Compensation remains to be among the driving forces of every successful organization. Forward-thinking human resources managers and management teams appreciate the value of how compensation impacts attraction, retention and employee performance. However, employee preferences, aspirations, and needs are changing, and even compensation is evolving. Organizations have adopted different forms of compensation, such as cash-based, equity-based, and incentive-based.
Any progressive organization should take the necessary measures to adapt to and manage these changes. That's where compensation management comes in; to take center stage regardless of the compensation strategies an organization deploys. Effective managers should always be aware of the critical objectives of compensation management in their organizations.
Let's explore how to accomplish these objectives and why they matter to every organization and workforce.
Compensation Management: Defined
Compensation management, also known as salary administration or payroll management, is a Human Resources process used to determine how much an organization compensates its employees for their work.
This process involves multiple aspects of compensation, including:
- Setting appropriate pay structures
- Calculating accurate wage rates
- Administering paychecks and benefits packages
Compensation management maintains an equitable relationship between an organization's performance and employee compensation. This ensures that employees receive fair wages based on their contributions to the company's success while the organization receives optimum productivity from its workforce.
Compensation Management Objectives
Every organization is unique, with unique compensation management systems. However, the key objectives behind every successful compensation management are common, and they include the following:
Attract and Recruit Employees
Employees are an organization's most important asset. They tend to take care of the business and clients if they are taken care of themselves. Unfortunately, finding top talent is among the top challenges facing HR leaders, business owners, and recruiters.
A unique set of rewards and incentives for every employee will make working for an organization more attractive. The keyis to determine those, then build a compensation package around them.
There are various ways to attract talent:
- Offer a compensation package that reflects their value
- Providing excellent benefits, such as health insurance, retirement plans, company stock options, and equity remuneration, among others
- Regular pay raises
- Variable pay, such as onboarding and annual bonuses
When offering a competitive compensation package, it won't help if potential employees don't know about it. Over 60% of job seekers cite that including compensation in job ads is the most valuable part of the job ad. When posting the next job, consider stating the position's salary range to attract the right talent.
Improve Employee Engagement
Employee engagement is simply the level of commitment and motivation an employee has toward their job. It largely results from how well the employees are treated over time and can be measured in various ways, including productivity, performance reviews and employee surveys.
Astonishingly, according to a survey by Gallup, only 36% of workforces are engaged. Worse still, disengaged employees cost organizations between $450 - 550 billion annually. A Gallup study established that organizations realize a 21% revenue boost when the workforce is engaged since they are 17% more productive.
Here are several key ways to improve employee engagement and the work environment:
- Recognize and appreciate top and progressive performance through bonuses and other perks
- Creating an atmosphere that fosters a strong relationship between employees and management
- Clearly defined goals for each team member
- Clear metrics for success or failure in achieving those goals
- Regular feedback about performance and compensation policies
- Following through with the employee feedback
Establish Employee Motivation and Maintain Morale
Motivation helps keep employees engaged and productive. When employees clearly understand the goals they are working towards, they tend to be more motivated.
Conversely, employees may feel unmotivated and dissatisfied when they do not understand what the company expects from them or how their performance will affect their compensation.
Employee morale is another important factor in the success of any company. Low employee morale can lead to decreased productivity, high turnover rates, and an overall negative attitude among the workforce. It is important to stay abreast of the latest trends in compensation management to help improve employee morale throughout the organization.
Employee management is constantly evolving and adapting based on industry standards and specifications. However, improved efficiency through rewards and recognition remains constant.
Employ the following tactics to boost employee morale and motivation:
- Setting clear expectations with employees and giving feedback throughout the process
- Reward high performance, so the organization's most valuable assets aren't lost due to a lack of motivation or intrinsic rewards like recognition or praise from colleagues
- Regular bonuses or other perks like flexible schedules, additional vacation time with pay, or even paid sick days
Legal and Organizational Compliance Regarding Compensation
We can't overstate the importance of legal compliance. There are several legal requirements for compensation management that an organization must be fully compliant with, such as:
- The Fair Labor Standards Act (FLSA)
- The Equal Pay Act of 1963
- The Davis-Bacon Act
- The Workmen Compensation Act
- The Federal Employment Compensation Act
- Arizona Minimum Wage
- Arizona Paid Sick Leave
Additionally, organizations need to ensure that their compensation programs align with their current and future business objectives and the evolving talent needs across their workforce. Compensation programs aligned with these objectives help drive employee performance while creating a positive culture.
Regular job evaluations are an excellent place for organizations to ensure legal and organizational compliance. These evaluations documented the process for managing the different aspects of their compensation management process.
It's easy for employees to consider the greener grass on the other side. A high turnover rate can hurt the organization in terms of cost and productivity. While the average cost per hire is $4,700, it may cost up to nine months' worth of a position's salary to replace them with new hires. It's also likely to incur indirect costs, such as training and onboarding, and loss of productivity due to the disruption caused by frequent job changes.
Is the organization's culture and objectives aligned with its compensation philosophy? Does the compensation plan link the organization's workforce development framework with its tiered pay systems?
Are there clear opportunities for growth and development? Are there any retention bonuses, incentives, accelerated promotions, and mobility programs?
Organizations should do everything they can to retain their best talent if they want their bottom-line results to improve over time.
How to Achieve Compensation Management Objectives Effectively
Achieving effective and successful compensation management takes effort and time. While this process should include several stakeholders, HR leaders should be at the forefront of this process by:
- Collaborating with other leaders - employee well-being isn't an HR-only affair, but the entire organization's. While the HR leaders initiate compensation, they should involve and collaborate with all other departmental heads to create a comprehensive pay program that caters to all employees.
- Create and deploy a pay philosophy and system - a compensation/pay philosophy validates employee compensation and creates a consistent compensation infrastructure. The HR leaders collaborate with top leaders to develop a progressive pay philosophy to cater to the employees while supporting the organization's strategic plan, objectives, and competitive outlook.
- Involves the employees - it's vital to communicate with employees about the compensation management strategy that's about to be deployed. An effective way to create two-way dialogue is through the use of surveys, as employees are an organization's first source of unfiltered opinions and feedback.
- Implement employee feedback - it's not enough just to gather employee opinions and feedback, but also to the feedback. Implementing suggested changes received from the feedback engages employees and allows them to feel more confident and respected, knowing the organization values their input. Over 80% of HR professionals concur.
- Regularly review the pay philosophy - market and industry standards are fluid and evolve with time. Consequently, it's crucial to review and update the organization's pay philosophy to match the evolving standards.
- Automate compensation management - there are effective and affordable compensation management solutions that can help streamline the pay package process. This software can help to manage complex structures and provide real-time insights to all levels of employees throughout an organization.
Why Compensation Management Matters
Employees appreciate reasonable remuneration, giving them a valid reason to continue working in an organization.
There are several benefits of effective compensation management for any organization and its employees:
- Facilitates job evaluation processes that help create progressive and realistic work objectives
- Aligns the organization's goals with those of its employees
- Instills competency and motivation among the workforce, driving and achieving the organization's objectives and targets
- Increases brand awareness among the community and industry
- Getting fair compensation eliminates certain societal ills, such as theft, bribery, and corruption, to name a few
- Boosts employee contentment, commitment, and loyalty, reducing employee churn
- Boosts productivity since the workforce is motivated
- Ensures the organization always complies with labor and compensation requirements, thus averting costly legal disputes
It's Not Only About the Money
Compensation management is a broad and vital field that every HR leader should understand. However, it's crucial to note that managing compensation is not only about money, but rather the entire package of benefits an employee will receive. Every HR leader should be ready to collaborate with all stakeholders, other managers, employees, and investors.
A well-structured and efficient compensation management system can help the organization achieve the above-listed objectives. With Inflection HR’s Compensation Management solution any business can take these concepts and apply them in an efficient and streamlined way. Contact us if you need expert and professional assistance in creating and deploying effective compensation management in your organization. Start effectively managing your employees' compensation today.