The two most important numbers to look for when choosing Compensation Software are 100 and 0.
For some time now, software suites for Human Resources have offered to simplify and automate the work of HR professionals. Less stress, less mess, less human error – that’s been the assurance of digital technology since it became part of the average workday.
But what was once the pledge of accessibility has become the promise of disruption. New technologies loom overhead with buzzwords like ‘big data’ and ‘machine learning.’ The tale being told is this: a fully integrated HR Software Suite is essential for administering all functions from social sourcing through exit surveys, retirement, and everything in between. Failure to do so would be nothing short of apocalyptic.
With respect to the end of days, we disagree. While we don’t mean to decry the notion of a fully integrated HR software suite, we do intend to make this case: that compensation shouldn’t be thoughtlessly lumped into an HR software suite.
One of the most prominent ideas in HR software is the 80/20 rule, or the “Golden Compromise,” which says that a software solution that accomplishes 80% of a client’s needs is good enough to do the job. We’re going to examine and challenge this notion below, but to understand why the 80/20 rule exists, we need to understand the ideas that drive towards ‘big solutions’ in comprehensive HR software suites – and learn why these big solutions often hold back the effectiveness of compensation planning.
Vendor Expertise and Foundational Data
Traditionally, software vendors have specialized in their efforts. Vendors didn’t always aim to be a jack-of-all-trades; they tried to achieve the best-in-class performance they could muster for a core competency focus. Where one vendor excelled in incentive management, another perfected performance scoring, while another focused on recruiting.
Today’s HR software industry has matured. Vendors now aim to please every desire, and the drive towards ‘big solutions’ – where one software suite solves multiple problems – has made the field substantially more competitive. Larger stakeholders are now tempted by the allure of ‘big solutions’ that can solve multiple problems for one adjustable price tag. By adding more modules to their software, companies have more to sell to their existing client base.
As vendors have expanded to offer big solutions, they now share a great deal of foundational data in areas such as recruiting, compensation, performance management, succession planning, career planning, and learning. Organizations leverage these common data points in order to maximize the effectiveness of their platform. And in many cases, it works. See some of the most common data points that cross over functional lines below:
- Performance Scores
- Pay Ranges
- Market Data
- Education Levels
Many successful players in the various pillars of HR suites came out of deep domain expertise in areas of recruiting, performance management, succession planning, etc. Many of them started as subject matter consultants in the field, using their knowledge to develop their core application(s).
However, a key factor that even professionals overlook today is that each business model associated with each pillar of the Talent Management suite can be functionally distinct from the other suite members.
HRMS vendors routinely focus on managing employee-centric data such as payroll and benefits. The problem is that they do not always have the domain expertise or the business models they need to address more highly specialized areas. Though much of their key data may overlap, their application is wholly unique and may require considerations that other parts of the suite can ignore or work around.
The Golden Ratio of Compensation
The 80/20 rule is the belief that as long as your software solution does 80% of what you need, you can live with it. Also called the “Golden Compromise,” this rule allows multiple pillars of HR to function under a shared umbrella suite that’s a “mostly solution.”
There is, however, one specific function that does not do well with compromise – compensation.
Compensation is unique in that it’s one of the core areas where an offering that cannot do everything the customer needs will rarely, if ever, be acceptable. An organization that cleaves to a partial solution will inevitably return to manually producing, distributing, and collecting spreadsheets to obey its corporate strategy and business rules. Imagine handing an accounting department an accounting tool that doesn’t handle capital expenditures… are they going to use it? (Not without a fierce fight.)
Most HR functions are well-defined and regulated by local, national, and international laws. This is especially true for compensation. To play in these markets, HR systems must accommodate wide variations in taxation, overtime calculations, shift differentials, benefits enrollment, and other functions. Those accommodations require agility.
HR cannot sorta-kinda meet these regulations, otherwise they sorta-kinda get hit with fines, late comp cycles, and, ultimately, process failures.
The Effects of Ineffective Compensation Solutions
What happens when you ignore the golden ratio and get a comp solution that compromises on your needs?
For instance, suppose an HR system that doesn’t accomplish everything a customer needs regarding compensation. At first, the solution works well enough, and the savvy HR department functions around the gaps they find. Eventually, these small detours pile up until the work needed to overcome the gaps leads to working outside the gaps – i.e. outside the HR system.
In that case, they often lean into their previous process of creating hundreds, if not thousands, of spreadsheets, shipping them out, collecting them back from each manager, fixing incorrect data, moving and deleting employees, changing budgets, sending them back out again… and the process repeats for several months.
In this scenario, not only is the organization paying for a comp solution they can’t use, but they’re now wasting enormous amounts of time and resources to work around the solution that is supposed to help them be more effective! The amount of communication between HR staff to track and push comp processes through not one but two ineffective systems almost ensures that mistakes will be made along the way.
By paying for the power of a comp solution without the agility needed to be implemented effectively, HR specialists tie themselves to an anchor that drags them deeper into the mire of ineffective work processes and wasted resources.
The Necessity of Agility in Compensation Software
Another key thing to consider is how rapidly HR processes can change. Comp processes, in particular, can be completely upended if senior management redesigns the rules around a change in environment: a weak economy, a different HR leader, or a new desire to cut costs and save money. Consider an HR department that is barely hanging on to their comp solution that does 80% of what they want, and, well, it works okay. Two months before a comp cycle begins, a major change has to be implemented thanks to a new state law defining PTO classification. Now the comp solution can only handle 70% of the workload needed and a workaround solution for this new gap must be learned…during the busiest months of the year.
Excel is often viewed as the most flexible and agile software solution for compensation. The trade-off is that it requires an enormous amount of manual cut-and-paste work and hundreds of spreadsheets to individually push comp processes. More manual work means more time spent working 50, 60, even 70+ hour weeks! These exhaustive hours and manual processes will quickly burn out even the most competent workforce until they inevitably start asking themselves questions like
- Why does compensation feel like the only system that my HR solution doesn’t support?
- Why is my organization paying for a tool that I can’t even use?
- Why is my organization forcing me to use a tool that doesn’t work?
- Does my job (comp, payroll, etc.) matter less to my company than others (recruiting)?
- When will I get my life back from working long days and weekends?
Software suites are not inherently ineffective or undesirable. For many organizations, a comprehensive HR suite can give a multitude of solutions in a single package.
Compensation, however, will always be a bit different. A recruiter can still do their job with software that lacks a few features. Gaps can be covered by savviness and a willingness to work a little outside the box. Compensation planning has no such luxury to be a half-measure. 80% of a completed process is a failure in compensation. Gaps are not covered by ingenuity, but by the sweat on the brow of a hardworking comp specialist copying and pasting the sum total of their rules, formulas, and policies into 100s of data sheets over the weekend.
Organizations must make difficult considerations when choosing a software vendor and, more importantly, a software system. We are in the midst of a wave of webinars and talking heads touting that the HR Software suite is the wave of the future; however, most of these prophets fail to even ask the essential questions about what should and should not be managed in a suite at all.
When it comes to a compensation system, there is no Golden Compromise, no 80/20 rule. The Golden Ratio of Compensation is 100/0, or the devil slips into the details. And no one likes working weekends with that guy.
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.