Building a team of motivated, engaged, and high-performing professionals starts with more than just offering a paycheck—it requires a thoughtful compensation management strategy that goes beyond the basics.
When compensation is aligned with your company’s goals and people’s needs, it can become a powerful tool for fostering growth, innovation, and a thriving workplace culture. HR leaders can leverage industry data, determine compensation management objectives, and gather internal feedback to drive business success and support their people’s needs.
This article will review different types of compensation, the benefits of aligning compensation with performance, and best practices for effective compensation management.
What is compensation?
Compensation refers to the financial and non-financial rewards a company offers to team members in exchange for their work. It includes base pay, bonuses, incentives, equity, benefits, and other forms of payment that recognize work contributions.
Why is compensation important to HR?
HR and finance teams work together to create appropriate and competitive compensation packages to help recruit and retain top talent while balancing an organization’s financial goals. They can also offer bonus structures and performance-based rewards to support compensation-based retention efforts.
What is compensation management?
Compensation management involves managing, analyzing, and determining the salary, incentives, and benefits each team member receives. Creative compensation ideas include monetary and non-monetary benefits that boost engagement and employee productivity, reduce attrition, and attract top talent.
Compensation management plays an important part in any talent management and retention strategy. 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
Compensation management vs payroll
While compensation management requires strategy, payroll management involves more straightforward operational tasks. In compensation management, HR professionals conduct market research and analysis to understand salary and bonus expectations, evaluate competitive benefits packages, and set up long-term incentives. They also have a thorough understanding of team dynamics to ensure compensation strategies support engagement and maintain a cohesive company culture.
Payroll focuses on distributing team member compensation accurately and on time. It includes calculating wages and salaries, withholding deductions, preparing checks and direct deposits, and reporting tax information.
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
Indirect compensation includes anything that provides 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 impact compensation packages, including external factors like the company’s location and market as well as factors relating to the role and candidate.
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, a type of compensation usually used for sales roles in which the person’s compensation is tied to their performance outcomes
Compensation management benefits
Effective compensation management benefits an organization and its people. Professionals who receive a fair base salary, generous benefits, and incentives in return for their work likely stay at their jobs and maintain high morale and great performance. Effective compensation management can also fuel employee engagement, leading to company success.
Challenges in compensation management
Managing compensation isn’t without its challenges. For example, it may be challenging to reconcile a candidate’s compensation needs with the organization’s budget. Job market demands may suggest a higher salary or compensation package than a company can offer for a particular position.
In these cases, strategic compensation management can help HR teams develop a balanced package of non-monetary benefits like additional paid time off (PTO) to help make a role more attractive.
<<Learn more about how to simplify compensation management with Bob.>>
How HR leaders can 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 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 their people and job candidates.
Get C-suite buy-in
HR leaders can work with the C-suite to build competitive compensation packages. Approach your C-suite with market research, internal salary bands, expected employee lifetime value (ELTV), and a clear compensation strategy that addresses these factors.
Engaging key stakeholders ensures alignment with business objectives and fosters a sense of ownership and transparency throughout the organization. This collaborative approach also helps anticipate and address potential concerns early, leading to a smoother implementation of compensation changes.
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. They can also host question-and-answer sessions or share explainer videos with current team members to highlight changes and improvements in compensation plans, like new company benefits or performance-based bonuses.
Design a robust and transparent compensation strategy
HR leaders can collaborate with managers and specialists to offer all-inclusive compensation plans as well as generous benefits to improve quality of life.
Transparency demonstrates a commitment to fairness, equity, and open communication because it helps team members rest assured that they’re being appropriately compensated for their skills and position. It opens the door to honest conversations about compensation and builds trust among teams while strengthening morale in the workplace.
Conduct pay equity audits
Conduct thorough pay equity audits on an annual or biannual basis. Assign pay raises as needed to ensure your people receive fair compensation despite economic and organizational changes.
You can also use these audits to inform compensation packages for new joiners.
Ensure legal compliance
Labor laws, wage regulations, and tax requirements impact compensation details including minimum wage, overtime rules, and equal pay expectations. In your compensation management plan, include a regular review of all legislation changes to ensure your people receive fair pay and that your organization stays compliant.
Assess the results
It’s always helpful to learn from experience. HR leaders can analyze the results of their compensation management efforts to see what’s working and what isn’t. Use a compensation scorecard to collect and compare relevant data such as compensation as a percent to market or average merit ratings per department, which can improve the efficacy of compensation management.
<<Learn how to implement your first compensation plan.>>
What is compensation management software?
HR professionals use compensation management software to manage, calculate, and organize compensation data. Compensation management software has several features that make it highly valuable to organizations looking to 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 an HRIS
Compensation management software offers many helpful features, making it highly useful to professionals and teams involved in compensation decision-making and management. However, as a point solution, compensation management only helps with a single problem and has limited utility.
As an alternative, a platform solution like a human resource information system (HRIS) offers multiple solutions for a variety of HR functions. Rather than only helping with compensation management, an HRIS can also help with performance management, payroll, employee management, 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 have their uses, but one offers more value than the other because of its multiple functions. If your organization needs help with optimizing and automating processes across the entire employee lifecycle, an HRIS may be just the thing you’re looking for.
Include compensation management planning in your modern HR strategy
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 toward 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 full of happy and enthusiastic people.
Compensation management FAQs
Here are some answers to common compensation management questions.
How is compensation determined?
HR teams determine compensation based on a combination of the following factors:
- The level of skill required for the role
- The level of competition in the job market
- Candidate experience level
- How much value the role brings to the organization
- Market and industry data and expectations
- The organization’s budget
- The organization’s compensation philosophy
What is a deferred compensation plan?
Deferred compensation plans allow people to receive a portion of their income at a later date. This may be during retirement, when they reach a specific milestone, when they leave the organization, or at another predetermined time.
Common types of deferred compensation plans include stock options, retirement plans, and pensions. People can use deferred compensation plans to defer income taxes until they receive the funds.
What regulations affect compensation?
Regulations affecting compensation include:
- Labor laws
- Overtime requirements
- Minimum wage requirements
- Equal pay legislation
- Anti-discrimination laws
- Tax requirements
HR professionals can keep a high level of familiarity with these laws and regulations to stay compliant and make sure their people are compensated fairly.
Recommended For Further Reading
What is performance-based compensation?
Performance-based compensation rewards people for their achievements and contributions through monetary or non-monetary incentives. Organizations often offer bonuses and commissions as well as profit-sharing and additional PTO.
When executed well within a supportive company culture, performance-based compensation can improve employee engagement and productivity by directly rewarding positive results.
How can HR keep compensation fair?
While most organizations strive for fairness, quickly-changing industries and economies can make equitable compensation plans difficult to develop and upkeep over time. Ongoing audits, constant market analysis, and transparent policies contribute to overall fairness and equity in compensation management.
