Compensation Management Software Most Pivotal Implementation Issues

The Compensation Management Software Framework

Identified by Forrester as one of the four pillars of talent management (the others being recruitment, performance and learning); and one of the few issues given equal importance by employees and the C-level alike, compensation systems can be seen as the foundation stone that supports an organization's entire human capital management effort. Interestingly enough though, given that 2011 research from Ventana found that "only 42 percent [of respondents] said they are satisfied with their current software for managing compensation"; a large number of organizations are in the market for improved compensation management software. More specifically, companies are looking for integrated solutions that can enable a more sophisticated approach to goal/reward alignment and employee retention. However, due to this fundamental importance, there are a number of specific factors (outside of the necessary steps for compensation software selection) to take into account when implementing or upgrading a compensation management application.

Compensation Management System Issue #1: The current compensation landscape

Any compensation strategy has to be positioned within the current economic climate – largely the global recession beginning in 2008 and the long-term effects of which are still being felt by organizations as employees have become increasingly dissatisfied with many aspects of the work experience. The Mercer report, Compensation Planning 2012, found a bevy of labor cost reduction tactics such as furloughs, headcount reductions, tightened compensation budgets, pay freezes and cuts in training and recognition programs. Such tactics have precipitated a predictable downturn in employee morale and loyalty, leading the report to note that 32% of U.S. employees are seriously considering leaving their companies. The Mercer Group also found that, in an effort to retain talent, companies are "placing more emphasis on variable pay programs for top producers to contain fixed costs while providing an incentive for segments. And while non-cash rewards such as training and career advancement enhance retention, base and variable pay remain important to the employment deal." As organizations roll out increasingly sophisticated compensation management software feature sets and strategies in response to external market conditions, any software being implemented must support that strategy.

Compensation Management System Issue #2: Retention of high-performers

Integration of compensation management with employee performance is a key feature of current software and as such, implementation must position the system accordingly. In fact, Mercer's 2012 survey notes, "The gap between high- and lower-performing employees is widening significantly. …the highest-performing employees are expected to receive average base pay increases of 4.6%... compared to 2.8% for average performers and 0.4% for the weakest. In this environment, top-performing employees are an employer's competitive weapon, and companies are doing their best to implement a segmented rewards strategy. To do this, companies must identify employee performance drivers across job families, job levels, business unites, geographies and performance groups to determine where to place limited compensation dollars. This means surveying employee groups and marrying data with the companies' business strategy." This survey exercise forms an important part of an organization's preparation for implementing both new software and an up to date compensation strategy.

Compensation Management System Issue #3: Focus on the end game

All stakeholders in the compensation software implementation process must be in agreement as to desired outcomes, but they must also be working towards a common aim even though their respective interests might differ. In particular, Ventana research highlights recommendations that "HR and Finance must ensure that they agree on direction. The benefit companies most desire is being able to align their workforce to their business strategy and goals (52%), which is assisted by efficiency of process (50%), having visibility into employee compensation, performance and succession related information (40%) and establishing pay for documented performance (39%)". As such, a prerequisite of implementing compensation management software is the establishment and communication of clear and measurable priorities.

Compensation Management System Issue #4: Employee impact

While any business change or HR software introduction will generate employee responses (which will consequently influence the accompanying communication and change management strategies), the information that is made available by most compensation software may need particularly careful handling. As SHRM's 2011 report, Transforming HR through Technology says, "one of the most important aspects of any pay or compensation system is the employees' perception of the fairness of the system. Employees want to be fairly compensated for the value of the work they complete, as well as in relation to others in the organization (internal equity). They also want to be fairly compensated in relation to others in the marketplace (external equity)." While interested employees will have already sought out equity information via various external websites, the software's comparison functions will bring that information into the workplace. However, this may be leveraged as a positive; SHRM's report goes on to point out, "Transparency in compensation plans and policies can lead to increased employee trust and confidence that the employer truly values and rewards performance. E-compensation applications can help organizations share this information with employees in an efficient and cost effective manner."

Concluding Thoughts on Compensation Management Systems

Successful implementation of a compensation management software solution can enable managers to use various rewards and incentives to align performance to organizational goals—a process which can be instrumental in creating an organization's competitive edge for recruiting and retaining high-performing employees. The strategic aim though, is to arrive at the situation cited in CedarCrestone's 2011-12 HR Systems Survey, where "employees understand and value cash and non-cash incentives (including salary, bonuses, stock options, benefits, employee development and career planning, and work environment)". Only then, can the implementation of your compensation management system be truly deemed a success.

  Categories: Compensation Software

  Tags: Compensation Software Implementation

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 Author: Dave Foxall

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