What is compensation management? Tips & objectives

In a time of turbulent job markets, inflation, and new compensation trends*, more and more companies are making compensation management part of their strategy for staying competitive and increasing employee retention.

But effective compensation management isn’t as simple as deciding your pay ranges, when you’ll give employees raises, and what kind of bonuses you’ll offer. 

A key component of compensation management is transparency, which means communicating the “what” and the “why” behind your compensation plan to employees. This, along with attracting, retaining, and rewarding your talent, should motivate your compensation management strategy.

That’s what inspired us to put together this guide on compensation management, where we’ll discuss:

• What compensation management is
• What objectives should drive your compensation planning
• Expert-informed best practices for creating a compensation management plan
• How to choose the right compensation management software

*Willis Towers Watson, 2021
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What is compensation management?

Compensation management encompasses the strategic and administrative responsibilities involved in designing employee compensation packages to attract, retain, motivate, and reward the best talent. After all, motivation plays a big role in retaining employees.

Depending on factors like company size and strategic goals, an organization could structure its compensation management approach based on a direct compensation model, which offers employee salaries, bonuses, supplemental pay and equity, and is pretty straightforward.

Other companies, however, extend their compensation plans to a total rewards approach, which includes direct compensation plus an array of employee benefits like health insurance, flexible hours, and expense accounts.
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Compensation management objectives

Your approach to compensation management should be unique to your company and reflect your specific mission and values — but here are some common objectives that motivate organizations to devote their time and resources to compensation management:
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Stand out in a competitive labor market

A thoughtfully created compensation management plan will set your company apart in the battle for talent.
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Reward existing employees

Performance management and compensation are often closely linked in employee development frameworks; common compensation package components like performance-based incentives, bonuses, and raises motivate employees to meet the targets you set together.
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Encourage transparency between management and team members

Publicly publishing your company’s pay range helps avoid bias-motivated income disparities and protects vulnerable people against prejudice during the salary negotiation stage. This is why more and more US states are creating compensation transparency laws.
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Foster and keep track of pay equity

Pay equity (not to be confused with equity meaning a company ownership stake in stocks) is when a company pays employees with the same role equally and in accordance with experience and job performance. For organizations committed to diversity, equity, and inclusion (DEI), compensation management is key to staying on top of pay equity, especially as you scale your business.
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Increase employee performance and reduce turnover

Almost 70% of employees prefer to work for a company that values transparency on topics like compensation management. The reason is that it creates a fairer, more inclusive employee experience and culture. And as employees cite toxic work culture as their top reason for quitting a job, companies that care about transparent compensation plans will stand out in a competitive labor market.
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Tips for effective compensation plan management

An excellent compensation plan attracts the right people to your company and creates more openness and transparency within your organization — but what does it take to create, manage, and maintain one? Here are some of our best-practice recommendations.

⭐ Top tip: If you don’t have a clear compensation management process at your company, consider including it as a goal the next time you create OKRs for your team.

‍OKRs ensure task ownership and offer clear metrics for progress tracking, motivating the team and driving more results. 🚀

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Decide what kinds of compensation plans you want to offer

Your compensation plan for each employee will depend entirely on your company’s size and growth stage. For example, larger enterprises and tech companies tend to dedicate more time and resources to creating broad-based compensation and executive compensation plans:

“Broad-based compensation strategies involve a ton of planning to standardize your organization into job clusters, set career progressions, and tie specific salaries and bonuses to each level.

Executive compensation is a bit more fluid, as leadership positions tend to come with higher-level benefits, like profit sharing and deferred compensation,” said Natalie Fell, HR & Business Specialist at Step By Step Business, an online platform offering resources for new entrepreneurs.

“It’s also likely that there’s more room for negotiation for higher-level positions than an entry or mid-level job,” Natalie added.

The HR & Business Specialist also affirmed that “committing to developing a broad-based compensation strategy would be particularly helpful if your company is large with many different departments. However, it might not be worth implementing if you’re a smaller organization and creating more customized compensation plans on a case-by-case basis is manageable for your HR team.”

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Get clear & specific about your compensation philosophy

Creating a compensation philosophy as early as possible in your company’s journey helps guide all your future decisions around compensation, promotes transparency, and makes it easier to update your compensation policies when needed. A compensation philosophy should explain:

• How your salary structure reflects your business objectives: Imagine you run a software company with a long, complex sales cycle. You might emphasize that you pay your sales professionals salaries in the 75th percentile of the market.‍

• How you’ll approac​​h total rewards: Make sure your total rewards plan reflects your company’s mission and objectives. For instance, if you want your organization to be a great place for parents to work, consider including childcare stipends and PTO to care for sick family members as part of your benefits package.‍

• How incentive compensation works at your company: This is where you’ll highlight rewarding employees with bonuses and incentives — whether they’re based on time spent with the company or when employees meet specific performance goals.

• ‍How you’ll address in-demand skill sets: Your compensation philosophy should outline what you’ll do when a position becomes hard to fill — whether it’s offering sign-on bonuses or offering above-average salaries for in-demand roles. That way, employees won’t feel blindsided if you have to offer more competitive compensation packages to attract in-demand talent.

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Document & share your compensation policies

Recent SHRM research found that 91% of employees who think their company is transparent about compensation also feel they’re trustworthy enough to make equitable decisions around pay. Why? Because, just as secrecy around pay has a trickle-down effect that foments distrust, transparency about compensation policies lays a solid foundation for a culture of honesty.

‍Recent research from Slack’s Future Forum also highlights the importance of transparency; employees reported they’d be four times more likely to look for a new job in the next year if they felt their leadership was dishonest or evasive when facing challenges or uncertainty.

⭐Top tip: Consider opening up discussions with team members about how compensation and rewards are tied to performance when you give employee feedback.

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Have a plan for change

Companies often don’t feel they have all the answers to increasing inflation rates, labor shortages, and how the shift to remote work has changed the conversation on location-based salary packages. So, how do you address these issues with your compensation management strategy?

“You don’t just establish a compensation strategy once. Your HR team needs to review its compensation strategy as your business grows and market expectations alter,” says Mike Chappell — COO and co-founder of FormsPal, an online platform dedicated to making legal forms more accessible. 

“The secret is to be open to dynamic changes in the workplace and continuously explore new ways to meet employee needs. HR professionals received a crash education in just how ‘dynamic’ those changes might be in 2022.”

In uncertain times, your plan for market changes must include educating your compensation managers about how to answer tricky questions about how inflation and labor shortages affect compensation. Even if employees don’t like your answers, being honest with them will build trust and make them feel more confident in your leadership.

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What to look for in your compensation management software

Given how pivotal compensation management is to a healthy, transparent work culture that attracts and retains high-qualified professionals, you need easy-to-use solutions that help you get it right from the compensation planning stage. Here are some features of an effective compensation management software:

• Easily scalable: Look for software that’ll save your compensation managers time. Ideally, your choice should let you set up structured compensation and promotion review processes with‌ flexible templates and automated workflows. 

• Interconnected products and modules: A tool that lets you make compensation management decisions based on easily accessible employee goals and performance review insights from within the same platform means you can make holistic compensation decisions more efficiently. Leapsome’s performance review software can be tailored to your company’s needs, generating valuable performance data.

• Flexibility: When asked how she would choose a compensation management software, Charlette Beasley, HR and payroll analyst at Fit Small Business, said:
  
  “I look for those that allow you to create multiple compensation plans. That provides more flexibility for various positions and gives you the opportunity to see what proposed plans will look like before officially committing to them. You can also test them out on smaller groups.”

• In-depth analytics: Performance data helps managers make informed decisions ahead of their next compensation or promotion review. 

• An intuitive dashboard: Breaking down granular performance and career progression data visually with easy-to-read dashboards helps keep your key stakeholders in the loop with all the information they need to conduct a compensation review.

• Integrates with skill frameworks and performance reviews: A platform that lets managers see if an employee’s current compensation aligns with their skill set and performance makes it easier to know when it’s time for a promotion.
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💰 Leapsome’s compensation management tool can equip your teams with impactful compensation management data and features you need to build and scale your compensation management processes.

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Build your compensation management plan with Leapsome

Compensation management takes creativity, strategy, and collaboration between stakeholders from various disciplines — not just HR.

And while it can seem like a daunting task, employees appreciate structured compensation processes, and they’ll help you build a more transparent, sustainable work culture equipped for the long haul. You’ll find that the rewards of creating a good compensation management system for your company far outweigh the difficulties.

But if you’re worried about the difficulties, remember that compensation management tools like Leapsome are out there to help you streamline your planning and avoid the risk and frustration of doing the process manually.
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🚀 Build your compensation management plan with Leapsome

Leapsome gives you access to the data and insights you need to plan and scale your compensation management efforts. 

👉 Book a demo now