Compensation management is a critical area to devote resources to to as a people-driven organization.
In this article, we’ll describe the primary objectives and goals of compensation management to help you understand what you can hope to achieve from investing in this area of your business.
What is Compensation Management?
Compensation management is the science (and art) of determining how much to pay your team.
Whether you’re a small company with just a few staff on payroll or a massive corporation with over a million employees like Walmart or Amazon – the question of how much to pay your team is an essential factor in operating your business efficiently.
But why worry about compensation management at all?
After all, the primary mission of your business is almost certainly not directly related to compensation – you need to focus on providing some set of services or building, producing, and selling some type of product/services.
When investing in compensation management, organizations of all sizes typically pursue several concrete goals that allow them to focus the majority of their energy on their business' core competencies.
The Goals of Compensation Management
This article will provide an overview of the primary goals of compensation management – what they are, why they’re essential to people-driven businesses, and how effective compensation management can help.
1. Talent Acquisition and Retention
Talent acquisition and retention are two of the most important goals of any compensation management system.
Ultimately, for almost all companies, pay is what motivates employees to show up and do their best work.
Compensation that is competitive in a given market can help with both of these key objectives:
- Competitive compensation is a strong motivator for job seekers, and compensation can be an important mechanism to grow a strong bench of talent.
- Competitive compensation keeps employees satisfied and motivated, and can serve as a retention mechanism (or at minimum, can ensure that compensation isn’t the primary reason that employees choose to look for new opportunities).
In order to maximize the goals of talent acquisition and retention, companies should ensure that they are paying competitively with the market and granting employees increases in compensation via merit or promotion cycles when deserved.
With a strong compensation management plan in place, companies can hit their hiring and employee retention goals and ensure that they can focus on what matters most: building a strong business.
2. Managing Budgets Effectively
In a perfect world, we’d all want to pay our team members as much as possible. Compensation can be a strong motivator, and it would be great to pay teams more.
We’d all love to be Oprah buying everyone a new car, but unfortunately, it doesn’t always work out that way.
A well-designed compensation plan will help balance talent acquisition, employee retention, and fiscal discipline.
One of the primary goals of compensation management is to give your team the ability to weigh these competing priorities effectively.
There are several reasons that teams should aim to maximize compensation efficiency – many of which will help all employees by improving business health:
- Increasing cash compensation for some employees may increase retention but reduces the company’s flexibility to increase team sizes or disproportionately reward top performers.
- Running a leaner operation in terms of compensation can improve a company’s profitability, dramatically improving stock price performance (directly benefiting employees), especially during market pullbacks.
- Providing more equity compensation aligns incentives with employees. Also, it allows companies to achieve more free cash flow while providing a powerful employee incentive that is tightly aligned with the company.
- On the other hand, while equity compensation doesn’t impact cash flow, large equity grants dilute shareholders, impacting compensation for all shareholders and potentially drawing more scrutiny at public companies.
Compensation management can help your team manage budgets effectively, especially by allowing you to see and understand the impacts that compensation changes will have on team or departmental budgets during compensation cycles.
A robust compensation management solution will allow leaders to visualize and model changes to compensation and how they’ll impact budgets in real-time.
Ultimately compensation is a company resource, and teams should aim to maximize the leverage that they can gain from employees’ pay.
3. Consistent Communication
As your company grows, it can become surprisingly hard to consistently communicate details around your compensation.
There are several ways that issues can arise due to communication inconsistency on your team:
- Compensation schemes can differ significantly – for example, one team might have a formulaic bonus structure based upon performance targets (especially sales quotas), while other teams are primarily paid via discretionary bonuses or equity.
- Different managers may have different understandings of how specific compensation structures work, or may just have different communication styles overall.
- Employees may not fully understand how to value their equity, and may have varying beliefs about how much their equity is worth.
This inconsistency can create numerous problems, such as confused managers, wasted time, and a poor employee experience. Compensation management platforms that standardize the valuation and communication of compensation can help to meet the goal of communication consistency simply and easily.
4. Pay Equity & Compliance
Many companies mandate that employees are paid via a fair, non-discriminatory system. All else being equal, employees doing similar work with similar experience should be compensated similarly.
These policies, often referred to as “equal pay for equal work,” are necessary from a legal, moral, and practical perspective. Employees deserve to be treated fairly, and failing can have significant negative consequences.
One of the best ways to solve this goal is to use compensation management solutions to analyze pay equity.
By centralizing all compensation data into a single system, compensation management products can look at pay equity insights, ensuring that teams comply with their internal policies with respect to fairness.
Additionally, compensation management products can automatically generate insights to help companies catch when employees' compensation falls out of band, helping to ensure that consistency is maintained and pay continues to fit within your company’s policies.
Compensation management solutions can save you time and compliance headaches with a centralized view of compensation data and automated insights.
5. Efficient Operations
While all of these goals are crucial, at the end of the day, your company is (probably) not primarily a compensation company. Most likely, you provide a service to your customers or build and sell some type of product.
Nevertheless, your business has a critical secret sauce, and it probably doesn’t have much to do with how much you pay people.
As a result, one of the most important goals of compensation management is actually allowing your team to run efficient compensation management with as little time and effort as possible while still accomplishing the other goals above.
Saving time on pay decisions and answering pay-related questions allows you to refocus on the areas where you do have a market-leading advantage to press.
We also covered this topic when we described the importance and benefits of compensation management.
Organizational efficiency matters at scale, and efficiency is one of the most significant advantages a compensation management product can provide to your team.
Compensation management can help your team hit several goals, from talent acquisition to budgeting or compliance.
When choosing your compensation management strategy and deciding how much effort to invest, consider the many goals that a robust compensation management product can help solve and how they will benefit your organization.