How to Broaden Your Compensation Management Software Perspective
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By Micah Fairchild
Beyond Pay For Performance: The Keys to Comprehensive Compensation Management
Aside from the business imperative of linking the often disparate elements of compensation and employee performance management via Pay-for-Performance (P4P), few organizations seem to understand much about effectively managing compensation, let alone how to manage it comprehensively. Especially from an HR software perspective, high impact pieces of the compensation puzzle (that contribute to both the attraction and retention of a skilled workforce) seem largely neglected. Indeed, even though 52% of organizations studied in 2011 (by Ventana Research) want compensation "aligned with business strategy and goals", less than 22% of organizations are even looking to install comprehensive-view compensation management software systems.
While these statistics aren't that surprising given all the air-play that P4P has received, the numbers are nevertheless alarming. Compensation is the founding tenet of the employment relationship (even outside of any HR software system!), yet it appears as though a thorough understanding of how all facets of compensation fit together is still not widely understood. Specifically, Pay-for-Performance can only work after two very specific criteria are met first—market rate alignment and internal equity analysis. These two compensation elements help organizations build a structure for their compensation management system—without which the tactical gains of pay-for-performance cannot be fully achieved.
The Compensation Management Software "Market"
One of the greatest mistakes a company can make is to not know where they stand in relation to the market (i.e. how they measure up against their competition). When it comes to managing compensation, a similarly large mistake can be made if full understanding isn't realized for where employees' salaries stack up compared to the market. For example, how much should a mid-level engineer bring in for base + incentive compensation? Depends on a number of factors right? For argument's sake, let's put the total compensation figure at $85K. That's what your engineer can expect to make on the market for doing similar work. The question becomes, how close to that market figure do you want your total compensation to be? Do you see engineers as "a-dime-a-dozen" or does your business wholly rely on their expertise? Answering these questions can help you determine whether you will be leading, lagging, or meeting that $85K market rate for engineers.
Of course, it's not enough to simply define what your market alignment is; you need to look at the ramifications of your decision. For instance, leading the market could mean that you're actually overpaying your engineers. Likewise, lagging the market could put you at the disadvantage of not being able to effectively recruit for open positions or worst of all possibly losing employees to your competition. Regardless of your approach to the "market" question, it brings up a host of additional attraction/retention elements that need to be considered in tandem. For instance, does your organizational culture drive extremely high levels of employee engagement? If so, it may not be necessary to lead the market since your retention factors could potentially rest elsewhere.
To keep the "market" in check, up-to-date information (via salary surveys, industry benchmarks, etc.) is needed. As such, look for HR software solutions that highlight import features, data management functions, and data design elements (beyond just pay for performance).
Compensation System Equity
The idea of equity (outside of the traditional applications of compliance and executive compensation) refers to the practice of benchmarking pay against already existing salaries; and is becoming more of an ever-present issue with the economic recovery moving subtle progress. In fact, a recent study from WorldatWork, Addressing Salary Compression in any Economy, highlights the fact that "As soon as a down market begins to turn around, simmering discontent tends to escalate rapidly at all organizations". In turn, this "discontent" can lead to issues with morale, productivity, and turnover if not handled timely and properly.
If we continue with the example of engineers started above, let's presume that even though the market rate for an engineer is $85K, economic conditions (or even apathy) have caused the organization to not be able to keep pace with the market for their engineers—instead paying them $75K. With the market slowly turning now, some of these engineers are likely to start looking for positions that will pay them what the market says they're worth (you can thank companies like Payscale.com and Salary.com for that), and will leave. That's bad enough on its own, but now the organization is faced with recruiting problems if those employees do leave. Namely, how can you effectively recruit for an open position that pays $10K less than the market? Further, are you going to bring on a new hire and pay them exactly what your current engineers make? As you can see, the ramifications of equity issues are sizeable, and we haven't even brought into play the legal headaches that equity can cause (especially when considering race and gender figures).
To effectively manage equity issues look for compensation software solutions that highlight reporting features, linkages to a central compensation inventory, and manager self-service capabilities.
To be sure, pay-for-performance can be a powerful weapon in an organization's arsenal, but it is only one element in that organization's strategy for attracting and retaining key employees. Indeed, not only do organizations have to make sure that compensation is managed in such a way that specific behaviors are incented, but organizations also have to be ever-mindful of internal equity issues between employees and external market pressures—if there is to be any expectation for a comprehensive and effective system for managing compensation.
Up-to-date staff and market information (via salary surveys, industry benchmarks, etc.) are needed, so look for HR software solutions that highlight import features, data management functions, and data design elements (other than just pay for performance).