Analyst Perspectives

Compensation management is a critical part of human capital and talent management processes. Organizations must determine and provide the appropriate compensation for each person — whether it involves base pay, short or long-term incentives, cash or equity-based compensation — to attract and retain productive members of the workforce. However, the complexities of compensation can make it difficult for human resources departments to keep employees productive, satisfied and motivated.

In recent years, total compensation management (TCM) increasingly has been reframed as total rewards management. In the competition to attract and retain top talent, organizations are tracking and communicating the total value of all rewards, benefits and perks the organization provides to workers. More than rewards are needed, though. Being able to offer a personalized employee experience, particularly when it comes to compensation and rewards, is a competitive differentiator and should be a key part of an organization’s efforts to attract and retain top talent.

Ventana Research has conducted market research for almost two decades in a spectrum of related areas including TCM as well as broader human capital management areas ranging from workforce management (WFM) to payroll management and learning. We also have done research on the employee experience and candidate engagement. Our continuous research and analysis of the market for business applications and technologies guide our comprehensive approach to the recently published Value Index on Total Compensation Management.

We advise that organizations assessing their existing approaches or exploring a new RFI/RFP in TCM software examine our Value Index methodology and findings. The Value Index is a resource for organizations to understand how best to embrace an integrated approach that optimizes the TCM function and connects it with other HCM systems, information and processes.

To compete effectively for top talent, organizations are personalizing the employee experience in variety of ways:

• A tight labor market has created pressure to accommodate worker preferences; while one employee might prefer some or all of his or her compensation in base salary and annual increases, another might embrace a riskier variable compensation plan that pays more when the business or employee performs well.
• Artificial intelligence and machine learning technologies increasingly make it possible to personalize compensation and rewards in a way that scales.
• New digital tools and capabilities in compensation can not only personalize rewards but can help organizations model compensation pool funding or compensation based on organizational structure. These systems can support complex plans and packages and automatically trigger a new compensation plan or configure individual packages when a worker’s status changes. They even can match jobs to compensation market data when no direct matches exist, analyzing the cost of adjusting compensation for certain job families or business segments.

Additionally, TCM vendors have responded to requests that they improve existing functionality. Examples include the flexibility to consider an array of factors and better visual displays of budgets, including pool allocations to workforce segments such as high-potential workers or those with desirable skills. Systems are also offering more configurable and personalized total compensation statements and much better support for communicating with employees about total compensation. These platforms also integrate to varying degrees with performance management tools and financial systems as well as payroll, competency models, third-party administrators of equity plans and other systems.

The corporate compensation function once was satisfied with distributing an annual compensation statement to note base salary and any bonuses. Recently these statements have evolved to highlight everything the organization spends on the worker, including insurance coverages and benefits, the value of accrued PTO, potential variable compensation and incentive payout scenarios as well as various nonfinancial rewards. These rewards might include free or subsidized meals or snacks, the ability to work from home or the flexibility to participate in volunteer activities at full pay.

Despite the improvements in available systems and tools, we continue to see an overreliance on spreadsheets to manage and report on data during a compensation cycle. Line managers, HR and compensation professionals along with senior leaders often think spreadsheets are more convenient, flexible and discrete. Unfortunately, this misperception can cause serious problems. Among those organizations using spreadsheets, nearly one-third (29%) said they occasionally find errors that result in incorrect payment to employees while an additional half find errors that they can correct before payment. This and other research into business processes we’ve conducted make clear that spreadsheets pose challenges to the accuracy and continuity of an organization’s compensation management.

Today’s best rewards platforms present data in a spreadsheet-like display, requiring minimal training and offering far better security and version control. Vendors now offer rich visualization capabilities, easy integration with employee data, market pricing data and far more modeling and what-if analyses than spreadsheets can provide. These systems also minimize the risks of data errors that can lead to financial liability or employee flight or disengagement.

It’s worth noting that the current emphasis on delivering a great employee experience has put even more pressure on organizations to treat workers fairly in terms of how they are evaluated and rewarded. Total compensation and total rewards are a key piece of any serious effort to elevate the employee experience and maintain high levels of engagement and an attractive employer brand in a sustainable way.

The Value Index on Total Compensation Management evaluates seven vendors’ products on an RFP model across seven categories of requirements. Five are product-related, assessing usability, manageability, reliability, capability and adaptability, while two quantify the customer assurance issues of vendor validation and total cost of ownership and return on investment (TCO/ROI). We urge organizations considering an upgrade in their TCM systems to examine both our evaluation methodology and our findings.