Compensation planners know that every decision made about incentive programs, benefits packages, variable pay structures, and stock option compensation is informed by one essential asset: data. Lots and lots of data.
One of the most touted benefits of HR software suites is the ability to share key data more easily between functions and roles. However, many HR specialists are convinced that accessing compensation data is the same as applying it in functions of compensation management. In truth, there is a wide divide between these two properties, and it is altogether too common for them to be confused with one another.
Compensation management is a complex financial function that requires both access to data as well as a robust application of said data to be effective. In this article, we’ll examine some of the ways HR specialists and managers should consider potential software solutions in order to ensure they have a tool that provides both capabilities.
Defining Our Terms for Compensation Data Management
Compensation management and compensation data are used to fulfill different roles within large organizations. It’s important to understand what we mean when we talk about each term, so let’s touch on these definitions to define exactly what we mean.
Compensation Management: Compensation management refers to the operational activities that organizations undertake to design, implement, and administer programs related to compensation and incentives. Compensation management is a key tool for ensuring that an organization’s compensation strategy aligns with its overall business goals, primarily in the way it helps attract, retain, and motivate employees effectively. Some key aspects of compensation management include:
- Compensation Strategy: Developing a comprehensive plan for how an organization will reward its employees based on factors such as market competitiveness, employee performance, and budget constraints.
- Job Evaluation and Grading: Assessing and categorizing jobs within the organization based on their relative value and complexity, which serves as an additional basis for determining appropriate salary levels.
- Performance Management: Linking employee performance to compensation by designing performance appraisal systems that tie individual and team achievements to salary increases, bonuses, or other incentives.
- Salary Structure: Creating a framework that defines salary ranges for different job grades or levels within the organization.
- Incentive Programs: Designing and implementing bonus or incentive programs to reward exceptional performance or achievements.
Compensation Data: Compensation data encompasses the specific information related to the compensation of individual employees within the organization. This data is used by HR professionals to make informed decisions about compensation management. Key components of compensation data may include:
- Employee Salary Information: Data on salaries or wages of individual employees, often categorized by job title, department, or other relevant factors.
- Benefits Information: Details about benefits and perks offered to employees, such as health insurance, paid vacation days, education reimbursement, etc.
- Market Compensation Data: Data from salary surveys or industry benchmarks that help organizations determine how their compensation packages compare to competitors and other companies in the same industry.
- Historical Compensation Trends: Past data on salary changes, bonus payouts, and other compensation-related metrics. This data can be used to analyze trends over time.
- Performance Metrics: Data on employee performance evaluations and metrics used to determine individual or departmental performance.
Managing Compensation Data in an HR System
No HR Software Suite is complete without compensation data. Such data is the map that organizations use to pay their employees in line with the market and control spending associated with compensation expenses. It is also the foundation for keeping track of a very important business facet in a shifting global market: talent retention.
Talent management and retention usually rely on basic compensation data that exists in a company’s HRMS system (and possibly other specialized point applications). However, the ingredient that determines the success of compensation strategies is the actual management of compensation functions (specifically: compensation planning, merit increases, lump sum payments, bonus awards, market pricing, job evaluation, salary range development, base pay modeling, sales incentives, and stock management.)
Managers are the ones who interact with compensation planning tools, and for those organizations focused on pay-for-performance, those tools must contain performance ratings that support the business rules of the organization. In other words, their comp planning solutions must have the elasticity and flexibility to effectively utilize the compensation data on hand in ways that are specific to each organization’s goals.
By that, we also mean that the ability to apply data and the ability to access data are two very different things here.
The other integration point in the administration of compensation is the ability to access job descriptions when matching jobs to salary survey data and evaluate jobs as part of a point factor or job ranking process. When it comes down to making pay decisions, the most integrated need from an HR Software suite is one or more performance ratings and the approved pay rate and effective date. The need for compensation data flowing to the other applications within the HR Software Suite is minimal, basic, and easily achieved even across distinct systems.
The reality of compensation planning is that managers have a very small window of time to make decisions. They already have a good idea of what increase they want to give each of their employees, and the rating is typically there to drive business rules (1 = no money for you, 5 = more money for you). If a manager does not already know that Jeff frequently comes in late, Sally spends the first 3 hours of each day on a coffee break, and Gina is there early every morning and works late, then the manager either isn’t doing their job or is managing too many people. In either case, the manager will rely on the guidelines and business rules to hurry through the award allocation process.
Herein lies the human element in compensation planning – it is crucial to distinguish between the data produced by these compensation functions and the actual administration of these functions. The application of comp data requires three vital components:
- The tools to access the data
- The tools to apply the data
- The human insight into how to apply the data.
An HR software suite must give its users the means to proactively engage with compensation data. As such, the sharing and integration of comp data are both essential. But other features, such as a single portal for performing the administration of these functions, may be convenient but not vital.
Compensation Management As a Finance Function
Although compensation administration routinely falls under the jurisdiction of HR, many aspects of comp processes are financial by nature. This creates a slightly different set of rules and strategies for managers to contend with compared to the other less financial parts in their domain.
Compensation planning is a perfect example. As a whole, the process can be boiled down to a budgeting process with some business rules and guidelines to help managers make better HR decisions. The user must meet their budget (or get a special dispensation if they don’t) to complete their part of the planning process. It all rolls up to an overall spend, which must be approved at higher levels and often by the Board. When viewed this way, compensation planning is a math equation with dollar signs and budget lines.
Now examine a compensation department collecting salary survey data. The main reason to accomplish this is to ensure that employees are paid according to the market standard and model out the associated costs with any needed adjustments. This is, by all definitions, a highly specialized financial function. When finance provides corporate, divisional, and departmental financial results for calculating the associated incentives, the interactions left are nearly all financial.
The strategy of compensation planning as it relates to individual talent may not be strictly mathematical. These calls are motivated by judgment – you may be willing to pay a star player more than their peers if their performance is sensational. But the process of total compensation planning within budgetary constraints and market conditions is a financial function backed by financial data.
In these cases, do the associated functions of compensation planning sound like an HR Software Suite function? If so, does this mean the financial budgeting system you use must be part of an HR Suite since it incorporates employee development-related expenses, compensation costs, and benefits costs?
Applying the Information
The short answer is not quite.
Successful compensation management strikes a balance between financial sustainability and competitive compensation packages that meet the needs of both the organization and its workforce.
For that, a single portal in an HR software suite is a convenient function, but not an inherent solution. The best solution enables not just the management or sharing of compensation data but the application of it. For that reason, many HR specialists confuse convenience with effectiveness and only realize their mistakes too late.
Compensation management is a specialized HR function that integrates financial considerations with various other factors to design and administer effective compensation and benefits programs for employees. It requires collaboration between HR professionals and financial experts to ensure a well-rounded approach to compensation practices within an organization.
There is no doubt that compensation data is essential to the suite. The question is whether organizations should manage their compensation separately or as part of the suite, and what goals an HR professional should have when making such a monumental decision.
When pursuing a compensation management software solution, here are some questions to ask yourself:
- Is a single portal a tool of efficiency or merely a tool of convenience?
- Does an HR Suite merely give me access to compensation data, or does it help me apply that data in a beneficial way for making decisions?
- What happens if a vendor expands into compensation management but later finds it does not fit their business model and removes it?
- Does the financial nature of compensation management systems even belong in the HR Software suite?
CompensationXL is the flexible compensation planning solution for merit, bonus, long term awards, and total reward statements, enabling mid- to large-size organizations to implement competitive pay structures such as vested stock options and variable incentive pay.