessment of Trends and New Directions, published by Stanford University Press, 2003, that in today's time of knowledge economy, compensation (specially in service organizations) often accounts for 70%-80% of total cost of doing business. This indicates that the compensation management is so important in an organization that it deserves to be used as a strategic tool. The strategic perspective focuses on those competitive choices that help the organization gain and sustain competitive advantage.

The holistic nature of compensation highlights the fact that compensation strategies by themselves do not motivate people to perform better, and their success is intimately connected with the overall HRM climate in the organization vis-à-vis market expectations in each industry and in each job category. Hence, the best paymasters are not necessarily the best employers

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