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Guide to Compensation Management

Patrick Proctor
Patrick Proctor

If you want to hold on to your top employees, a strong compensation management program is critical.

A lot more goes into compensation management than just giving your employees some money and hoping they will stay. A well-thought-out strategy can be the difference between a mass exodus and long-term employee retention.

The concept of "total compensation" is where the real battle is fought for top talent. Your compensation management program will partially determine the strategic goals and objectives your company meets annually. Well-run compensation programs ensure pay equity and equality in benefits throughout the organization. It is important for business owners and HR leaders to know how compensation management works and what employees' expectations are so they can hit the bull's-eye with their compensation program.

What is compensation management?

Compensation management is the practice of planning and distributing the overall pay and benefits package to a company's employees. This program ensures that a company's salaries and bonuses remain competitive within the industry and equitable within the organization. It also involves managing company benefit programs, ensuring the job classifications are up to date, risks are minimized, and the package meets the overall needs of employees and their families. 

A company's compensation program is one of the main reasons employees choose to remain with an employer or look for a new one. According to a 2015 study by Jobvite, 71.6% of companies offer benefits designed to attract talent (i.e., they strive to offer more than their competitors do).

Even when employees choose to stay, that does not mean they appreciate or fully understand their compensation package. Employers need to make the effort to help employees learn the true value of their overall compensation package.

What are the main types of compensation?

There are four primary types of direct compensation:

  • Hourly
  • Salary
  • Commission
  • Bonuses

There is also indirect compensation, which includes retirement benefits, health insurance and paid time off. Factoring direct and indirect compensation together helps determine total compensation – the total amount of remuneration a company pays to its employees. [Read related article: What Are Fringe Benefits, and Should You Offer Them?]

In addition to employees' salaries, hourly pay, bonuses and commissions, total compensation includes the value of any benefits they receive. Indeed lists these as some of the most common attributes within the total compensation spectrum:

  • Paid time off (vacation days, sick days and holidays)
  • Profit-sharing distributions
  • Insurance (medical, dental, disability and life)
  • Tuition assistance
  • Child care assistance
  • Retirement plans
  • Employee assistance programs
  • Gym memberships
  • Relocation expenses
  • Learning and development offerings
  • Career-advancement opportunities
  • Stock options
  • Other non-cash benefits

While these aren't all of the options that can be included in a compensation package, you will likely need to offer at least some of the above perks to keep employees engaged and to remain competitive within your industry.

According to a recent study from Jobvite, the most-wanted employee benefits include flextime and remote work opportunities, corporate recreation centers and gym memberships, free food or catered meals, mentoring and development programs, and casual dress codes. A 2016 Glassdoor report also found that 57% of the surveyed job seekers considered benefits and perks a top priority in their decision of where to work.

Some employers provide employees with a total compensation report that details all of the compensation they receive. Here's an example of a total compensation statement from Genesis HR Solutions:

How is compensation determined?

HR managers typically use a two-part process to assess how to compensate their employees. The first part is done internally. It includes determining not only what the company should pay, but what can it afford to pay.

The second aspect of this process has to do with external factors. For example, what do market surveys tell you? What are your competitors paying? How do regional differences in the cost of living impact total compensation? Are there hiring challenges in certain markets?

These are some of the various factors in rates of compensation:

  • Research: Conduct your \market research within and outside of your industry to gauge what's normal and on trend. 
  • Competitive strategy: You should offer enough not just to stay on par, but to attract top talent away from your competitors. 
  • Marketplace drivers: At times, employers will pay more to get recruits with hard-to-hire skills on their team.

Why is compensation important to HR?

Workest by Zenefits notes that compensation management plays a significant role in HR, as it directly ties in with employee retention, the hiring and onboarding processes, employee performance, and team engagement throughout the company. Many larger companies not only have HR managers, but also compensation managers to lead this process.

At its heart, compensation is the foundation of all that motivates team members within the workplace. So, as HR assists supervisors with behavioral and performance matters, they can also factor employee performance into compensatory decisions. 

What is compensation management software?

Compensation management software is enterprise software (whether a stand-alone solution or part of a larger HR software platform) that helps HR personnel curate, manage, calculate and budgets for employee salaries. This type of software can benefit businesses of all sizes. The best, most comprehensive compensation software platforms are designed to bring teams closer together and to present information quickly, accurately and cleanly.

Alight notes that compensation management systems tend to be managed by HR teams; depending on your permissions and security settings, though, they can be accessible to managers, supervisors or lead workers whenever necessary. Much of the time, compensation management data are accompanied by employee performance data. These combined data sets can help you determine promotions, bonuses and annual increases.

These are some of the more popular HR software platforms with compensation management abilities: 

  1. Paychex Flex HR software: Paychex Flex, a full-service payroll and HR software platform that can support businesses of any size, is our best pick for remote teams. Its scalable features can help businesses manage their remote teams and maintain legal compliance.
  2. Rippling HR software Rippling is a customizable HR software that combines HR and IT automation into one platform. The intuitive software is easy to implement and can be accessed through a self-service dashboard. With more than 400 integration capabilities, Rippling can be easily incorporated with other business software as well. It can help with HR tasks like onboarding automation, benefits administration, talent management and legal compliance.
  3. Gusto HR software: Gusto is ideal for employers who want advanced payroll capabilities. Users can onboard new hires, administer employee benefits, track hours and paid time off, run payroll, and automatically file payroll taxes. Read our Gusto HR software review to find out if these robust features are right for you business.
  4. GoCo HR software: GoCo is a comprehensive HR software that allows small businesses to manage and streamline their HR processes. The flexible and user-friendly software is especially ideal for automating employee hiring and onboarding workflows. To manage employee payroll, businesses can either use GoCo's embedded payroll option Execupay, or integrate any cloud-based payroll software or their choice. GoCo users can access custom reporting, a self-service dashboard, and supportive customer service.
  5. BambooHR softwareBambooHR is ideal for small businesses wanting a flexible HR software option.
    You get traditional HR-management features to streamline your internal HR processes. Advanced capabilities like goal tracking and employee assessments can be added separately, read our Bamboor HR software review for more information on their features.
Image Credit: lovelyday12 / Getty Images
Patrick Proctor
Patrick Proctor
business.com Contributing Writer
Patrick Proctor, SHRM-SCP, is certified as a senior professional in human resources. His more than 15 years of executive level leadership inform his work on inclusive and engaging workplace culture, as well as educating senior leadership teams about human capital management and organizational strategy. Patrick has written dozens of articles on global business, human resources operations, management and leadership, business technology, risk management, and continuity planning