Analyst Perspectives

Determining and providing the appropriate compensation for each person — whether it involves base pay, variable pay such as commissions or bonuses or longer-term incentives in the form of cash or equity or other rewards — is critical to being able to attract and retain productive members of the workforce, whether full- or part-time employees, contingent workers or contractors. The complexities of compensation often prove to be a core challenge for human resources departments as they strive to keep the organization productive, satisfied and motivated while ensuring equitable and defensible pay practices across the entire workforce. In today’s age where workers can get an online crowdsourced compensation benchmark for their role, managers and HR must be prepared to respond to comparison questions.

As a result, many organizations are looking to what we call total compensation management (TCM) to optimize their compensation processes and use all relevant information to maximize the value of and return on their total compensation spend. However, HR departments aren’t often equipped to manage sophisticated programs that extend beyond the annual review process for establishing and communicating the components of base and variable pay or performing market adjustments. Progressive HR departments and dedicated professionals that acknowledge the strategic benefits of having an end-to-end, year-round 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 mature enterprise compensation management processes.

Understanding what the next generation of compensation systems can do is critical to advancing the sophistication of both purchasers and the marketplace. Our new benchmark research, Total Compensation Management — Deriving Full Value from Compensating the Entire Workforce, gathers that knowledge by examining how organizations are managing essential components of TCM. In our view, an investment in elevating TCM is a strategic step forward in human capital management (HCM) and our previous benchmark research on this topic found some progress in modernizing compensation practices. Almost three-fourths (72%) of organizations said it is important or very important to have a TCM model rather than a piecemeal approach.

Moreover, nearly half (49%) of organizations told us they are confident or very confident that their organization currently manages its compensation processes effectively. This is becoming ever more important as most organizations also periodically review and audit their compensation practices to ensure that fairness is upheld across key demographics, often comparing its policies to those of other organizations.

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 succeeded in doing it. In our previous research the largest percentage of participants (47%) cited inconsistent execution across divisions and departments as an impediment motivating investments in compensation management. Most organizations need to know which process and systems changes will make their compensation practices more strategic and effective. Executives and managers need help to determine the set of capabilities that could play a key role in reengineering the organization’s approach to compensation management.

Automating compensation processes and improving efficiency and decision-making will help standardize them. But the real value of a new approach to compensation for HR, line and senior management lies in reinforcing the pay-for-performance model and using internal and external metrics like that from benchmarking will align compensation plans to the skills and value to increase outcomes to both employee and employer. In addition, a range of compensation types should be available for senior employee levels where interactions and incentives and rewards are critical for attracting and retaining talent. Another current trend is making it easy for an employee to retrieve all their compensation-related information using 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 always included in a conventional human resources management system (HRMS) or in many HCM application suites, which have not fully evolved beyond salary and bonus administration. Those outdated systems cannot meaningfully help an organization motivate and manage its workforce.

Some software vendors already provide a new generation of TCM systems that integrate with talent management, workforce management, HR management, financial and budgeting and planning systems and even compensation benchmarking providers. Equipped with these advanced systems, organizations can make compensation processes and systems more robust. They can use planning and management tools to drive productivity, collaborative interactions and satisfaction among managers and workers alike. Organizations adopting modern processes and systems will gain valuable insights by unifying internal compensation benchmarking compared against industry pay practices.

Click here to participate in this research and here to learn more about our methodology and large body of research on HCM, including Workforce Management, Payroll, Learning Management Systems, the Employee Experience and Candidate Engagement. The breadth of this research, in development over more than a decade, has given us insight into trends that affect IT departments and the needs of other parts of the organization. Our research has consistently indicated a connection between not using the right software (or using appropriate technology improperly) and not performing well.