8 Benefits and Challenges of a Modern Compensation Management Strategy

What if you could achieve the following with one strategy?

• Positively impact your organization’s performance
• Increase employee productivity
• Grow employee and customer satisfaction
• Align business goals and individual performance
• Attract and retain top talent
• Foster a culture of achievement

Think it sounds too good to be true? We promise it’s not. A well-designed and implemented compensation management strategy can help unlock the true potential of your people and your organization.

However, compensation management also presents certain challenges. Balancing costs, maintaining equity, and addressing potential disparities are critical considerations. Below we outline the complexities of compensation management so you can make the best decisions moving forward.

What is Compensation Management?

Compensation management is the process of designing, implementing, and managing a company's pay structure, which includes wages, salaries, and benefits. That last piece – managing pay structure – is a crucial component.

Specifically, compensation management helps companies stay compliant with various regulations and legal requirements. Implementing effective compensation management practices also supports fairness, transparency, and adherence to applicable laws (such as minimum wage laws, overtime regulations, equal pay laws, and anti-discrimination statutes).

Finally, prioritizing employees through compensation management helps mitigate risks, maintain a positive reputation, and foster trust across the entire organization.

Make Informed Decisions with a People Ops Platform

You can make gut-decisions or you can make informed decisions. When it comes to people’s pay and benefits, we’ll always choose the latter.

Luckily, a people operations platform with compensation management functionalities provides valuable data to make informed compensation decisions. The right platform allows you to:

• Build fair compensation review cycles with guidelines, workflows, and eligibility rules
• Visualize the impact of compensation on budget pools
• Give managers the data they need to grant promotions and raises
• Propose changes to compensation and collaborate with key stakeholders
• Keep sensitive information safe, while making it easy to access for those who need it

Plan more effectively with a comprehensive view of performance ratings, equity, compensation, salary history, bands, and more — all in one system.

Advantages of Developing a Modern Compensation Management Strategy

We could be here all day talking about the many benefits of a strong compensation strategy. Let's start with the following four, all of which support an engaged and healthy workforce.

1) Attracting Top Talent

Attracting top talent has become increasingly challenging in today's highly competitive job market. To stand out and secure the best and brightest professionals, you must prioritize a well-structured compensation plan.

Salary and compensation play a significant role in the decision-making process for job seekers. In fact, a survey conducted by Glassdoor revealed that 67% of respondents considered salary and compensation as one of the most important factors when evaluating a job offer. As a pro tip, putting the salary (or salary range) in your job descriptions provides full transparency to help better attract top talent.

Ultimately, a well-designed compensation plan not only demonstrates your organization's commitment to recognizing and valuing employee contributions, but it also positions your company as a desirable employer of choice. As a result, doing so enhances your ability to attract, recruit, and retain the talented individuals needed to drive your success in today's competitive landscape and uncertain economic conditions.

2) Motivating Employees

If you’re looking to motivate employees – and see an increase in engagement and productivity – consider implementing performance-based pay. In short, performance-based compensation reinforces your organization's commitment to recognizing and valuing employee contributions.

Linking compensation directly to performance encourages employees to set and strive for ambitious goals, knowing that their efforts will be appropriately recognized. This alignment between performance and rewards creates a culture of accountability and continuous improvement as well as a focus on achieving desired outcomes.

Furthermore, performance-based compensation fosters collaboration and encourages employees to push boundaries, ultimately driving productivity, innovation, and overall organizational success.

If you introduce performance-based pay, you’ll be in good company. According to a pay practices study, 85% of organizations use performance programs to motivate and reward employees based on individual performance. Just remember to allocate your budget accordingly so you can create a sustainable and fair process.

3) Retaining Key Employees

High turnover rates can pose significant challenges to stability and growth, making it difficult to gain a competitive edge. Fortunately, a well-implemented compensation management strategy can play a vital role in improving employee loyalty and reducing churn.

Top talent – especially those who hold specialized, critical roles within your organization – are particularly susceptible to being enticed by external opportunities that promise better compensation or benefits. However, offering a compelling and competitive compensation package with clear paths to growth can mitigate the risk of losing these valuable employees.

According to a report by Payscale, companies that effectively manage their compensation strategies and align them with market standards experience 22.2% lower turnover rates compared to those with ineffective compensation practices. By providing fair and enticing compensation packages, you can enhance employee loyalty, reduce the likelihood of turnover, and secure the talent necessary for sustained success.

4) Ensuring Internal Equity

Maintaining internal equity within your organization is crucial for building a productive workplace culture. Compensation management plays a pivotal role in achieving this goal by ensuring that employees are fairly compensated for their contributions, regardless of their role or level within the organization.

By implementing transparent and consistent compensation practices, you’ll demonstrate your commitment to treating employees equitably. Doing so not only reduces the risk of resentment or dissatisfaction among your workforce, but it also promotes a positive environment where individuals feel valued and motivated to perform at their best. And of course, let’s not forget you’ll help mitigate any legal – and potentially financial – risk associated with not making fair and equitable people decisions.

With the right platform, you can run reports using your people data to ensure equitable compensation across your workforce.

4 Challenges for Maintaining a Competitive Compensation Management Strategy

Despite all the benefits that a well-maintained compensation management strategy can deliver, there are many common challenges when it comes to designing and managing your strategy, including:

1) Cost Implications

Unfortunately, providing attractive and competitive compensation can be a significant financial burden for companies. According to the U.S. Bureau of Labor Statistics, employee compensation accounts for approximately 70% of a company's total operating costs. On top of that, many organizations leave wiggle room in their budget to help attract and retain top talent.

That being said, it’s important to view compensation as an investment in your organization's success, as it contributes to employee satisfaction, engagement, and overall performance. Striking a balance between competitive compensation and financial sustainability is a key challenge, but one that’s essential to get right to ensure long term growth.

Because a people ops platform houses all of your people data in one place, you can forecast your budget for new hires, raises, and attrition.

2) Subjectivity and Bias

Despite leaders’ best efforts, it can still be a challenge to ensure fairness and reduce unconscious bias in the workplace. And unfortunately, the subjective nature of determining employee salaries, bonuses, and benefits can contribute to unequal pay practices if not carefully managed.

Objective and transparent compensation frameworks, regular pay equity audits, and training on unconscious bias can all counteract these issues. These efforts proactively address subjectivity and bias to foster an inclusive and fair compensation culture that ensures all employees get paid based on merit rather than factors unrelated to performance.

3) Complexity and Administration

Compensation plans are complex; they often encompass multiple components and require meticulous data collection, analysis, and administration. Failure to build out a Finance team and purchase the right technology can result in errors, delays, and inefficiencies in compensation processes, leading to employee dissatisfaction and potential compliance risks.

As a result, it’s important to dedicate resources to navigating your organization's unique compensation needs. By recognizing the complexity involved and investing in the necessary resources, you can streamline your compensation administration, ensure accuracy and fairness, and ultimately enhance employee satisfaction and engagement.

4) Market Volatility

What’s true for your market one day can completely change the next. For example, as Joanna Wise, SVP of People at Whip Media, puts it: “The current economic environment has generated a lot of turmoil, and companies are now operating in a more nimble and lean manner than before.” Given this change, she predicts that we’ll see “an even greater focus on pay equity and transparency” in the future.

That’s why it’s necessary to discuss how external factors – such as economic fluctuations and changing market trends – can affect your budget and compensation management strategies. Once you determine those plans, you’ll need to regularly monitor trends to remain competitive and ensure that your efforts remain aligned with the ever-changing market.

Create an Informed and People-First Compensation Strategy to Mitigate Risks

A strong compensation management strategy offers numerous benefits to both your organization and its people. However, it’s important for stakeholders to strike a balance between the benefits and challenges when designing and implementing compensation strategies.

To do so, make sure you carefully assess your organization's specific needs, goals, and resources, and always remember that compensation management is a dynamic field that requires continuous adjustments to meet the evolving needs of both employees and organizations. By understanding the risks, you can make informed decisions that foster a motivated, engaged, and satisfied workforce.

If you're considering crafting a new compensation strategy or updating your existing one, our quick start guide provides five steps to steer you towards a successful planning process. Download the guide now and unlock the key to creating a compelling and competitive compensation approach.