The Importance of Compensation Management
Compensation management is one of the most important areas where people-driven companies can invest. In this post, we’ll run through some of the benefits of a well-run compensation management program.
What is Compensation Management?
Compensation management is the science (and art) of determining how much to pay your team. Compensation management can refer to a number of solutions that range in sophistication from simple spreadsheets to purpose-built software.
Whether you’re a tiny company with just a few staff on payroll or a huge corporation with over a million employees like Walmart or Amazon – the question of how much to pay your team is an important dimension of how to operate your business.
The Benefits of Compensation Management for Your Organization
A strong compensation management system helps your team to make better comp decisions faster. Let’s run through some examples of how this important business process can help your company succeed and grow.
Paying competitively is a key lever for attracting talent. Many employees understandably rank compensation as an important factor in any job search, and a wide array of the most desirable companies or organizations to work for are in fields with high compensation. For example, technology, financial services, and consulting are all well-represented at the top of LinkedIn’s 2023 list of top companies to work for.
Whether you’re a small or large firm, compensation is an important and effective arena in which you can compete for talent.
Many large global companies such as Alphabet, Exxon Mobil, Goldman Sachs, and Amazon differentiate themselves from the competition with generous (or some would say lavish) compensation packages that make them a magnet for job seekers.
Firms in smaller markets can also use compensation to stand out. For example, by establishing a reputation as one of the top compensators in a local area or niche industry, you will gain an edge in an otherwise competitive labor market. Small and upcoming startups often attract talent with generous equity packages that have a very high upside if their businesses grow substantially.
In order to use competitive compensation packages to rapidly grow your team, you need to have an understanding of who you want to hire and how effective your comp packages are at attracting them.
A strong compensation management system helps you to understand the market for talented candidates and what it will take to win them over by tracking offer acceptance rates, adjusting new hire pay bands, and modeling headcount expenses.
Being a top compensator isn’t free, and compensation management can help you understand how the market is reacting to your offers so that you can attract the talent you need without breaking the bank.
Retain Your Team
On the opposite side of accelerating hiring, compensating your team effectively can help you to prevent regrettable attrition (when employees with solid to top performance leave your organization voluntarily). It’s hard to make your team happy with compensation on its own, but it’s very easy to make them unhappy with poor pay practices.
High-quality compensation management can help your team prevent a wide array of pay-related problems that could trigger resignations.
Here are some of the ways that compensation management can help you to retain your team:
- Eliminate or reduce cases of salary compression (or inversion), in which newly hired employees are paid the same (or more!) when compared to more experienced employees at the same level. For example, it’s not uncommon to see new hires with top reputations command salaries that are higher than experienced team members who’ve been at the company for years – compensation management systems should prevent this pattern.
- Identify and correct cases of pay inequity – for example, paying members of protected classes or marginalized groups less for equal work and performance.
- Gain insight into cases where high-performing team members’ compensation is falling below market, often due to factors such as large changes in the job market or large equity grants that are reaching the end of their vesting schedules.
By correcting these unfair or problematic comp issues, compensation management can help you improve overall satisfaction with your total rewards package and ensure a happy team.
With a thoughtful compensation management system, you can proactively fix comp problems before they start, rather than needing to scramble and react when someone is about to quit (who else has heard of the raise offered to an employee when they already have one foot out of the door?).
Increase Employee Engagement and Motivation
Compensation management is also an effective way to align incentives and actively inspire your team – improving engagement and incentivizing them to push themselves to succeed.
Comp management helps your leaders stay organized and ensure that employees have the right mix and level of compensation to motivate them and ensure that their own ability to maximize their earnings is aligned with the company’s success.
Commission-based variable compensation exemplifies how pay can inspire performance. On a sales team, it’s common for a large portion of compensation to be driven by hitting sales targets. This creates a powerful incentive to make more sales – helping both the company and the employee in turn.
Performance-based bonuses provide a similar example, in which strong work performance translates directly to higher rewards (a regular cadence of eligibility for merit increases or promotions can have a similar effect). Compensation management helps you to model and understand the impact of both of these strategies on your team.
Another key way to align incentives is via employee equity. When employees own equity they are partial owners in the business and (as a result) highly incentivized to help the business succeed.
Due to vesting schedules, refresh grants, and changing share prices equity compensation can be very hard to model – if equity is an important part of your comp strategy as it is for so many startups, compensation management is essential for modeling its effectiveness and cost.
Streamline Compensation Processes
All of the decisions that go into compensation – base salaries, bonuses, equity, commissions, and more – can create a complex web of decisions that need to be made across your entire employee base.
At the same time, teams need to wrestle with their individual business needs. Leaders need to ensure fairness, make decisions consistently across sub-teams and departments, and most importantly, stay within budget.
One of the most important benefits of compensation management is that it allows your team to operate more efficiently, by not only making good decisions but making them faster.
It’s all too common at many growing companies for comp decisions to be made across a mess of spreadsheets emailed between different teams. These processes are often error-prone, from ad hoc decisions to clunky mechanisms for approving or actually communicating compensation changes. With a robust compensation cycle product (we’re proud of what we’ve built at Aeqium!), you can ensure a consistent and efficient decision-making process.
Improve Your Bottom Line
And finally, compensation management allows you to defend your bottom line and ensure that you’re running a healthy and profitable business. In a perfect world companies would just pay whatever made their team the happiest, but back in reality companies operate with financial constraints.
When it comes time to run a merit or promotion cycle, managers need to be able to understand the impact of compensation changes on their bottom line.
Compensation management solutions like Aeqium’s can provide real-time feedback to model how compensation adjustments like a 10% raise or an additional grant of 1,000 shares will impact your team’s budget, and help managers stay within agreed-upon parameters.
Sophisticated compensation management platforms will also provide multi-level approvals and governance models, as well as note-taking functionality, allowing comp decisions to be audited and approved to ensure profitable operations. Given how important headcount is as an expense category, it’s vital to provide these lightweight but thorough controls in order to ensure business health.
Compensation management has numerous benefits to any people-driven organization, ranging from team happiness to business efficiency and time savings.
Most importantly, these benefits can be realized at almost any company size – after all, many benefits such as employee retention or efficiency are often more important when your company is still small.
Investing in a compensation management system early in the life of a growing organization allows you to begin to reap the compounding benefits of factors such as higher employee retention and satisfaction earlier, helping to drive business growth even faster.