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November 30, 2015
Increase the impact of your compensation system

So, what’s your problem? We’re not trying to be confrontational but asking a sincere question. If you’re one who designs, processes, or transacts your company’s compensation program, it isn’t a stretch to think that you may have a few headaches.

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In a recent survey and accompanying white paper, talent management software firm HRsoft listed several problems that are common to folks whose jobs involve the design and administration of an effective compensation program. In fact, it seems that problems with compensation programs have a much longer reach than just into the HR or compensation departments.

That’s because, while compensation is supposed to be strategic in nature—a planning exercise that should support a company’s business strategy—it has turned into something one might refer to as a series of fires … as in putting them out. You know the feeling. The increasing complexities involved make the whole program about dealing with paperwork and budgets, with much less focus on planning than everyone would like.

Austin Muzumdar, senior vice president of client success at HRsoft, says the complications of today’s compensation programs include:

  • Increased organizational scope. “Most firms are larger and or have greater diversity of operating groups and regions including global operations. This makes it increasingly challenging to have a pay strategy that works well for all staff.”
  • War on talent. “The economy, at least for high-value, high performers, has recovered well, and identifying and rewarding such folks is critical to sustaining growth.”
  • Job-hopping. “Younger employees in particular are apt to leave over small perceived discrepancies in pay.”
  • Increased regulatory environments. “It is more vital than ever to have a transparent and compliant pay process that is defensible, as more scrutiny than ever is being placed on pay programs.”

Compensation troubles trickle down

People outside the compensation department are not immune from the troubles. Ineffective compensation programs may cause issues for people throughout the organization: inside the comp department, challenges include obtaining the data needed to design plans that will engage employees and, at the same time, stay within requirements from the company, from regulators, from unions, and sometimes from other constituents.

Managers need the program to perform in a way that will attract and retain employees. Errors need to be kept to a minimum in order to save headaches and perhaps even penalties. And of course, consistency is important so that everyone is on the same page in regard to rewarding top talent and staying within budget.

HRsoft asserts that an ages-old saying—“change is the only constant”—easily applies to compensation. They would add complexity to the statement, too. The combination of change and complexity has brought many companies to a point where they simply don’t have the time to use the program strategically. Instead, they have been overwhelmed by the need to meet deadlines.

HRsoft’s survey queried about 70 U.S. companies that have evaluated Enterprise Compensation Management technology solutions. The companies ranged in size from 1,500 employees to more than 150,000, with an average of 18,000 employees.

Move from administrative to strategic

They propose that companies implement a High Impact Compensation Management (HICM) solution, one that moves compensation from administrative to strategic. While it seems intimidating, especially considering the transactional nature of what many comp departments are doing, technologies are also evolving that can make it a reality.

A key benefit of implementing an HICM solution is the ability to optimize the compensation budget. Ideally, performance pay should be directed to the business’s high performers. Unfortunately, that doesn’t always happen due to problems in the design or implementation of the system.

An HICM allows for specific and accurate differentiation among performance levels. In fact, the survey showed significant potential savings in the compensation budget in two areas: better allocation of the compensation budget based on merit and improved connection of variable pay to performance.

The benefits of moving into the “high impact” mode are many, according to Muzumdar. For example, such a system allows more control of the budget.

“No longer are mistakes unfound, the process ad-hoc, and the results and budgets difficult to control,” he says. Rather, “a strong compensation automation solution helps an organization maximize their employee compensation budget by helping managers and planners make performance- and policy-based award decisions.”

HRsoft provided an example of a manufacturing company of 5,500 employees with an annual compensation budget of $375,000,000. By ensuring that the salary increase budget was distributed as intended— with higher pay increases (8%) going to their excellent performers and low increases (1%) going to below average performers—the company was able to save about $375,000 for the year. Perhaps more importantly, the salary increase budget was directed in alignment with strategy.

Increase impact, reduce turnover

You already know that turnover is expensive; just how expensive is debatable. But HRsoft cites research from the Saratoga Institute that found turnover costs a minimum of $9,500 per employee, without factoring in any loss of productivity. Based on this figure and considering how many of your employees left last year due to compensation issues, how much did turnover cost your company?

Muzumdar says, “Employee compensation is the single highest cost for most employers. As such, it is critical to maximize ROI on this investment by generating the most discretionary effort for each dollar allocated. You can do that only by evaluating your workforce, determining critical roles, evaluating and using market data, and getting the necessary decision-support tools in place to help managers—the people who are closest to employee—be positioned to make great compensation decisions.”

Turnover often declines as employees become more engaged, and that can happen when performance is clearly linked to pay. Line managers may also be more engaged and satisfied because they can make compensation decisions more easily and in a shorter time.

Those line managers play an important role in the compensation program as a whole, because they are the ones who rate performances and make budgetary recommendations. In HRsoft’s survey, line managers appreciated using an HICM system because it allowed them to more easily access the information and guidelines they needed and make more informed compensation decisions and recommendations.

Higher level managers, who have responsibility for assessing the budgetary impact of compensation decisions, appreciated better automation because it allowed them to efficiently address special circumstances.

“Instead of wasting time with manual efforts to administer painful offline processes, HR, compensation and managers can focus on higher value activities, such as making sure that budgets are utilized for maximized engagement, retention and motivation,” Muzumdar says. In these areas, the survey showed 40% improvement in productivity for the average company.

All in all, HRsoft’s research found many benefits to increasing the impact of compensation systems through improved technologies. If you haven’t taken the time to review the available products recently, now might be the right time. In the long run, it could save the company money by increasing efficiency, reducing turnover, and improving employee satisfaction.

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