Types of Compensation Management
In this article, we’ll run through the four main types of compensation management solutions in various fast-growing companies. As a founder, executive, or people operations leader, these are the four main compensation management systems that you should consider implementing for your organization.
What is Compensation Management?
Compensation management is the process by which companies determine how much to pay their teams – for decisions ranging from offer decisions for a single candidate to compensation cycles for thousands of employees.
The different types of compensation management vary widely in sophistication, flexibility, and cost. Compensation management can refer to a number of solutions that range in complexity from simple spreadsheets to purpose-built software.
Use our guide on the types of compensation management to select a solution based upon the maturity and complexity of your organization’s needs. We will discuss these types in detail in the upcoming section. If you're trying to figure out exactly how much to invest into compensation management, we're here to help you get started.
Four Types of Compensation Management
In this section, we’ll discuss the four main types of compensation management that are common in the market today.
Compensation management systems vary in terms of the sophistication, cost, and investment that they require.
Generally speaking, the more your business relies upon human capital, the more important you’ll find compensation management and the more sophisticated a system you’ll want to use. Larger companies also generally find compensation management to be more crucial, as a larger number of employees means an increased need for efficiency.
1. Ad Hoc Decision-Making
At the earliest stages of your company, you likely have more important things to do than worry about making excellent compensation decisions – from incorporating the company to running the nascent business to making sure that even more critical tasks are done (like making payroll!).
The earliest form of compensation management that most companies invest in takes the form of paydecisions based on a few individuals' judgments.
At these stages, it’s common for the CEO, founders, or business owners to make all decisions about how to compensate their teams, often with minimal research and oversight. There are relatively few employees at these early-stage companies and it’s straightforward to make compensation decisions with a small pool of new hires.
There are a number of risks to this sort of ad hoc decision-making around compensation:
- Pay inequities between team members with similar roles and performance.
- Pay that doesn’t fit within a cohesive compensation strategy – resulting in uncompetitive compensation (risking slow hiring or employee retention challenges), or paying people too much (increasing headcount expenses unnecessarily, and causing future salary compression).
- Wasted time due to complex or inconsistent processes.
With this type of compensation management system, there are two main areas where leaders should make sure that operations are buttoned up at a bare minimum:
- Having a complete record of all of your team’s compensation plans, including discretionary bonuses and equity (many companies make mistakes here!).
- Ensure that you aren’t making very problematic decisions, such as wildly unequal compensation across similar roles, or compensation that is so low that you risk significant employee retention issues.
Of course, this type of ad hoc decision-making is highly manual and error-prone, so we recommend upgrading to a more robust form of compensation management system as soon as it’s feasible for your team.
2. Spreadsheets and Manual Processes
As teams increase in size and scope, it’s common for compensation management to graduate to a combination of spreadsheets and manual processes to make decisions and run compensation cycles.
At this point, businesses typically have some form of Human Resource Information System (HRIS) or payroll software integrated, such as Gusto, Zenefits, Carta or BambooHR, that can keep track of employees’ total compensation.
However, it’s still common for data to live in disparate systems. As a result:
- There’s no easy way to see an employee’s total compensation across base salary, bonus, and equity without exporting and combining data from multiple sources.
- Decision-making processes need to be run in a manual, error-prone way using spreadsheets that lack governance controls.
As complexity increases to this point, many companies will also hire compensation analysts or managers who can help to set up scalable pay processes.
While this type of compensation management can work for the basic needs of deciding how to pay your team, spreadsheet-driven systems are often error prone and time consuming.
3. HRIS Modules
Many enterprise Human Resource Information Systems, such as Workday, provide submodules for compensation management. These compensation management modules often offer direct integrations with existing payroll software or organizational data such as employee directories.
Depending upon the system, they may also combine additional types of functionality such as pay equity insights and compensation cycles.
One of the primary advantages of compensation management add-ons to existing products is that they allow teams to consolidate their HR and People Ops workflows in a single vendor. These products also have direct integrations allowing teams to effectively run compensation management processes.
On the other hand, these enterprise HRIS solutions have several significant downsides:
- They typically don’t specialize in compensation management and aren’t geared towards allowing managers and department heads to visualize total compensation across their teams. This results in poor decisions being made.
- They typically also have less friendly UI and come with additional costs.
- They often require dedicated resources just to set up and maintain on an ongoing basis.
Compensation management-focused HRIS modules can be a solid solution for teams with resources and large teams who can help to support a complex software stack, as long as you're willing to handle some of the tradeoffs that come from a product where compensation management is not the primary use-case.
4. Dedicated Compensation Management Software
Finally, for teams that need to ensure that they are maximizing the benefits that they derive from compensation management, there are dedicated products that specialize in all dimensions of helping teams optimize their comp.
Dedicated compensation management software products can be configured to integrate with payroll, HRIS, and cap table management products to provide a seamless experience and excellent UI.
By helping you save time and make better comp decisions, these compensation management software solutions deliver positive ROI by helping you operate more efficiently.
In addition to providing a more modern and efficient experience, these products often incorporate additional compensation-related features:
- Gathering data on recent offers and using it to inform internal compensation bands
- Providing employees and job candidates with easy ways to model and visualize their own compensation
- Setting up and managing compensation bands
- Dedicated functionality for customizing and administering compensation cycles
- Tracking and generating insights on internal pay equity
The primary downside of dedicated compensation products is that they require additional expense and the overhead of managing an additional vendor. But these issues are usually more than made up for by the ability to efficiently level up compensation management strategy and save time or money, while also making better decisions.
Here at Aeqium, our core solution is a compensation management software system that helps you make better compensation decisions faster. So, we’re definitely advocates for investing in dedicated compensation management products that will help you succeed.
Compensation management is an important consideration for any company. However, given the tight labor market, increasing costs to hire, train and retain employees, it has never been more crucial to plan and set up a compensation strategy for your company – regardless of the size and stage.
However, it’s challenging for some teams to choose the best type of compensation management solution given the demands on their time and resources. To choose the best compensation management solution or system for you, consider your company stage, resources, and employee count when deciding what type of compensation management strategy to pursue.
As you scale your company with more employees, we also strongly recommend that you look into a compensation management software solution like the one that we’ve built at Aeqium. Contact us to have a complimentary discussion and demo to see how you can optimize your compensation management needs at your company.