What Is Compensation Management and What’s HR’s Role in it?
Is your compensation management approach helping or hurting your organization in the talent war? In a recent LinkedIn Talent Solutions report, compensation was ranked as the #1 top priority for candidates worldwide.
That makes effective compensation management an essential tool in any HR professional’s arsenal when it comes to attracting the best candidates and lowering attrition rates. Plus, when the right mix of incentives and benefits is tied to individual performance, organizations can both boost employee engagement and achieve their strategic goals.
In this article, we’ll explore the ins and outs of compensation management and why it matters. We also explain the role of HR in shaping and administering compensation and benefits plans, software tools to provide analytics and insights and streamline the compensation management process, and HR best practices.
Contents
What is compensation management?
The role of HR in compensation management
3 types of compensation
Compensation management tools
8 best practices for compensation and benefit management
What is compensation management?
Compensation management is an important HR function that involves the processes of analyzing, defining, and managing the salary, incentives, and benefits of every employee within an organization.
An effective compensation management plan is an important competitive lever to help companies attract and retain top talent while also improving employee satisfaction and driving better performance outcomes.
Compensation management vs. payroll: What are the differences?
Although they are related disciplines, compensation management, and payroll differ in several ways.
Key aspects
Compensation management
Payroll
Function
Determines how much employees are paid.
Distributes and records employee pay.
Difference
Concerns the strategy and policies that an organization uses to determine how employees are paid.
Refers to the actual process of calculating and distributing wages and salaries to employees.
Focus
Strategic focus: Aligns employee compensation with the goals of a business.
Operational focus: Ensures the accurate and timely payment of employees.
Objectives
• Attract top talent
• Improve employee satisfaction
• Align pay and benefits to performance and outcomes
• Strive for fairness and transparency
• Reduce churn rate / increase retention.• Issue paychecks to employees
• Create the payroll records required by the government.
Activities
• Undertake internal and external research to benchmark salary ranges and benefits packages
• Develop pay structures, set pay rates, and design bonus plans
• Conduct job evaluations
• Conduct performance reviews
• Administer bonuses and incentives
• Ensure the compensation and benefit management program is aligned with the company’s goals and values.• Track employee hours
• Calculate pay deductions
• Prepare and distribute paychecks
• Withhold taxes
• File tax reports.
Components
• Base salary
• Incentives and commissions
• Financial benefits
• Non-financial benefits.• Working hours
• Salary
• Bonuses
• Benefits
• Reimbursements
• Deductions (gross pay vs net pay)
• Employees’ tax numbers
• Tax withholding
• Reporting.
Personnel
Compensation Analysts, HR Professionals, Data Analysts.
Accounting Clerks, Payroll Specialists.
Regulations
• In the US, the Department of Labor stipulates regulations that must be complied with, such as the Fair Labor Standards Act (FLSA) and Equal Pay Act
• State and local wage and hour laws must also be observed.Tax regulations mandated by the Internal Revenue Service (IRS), as well as state and local tax laws, must be adhered to.
The role of HR in compensation management
HR is responsible for designing and managing compensation and benefits plans. Here are some of the key roles it plays in this process:
1. Establishing a compensation strategy
As an HR professional, it’s your responsibility to work with company leadership to define your overall approach to compensation management.
This includes determining salary ranges, benefit offerings, and bonuses – and deciding how to allocate compensation resources according to your budget. A successful compensation strategy boosts the morale of your current employees and makes it easier to attract new ones.
2. Conducting market research
It’s essential to stay up-to-date on salary trends and benefits offerings in your relevant industry and geographic area (which may extend worldwide if your company sources its hires globally).
When it comes to compensation metrics, accurate data is essential for benchmarking the competitiveness of your packages. While online information is both plentiful and helpful in seeding ideas, it may not be reliable. Get your research from legitimate sources such as surveys, consultants, or government reports to make informed decisions.
3. Evaluating responsibilities and skills for each job
Job evaluations and skills analysis are vital for fair compensation. They provide a systematic and objective way to compare jobs, address pay gaps, and enforce internal equity. By valuing roles based on responsibilities and skills, HR professionals can help their organizations create a fairer and more strategic compensation system.
4. Performance management
Tying pay to performance can motivate employees, align goals to outcomes, and retain high-performing talent. However, subjectivity, inconsistent measures, or unclear communication can hinder the effectiveness of performance management.
Your role in HR is crucial in designing objective evaluations, analyzing data, training managers, and communicating clearly to ensure a fair and rewarding system for both employees and the organization.
5. Benefits administration
Beyond administering the company’s benefits programs (including enrolling employees in benefits plans and processing claims), your role in HR is also strategically shaping your benefits program.
You do this by identifying employee needs, negotiating deals with vendors, managing costs, and ensuring compliance. HR also acts as a cheerleader in educating employees, promoting wellness, and fostering satisfaction.
6. Compliance with labor laws and regulations
As an HR practitioner, you are responsible for developing and maintaining compliant policies, classifying employees, managing data, training staff, and conducting internal audits. By proactively managing all these aspects, HR helps companies avoid legal risks and establish fair working environments.
7. Communication
Clear communication from HR on compensation and benefits is critical in building trust, reducing confusion, boosting satisfaction, and empowering employees. This involves explaining how pay is determined, what benefits are available, and how employees can make changes to their benefit plans.
Importantly, by encouraging questions and addressing sensitive topics, HR can also contribute to a transparent environment and foster a more engaged and productive workforce.
3 types of compensation
Any comprehensive management plan will feature three types of compensation:
1. Direct compensation
Direct compensation refers to various forms of remuneration that employees receive, such as hourly wages, monthly salaries, commissions, and bonuses. In service industries, tips are also relevant.
Deferred pay options, including annuity payouts and savings plans, may also be considered. Additionally, merit pay might be offered to employees who excel in their roles or achieve predetermined targets.
2. Indirect compensation
Indirect compensation (often referred to as ‘benefits’) is not typically given in cash. However, it’s still considered a financial benefit due to its monetary worth.
Indirect financial benefits include equity packages, stock options, health benefits, life insurance, pension plans, and retirement funds.
Non-financial indirect benefits include time off (paid or unpaid), flexible working hours, remote working provisions, company-issued cars and devices, learning and development opportunities, and even simply recognition of a job done well.
In recent years, companies have become more creative with non-financial benefits to woo top talent, with some offering unlimited vacation days, bring-your-pet-to-work days, massages, onsite yoga, and free tattooing services.
3. Total compensation
A total compensation package includes a selection of direct and indirect compensation relevant to a particular role and job level.
HR tip
Skip the guessing game; ask your team directly. Survey your employees to discover which incentives and benefits actually motivate them and which leave them cold – and don’t be shy to ask about their most-loved benefits and incentives offered by previous employers. This will provide you with a host of fresh ideas based on external data from trusted sources.
Compensation management tools
Choosing the right software is essential to gain the upper hand in running an effective compensation management process today.
Data-driven analysis can inform the design of competitive and cost-effective compensation packages, while automation can streamline payroll calculations and employee self-service. Real-time dashboards generate insightful metrics on payroll costs, pay equity gaps, and churn rates to enable proactive decision-making. Plus, compliance features help mitigate legal risks, and audit trails increase transparency.
Here are six compensation management software tools to consider:
Tool Description beqom beqom positions itself as a ‘total compensation’ solution encompassing all aspects of pay, including direct salary remuneration, bonuses, benefits, and equity. The software enables flexibility and customization through its modular design, which can be configured to suit your compensation plans, performance management, workflows, and reporting needs. You’ll also have access to insights and intelligence via real-time analytics and benchmarking data to help you build a competitive, market-aligned compensation management plan. Comp Analyst by Salary.com Comp Analyst is strong on data analytics. It merges reliable HR-reported data with compensation management tools to help you determine pay scales for jobs in your industry by benchmarking against your market. The software provides features to create and model salary structures across job families, departments, and divisions. It offers survey tools and analysis to help you gain insight and participation from your employees. It also provides transparency on external competitiveness and internal pay equity. CompTrak by HRsoft CompTrak is one of Canada’s fastest-growing companies and caters to over one million employees across various sectors. It helps enterprise-level organizations manage their salary data, and its analytics enables informed compensation decisions. The software offers numerous features, including salary surveys, job descriptions, and compensation analysis tools. It also provides insight into the Diversity, Equity and Inclusion (DEI) of your organization’s compensation programs to help you ensure your compensation practices are fair. SumTotal Talent Development This option assists organizations across the employee life cycle with solutions for recruiting, onboarding, developing, and retaining staff. Its performance and rewards features simplify the complexity of compensation management planning, budgeting, and incentive management by enabling users to create competitive packages, automate workflows and manage multiple compensation plans within a single organization. Leapsome Leapsome offers solutions for employee engagement, development and productivity via a modular system that can be configured to suit your HR processes and needs. Its compensation module helps to boost employee retention through a range of features that include compensation and promotion reviews, budget management, integrated goals and OKR management, and analytics on pay gaps. The tool also has functionality to support 360-degree performance reviews and engagement. BambooHR This all-in-one HR software suite helps companies automate and streamline their onboarding, applicant tracking, training, and offboarding processes. Add-on modules, including Payroll, Benefits Administration, Performance Management, and Time Tracking, provide users with a comprehensive compensation management toolkit.
Ultimately, the compensation management software best suited to your organization will depend on your specific HR needs, sector, budget, and company culture.
8 best practices for compensation and benefit management
Here are eight best practices for HR when it comes to compensation management:
Step 1: Determine your compensation philosophy
If your company doesn’t have a compensation philosophy, create one. Think of your compensation philosophy as a talent map – it shows where you want to go (e.g., attract top performers aligned with our values) and how to get there (e.g., competitive pay, unique benefits, rewarding performance and value alignment).
Step 2: Align compensation with strategy
Tie your compensation packages to your overall business goals and desired employee behaviors. This can involve setting performance metrics and OKRs linked to bonuses or stock options and ensuring salaries are competitive to attract the talent necessary for important strategic initiatives.
Step 3: Promote internal mobility and career growth
In a recent Gartner study, 66% of HR leaders admitted that career paths within their organizations were not compelling for many employees. Offer opportunities for employees to grow within your company and take on new challenges with corresponding increases in compensation. This incentivizes loyalty and development while reducing turnover costs.
Step 4: Implement a transparent compensation system
Your employees should understand how their compensation is determined, including factors such as base salary, bonuses, benefits, and equity. Clear communication fosters trust and reduces resentment.
Step 5. Embrace total rewards
Beyond a base salary, consider a full range of benefits such as paid time off, flexible work arrangements, healthcare, employee discounts, and ‘out-of-the-box’ perks to position your company as an employer of choice. A ‘total rewards’ approach will also make your compensation package more attractive to individuals with diverse needs.
Step 6: Conduct regular pay equity audits
Proactively identify and address any potential gender, racial, or other biases in your compensation practices. Regular audits help to establish fairness and compliance with relevant regulations.
Step 7: Get employee feedback
Conduct surveys or focus groups to understand employee perceptions of your compensation system. This feedback can help identify areas for improvement and ensure your packages address employee needs and expectations.
Step 8: Invest in data and tools
Implement and leverage HR software or compensation management platforms to automate tasks, track data, and enforce consistency and compliance in your compensation practices. This can save time, improve accuracy, and provide valuable insights.
Key takeaway
Compensation management involves more than determining salaries; it strategically aligns employee rewards with the organization’s goals. This alignment is crucial in attracting, satisfying, and retaining talent, enhancing overall business performance.
By effectively managing compensation, organizations can create a motivated workforce, which in turn, drives achievement of strategic objectives.
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