Analyst Perspectives

Compensation management is a key activity for engaging all employees and thus for human capital management. I discussed this connection in my perspective on unifying human capital management. In a further step in that direction, I am excited to announce the launch of our next-generation compensation management benchmark research. Determining and providing the appropriate compensation for each person, whether it involves base pay, merit pay, variable pay and incentives or bonuses, or a combination of these, is critical to being able to attract and retain productive members of the workforce – full- or part-time employees, contingent workers and contractors alike. Incentive compensation tied to objectives often is critical in business areas such as call centers, sales and field service. The complexities of compensation make more difficult the core challenge faced by human resources departments: keeping employees productive, satisfied and motivated.

The activities and systems that support compensation plans for executives and variable pay and rewards for those in sales, field service and contact centers, as well as stock grants and other incentive programs, are diverse and complex. As organizations consider advanced practices such as pay for performance and talent management, many are finding they need a comprehensive and more strategic approach to compensation. As a result, what we call total compensation management is gaining interest from organizations that seek to streamline their compensation processes and fully use the information they have to derive optimal performance from their workforce investments.

Improvement of compensation processes has become a part of business strategy and planning conversations in executive-level management meetings. However, this does not mean that many organizations have succeeding in doing it. In our previous compensation research the largest percentage of participants (47%) cited inconsistent execution across divisions and departments as an impediment motivating investments in compensation management. Many don’t know which process and systems changes will make their compensation practices more strategic and effective. Executive managers need help to determine the set of capabilities that could help them re-engineer the organization’s approach to compensation management.

Our experience in this field indicates several directions worth pursuing. Automating compensation processes and improving the efficiency of managing them will help, but the greatest value of a new approach to compensation, for both HR and corporate management, lies in tying compensation more closely to performance by evolving it into a unified or pay-for-performance system. In addition a range of types of compensation should be available for deployment at the managerial levels where interactions and incentives and rewards matter the most. Another current trend is making an employee’s own information easily accessible to him or her through self-service applications. Only recently have tools to provide this access become readily available, including through mobile devices such as smartphones and tablets. These capabilities are not found in a conventional human resources management system (HRMS) or in many human capital management application suites, which typically have not evolved beyond salary budgeting. Those outdated systems cannot help motivate and manage the workforce at any level.

Most HR departments aren’t equipped to manage sophisticated programs that extend beyond the annual review process for establishing and communicating the components of base and merit pay. Progressive HR departments acknowledge the importance of having an end-to-end compensation management approach, and many of them have reviewed or are currently reassessing their established processes and underlying systems. But this important step is merely the first in building a mature enterprise compensation management process.

In our view, an investment in total compensation management software is a strategic step toward advancing human capital management, and our previous benchmark research on this topic found some prog­ress in modernizing compensation practices. Almost three-fourths (72%) of organizations said that it is important or very important to have a total compensation management system rather than a piecemeal approach. Moreover, nearly half (49%) told us they are confident or very confident that their organization currently manages its compensation processes effectively.

Though compensation management is maturing, breakdowns in the process and underlying systems still occur. Many organizations have pockets of compensation-related functions situated outside HR. Most of these have neither a complete view of compensation information nor an understanding of the strategic implications of compensation options and factors beyond base and merit pay. Moreover, applying analytics to complete and accurate compensation data is critical for developing metrics and performance indicators that can guide decisions on compensation policies and for individuals. This, too, is not widely done.

Such analysis is important as organizations decide that they need to benchmark their internal history and compensation policies and practices against those of comparable organizations. Doing so can ensure awareness of potential diversity issues and fairly compensation for all individuals regardless of gender and ethnicity. The topic of equal pay for equal work is an issue that organizations need to address, and to do that they must have data and analytic skills that enable comparisons of skills and experience along with the roles and responsibilities of individuals at common job levels. At this point, however, most vendors in the compensation software market have yet to provide the required modeling and analytics capabilities that enable organizations to answer this key question: “Are we on average paying people fairly at every level of the organization no matter their gender or ethnicity?” It can be difficult to address these needs in the short term, and customers should demand that their software vendors invest in it and energize their efforts to simplify it.

Some software vendors are moving to provide new total compensation management systems that integrate with talent management, workforce management and HR management systems. But our previous research found that fewer than one in five (17%) have integrated compensation with talent management although almost one-quarter (23%) were planning to. Equipped with advanced systems, organizations can make compensation processes and systems more robust as planning and management tools and use them to increase productivity and satisfaction among managers and workers alike and to facilitate collaborative interactions among them. While an integrated approach is desirable, organizations should not allow vendors to force them to buy an entire suite to start the relationship; it is often a better practice to select a single specific application and, if it meets requirements, add on other applications in the suite.

Complicating the situation is widespread use of ad hoc planning tools, especially spreadsheets that cannot be integrated easily into a total compensation management process and are difficult to audit or control. Many organizations use a heterogeneous mix of applications and services inside and outside of the enterprise to manage compensation; this complicates even the most basic tasks. In our previous research 26 percent of participants identified inadequate software as the largest barrier to effective workforce planning. More than one-fourth of organizations said they use only spreadsheets for tracking and managing compensation, and 35 percent said they use them extensively in conjunction with their compensation systems. A range of other applications, including some dedicated to this purpose, were named less frequently.

Spreadsheets are designed as personal productivity tools. Our research has found repeatedly that using them for an enterprise process such as compensation management undermines productivity and increases financial risk. Our previous total compensation management research confirms this: 38 percent of participants said they have found errors in payments to employees in the past 18 months. Yet fewer than one-fourth perform audits to locate errors in calculations in spreadsheets. It comes as no surprise then that only 42 percent said they are satisfied with their current software for managing compensation.

This situation constitutes for any performance-oriented organization a mandate to examine new systems that will address the complete span of compensation management needs and support financial and operational management as well. Regarding the latter our previous research found that the finance department plays an essential role in assessing and adopting new compensation software with many influencing (31%), needing access to (23%) or sponsoring and funding (13%) the investment. The advent of cloud computing and software as a service, which can be easily deployed and configured, makes compensation management more readily available to any size of organization. To manage compensation effectively for both salaried talent and the hourly workforce is critical, but to do so requires more than better administrative systems; the capabilities must be available to all levels of the organization, from management and managers to the range of workers. As noted earlier, being able to benchmark and evaluate compensation within the organization and to compare that data to the industry at large is now a requirement; software should be able to help users do this.

In recent years some vendors have more tightly coupled compensation management with talent management capabilities, making it available not only during the recruiting and hiring processes but also throughout performance reviews and appraisals. Our previous research found that only one-fifth of organizations have such a system, but more than three-quarters (76%) of participants said such linkage is important or very important. As organizations consider a comprehensive approach for all employees rather than just salaried ones, they need to integrate compensation information related to hourly pay and incentives with workforce management systems. Further, integrating with sales compensation systems is essential to ensure that all forms of compensation information are brought into a uniform view for determining fair and effective compensation plans. It also is important to integrate such information with the HRMS, which is the source of policies established to provide a more uniform approach to all compensation information. We add that integration across a variety of systems was the second-most often cited barrier impacting compensation management, for two-thirds of organizations in our previous research.

Total compensation management is poised to become a powerful component of all phases of human capital management; used properly, it will help organizations understand how to get full value from all of the talent in their workforce. It can even deliver a competitive advantage to engage and retain employees. But understanding the changing processes and related application needs requires in-depth market research. Ventana Research’s Next-Generation Compensation Management research will help us provide best practices and guidance for human resources, finance and compensation professionals. More information and access to participation are at http://www.ventanaresearch.com/tcm/. We are also assessing vendors and products that provide compensation management in our Value Index. Please join us in following and contributing to these efforts.

Regards,

Mark Smith

CEO and Chief Research Officer