Analyst Perspectives

Compensation management is a key talent management process involving all workers and managers within an organization. Determining and providing the appropriate compensation for each person — whether it involves base pay, merit pay, or variable pay and incentives such as bonuses — is critical to being able to attract and retain productive members of the workforce, including full- and part-time employees, contingent workers and 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.

Unfortunately, most human resources departments lack the sophistication in process and support structure to provide a best-in-class total compensation methodology. This brings me to my first imperative for compensation management: Human resources and the Office of Finance must both make compensation management a key priority in their respective divisions and must work together to elevate the practice. It is common knowledge that labor is the largest variable cost in most organizations, but it is not just about the cost of payroll. There is a hard cost associated with lack of labor, also known as cost of vacancy, that has been spotlighted during the pandemic era like never before. At Ventana Research, we assert that by 2024, one-third of organizations using compensation planning tools will be able to support complex (salary increase and bonus) budget-allocation modeling scenarios, rules and guidelines, by both P&L and talent segments. The power to accurately predict compensation changes, likely turnover, and the costs associated with replacing existing talent can help alleviate some of the costs of recruitment and lost productivity, down to the individual business segment, which is a total business imperative, not just an HR issue.

Even with the support of their finance colleagues, HR leaders cannot provide the level of compensation management and insight the business needs using antiquated methodology or tools. Staffing levels, DEI and pay equity levels, labor costs, business wins and losses, and employee sentiment cannot be tracked and analyzed in any meaningful timeframe with a spreadsheet, and yet our recent Total Compensation Benchmark Research revealed that nearly three-quarters (73%) of participants are using spreadsheets in the compensation management process. In order to ensure the best prospect of fairness in compensation practices that lead to the most desirable business outcomes, organizations should invest in proper compensation management technology. The return will be evident in compliance risk mitigation, retention, talent attraction, and by providing a model and pathway to optimal staffing levels based on changing business needs.

With the right technology in place, HR leaders can spend less time doing the manual work of forecasting, modeling and tracking and more time focused on executing the best strategic approach to compensation management. The technology enables individuals to focus on what is important rather than having to spend time overcoming the limitations of spreadsheets. This is not the current annual compensation review that is favored by most organizations today; rather, it is an end-to-end, year-round approach to compensation management. The annual compensation review is antiquated and potentially harmful to businesses by leaving them ill-equipped to adjust mid-cycle to macro-economic, market and business shifts that can radically impact staffing levels and business performance. It is critical that market, business, and people data be regularly evaluated in context to ensure the desired market compensation strategy is maintained (whether lead, meet or lag), that compensation is distributed fairly and equitably throughout the business, and that risks are identified so that they can be mitigated before they negatively impact the business.

Compensation management is complex and getting it “right” is difficult under the best of circumstances. When managed properly, a well-planned compensation strategy can be a competitive differentiator for organizations that use the information to attract the best talent, minimize regrettable turnover and maintain regulatory and legal compliance. In order to support the sophistication of the process, organizations must provide the right level of interdisciplinary support, technology that is fit for purpose, and a continuous compensation management approach in order to reap the benefits. Without these things, the true potential and business impacts of a modern compensation management approach will never be realized.