What is compensation management?

Compensation management is the process of managing, analyzing, and determining the salary, incentives, and benefits each employee receives. Compensation management is a crucial part of any talent management and retention strategy. Creative compensation includes monetary and non-monetary benefits companies can employ to boost engagement and productivity, reduce attrition, and attract top talent.

Compensation managers aim to attract, retain, and engage employees by offering broad and competitive compensation plans within the company budget.

Compensation management ensures that people get paid a fair salary based on:

  • Work performance
  • Position
  • Responsibilities
  • Experience
  • Job market
  • Company budget

Why should HR leaders care about compensation management? 

Effective compensation management benefits both the employer and the employee. Professionals who receive a fair base salary, generous benefits, and incentives in return for their work are much more likely to stay at their job and maintain a high performance level and morale.

Effective compensation management fuels employee engagement and thereby leads to company success.

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What are the main types of compensation? 

Compensation includes far more than just a base salary. The full compensation package includes a variety of compensation types, both direct and indirect. 

The four types of direct compensation are:

  • Hourly pay
  • Salary
  • Commission
  • Bonuses

There is also indirect compensation, which includes anything that provides people value such as:

  • Retirement benefits
  • Insurance (medical, dental, life, etc.)
  • Paid time-off
  • Profit-sharing distributions and stock options
  • Tuition assistance and learning and development offerings
  • Childcare assistance
  • Gym memberships
  • Relocation expenses
  • Perks such as free food, an office gym, events, and so on

How is compensation determined? 

Many factors go into determining the specific compensation package offered to any given person, including external factors relating to the company’s location and market as well as factors relating specifically to the role and the candidate in question. Some considerations that go into calculating compensation include:

  • What the company can afford to pay
  • Typical salary range for similar roles in the region
  • How much competitors are paying
  • The local cost of living
  • The role—if it is a highly-skilled job, it may require higher compensation
  • The candidate, their qualifications, and their compensation expectations  
  • Whether or not it is appropriate to use incentive compensation management, which is a type of compensation usually used for sales roles in which the person’s compensation is tied to their performance outcomes

What can HR leaders do to ensure effective compensation management?

HR leaders can guide compensation management towards building and implementing successful compensation plans with these methods:

  • Develop and apply a compensation philosophy. A compensation philosophy formally documents the company policies regarding salaries, bonuses, and benefits. It also demonstrates a company’s commitment to transparency. Consistently adhering to a compensation philosophy demonstrates company integrity to employees and job candidates.
  • Explain the compensation plan. HR can clarify the components of the compensation plan to candidates and new joiners, helping to attract and retain top-notch talent.
  • Design a robust compensation strategy. HR leaders can collaborate with managers and specialists to offer all-inclusive compensation plans as well as generous benefits to improve their people’s quality of life.
  • Assess the results. It’s always helpful to learn from experience. HR leaders can analyze the results of compensation management to see what’s working and what isn’t through a compensation scorecard, which can improve the efficacy of compensation management.

Compensation management software

One tool that has skyrocketed in popularity in recent years is compensation management software. This software is used to help HR professionals manage, calculate, and organize compensation data. Compensation management software has several features that can make it highly valuable to organizations looking to streamline and optimize their compensation management processes, including:

  • Storing all updated data on salary, tenure, and performance for all relevant stakeholders (HR, finance, C-levels, and managers) to access 
  • Tools and data to improve salary decision-making
  • Tools for planning and managing salary reviews
  • Bonus and equity allocation
  • International currency management with localized currency views and local salary benchmarks

Compensation management point solutions vs HRIS

As you can see, compensation management software offers many helpful features, making it highly useful to professionals and teams involved in compensation decision-making and management. However, it qualifies as a point solution, meaning it’s a tool that can help with a single problem. This means that its utility is limited. 

The alternative is a platform solution like an HRIS which offers multiple solutions for a variety of problems that an HR team deals with. Rather than only helping with compensation management, an HRIS can also help with things like performance management, payroll, time and attendance, and more. 

Essentially, you can think of HRIS vs point solutions as a Swiss army knife vs a simple pair of tweezers. Both are useful, but one is able to offer more value than the other because of its multiple functions. So if your organization could use help with optimizing and automating processes across the entire employee lifecycle, an HRIS may be just the thing you’re looking for. 

Why should compensation management planning be a part of modern HR strategy?

Compensation management ensures the financial success and wellbeing of employers and employees and makes both happy. Integrating compensation management into a company’s HR strategy helps organizations reward their people with market-range salaries, well-deserved bonuses, and incentives to improve their people’s lifestyles. It also allows employers to show their people that they appreciate them. 

Appreciation goes a long way towards making people feel motivated and engaged. It can also inspire people to give back to their employer through increased productivity and high-quality work. All of this leads to a company culture made of happy and enthusiastic people.