Top Challenges of Compensation Management

Definition of Compensation

The term compensation means financial payments such as wages and salary paid to employees.
Compensation also includes bonus and incentive payments, raises and company stock awarded to
employees. Compensation specialists often have knowledge of both compensation and employee
benefits. This is one reason why human resources departments sometimes combine
compensation and benefits into one departmental function.

Human Resources Budget

It has been argued that human resources budget allocations are too low because HR is not a
revenue-producing department. In theory, however, the most valuable resource a company has is
its human capital. Consequently, human resources compensation specialists and HR department
leaders must sometimes work within limited budget constraints. In addition, justifying budget
increases requires proof of return on investment in HR department activities. You need to be able
to demonstrate your ROI. If you can articulate your department’s performance in terms of
company goals, it will be much more difficult for the top brass to tear into your budget.

Salary and Wage Levels

Attracting qualified applicants may depend on your company’s ability to offer extremely
competitive wages. Employee benefits are important, too, but the base amount is what initially
appeals to most job seekers. A company’s reputation is also a determinant in whether your
company can become an employer of choice. It is likely that competitors’ employees and
industry experts network with your employees to share information. Candidates want fair wages,
not necessarily high wages, especially when a job offer comes with an attractive benefits
package. Compensation specialists analyze competitors’ wages, labour market trends and
employment levels to construct compensation policies.

Bonus and Incentive Pay

Some employers offer annual bonuses or incentive pay based on the individual employee’s
performance or organizational performance, also called variable pay. “The broadest type of
variable-pay incentive programs — company-wide pay-for-performance plans — reward
employees on the basis of the entire corporation’s performance. The most widely used program
of this kind is profit sharing.” The amount of bonuses and incentives is difficult to budget too far
ahead if your company is relatively new; however, if you have an incentive program that’s
structured and adhered to consistently without favoritism and bias, you can accurately project
budget requests for bonuses and incentive pay.
Easy to Administer

In a job-based compensation structure, the job itself becomes the unit of determining base pay.
Human resource professionals establish minimum and maximum pay amounts for each job and
compensate employees based on their performance. Employee job evaluation determines
employee performance. This structure is easy to administer because it focuses on allocating pay
systematically and ensuring that the most important jobs are paid more.

Skill-based Pay

Skill-based systems have long been used to define jobs within the trades. Increasing skill levels
are the determining factor in describing positions like an apprentice. Other examples of skill-
based pay systems can be found among white-collar jobs where the company is providing a
career progression based on increasing technical skill as an alternative to being promoted
through various management levels.

Competency-Based Pay

The term competency-based pay describes a system where rewards are based on the use of
competence without consideration for results. The premise is that individual performance
depends on having relevant competencies and higher levels of competence will produce superior
performance. A competency-based pay system focuses on individuals. In practice, competency-
based systems are seldom used in a pure form. Competency may be one of the factors
determining pay, but performance may also be a factor.

India is diverse, so are its compensation practices. Just as India is a highly diverse nation made
up of multiple languages, religions, ethnic groups, and customs spread across a tremendous
geographic range – so too are its compensation practices.
Talent management: Compensation issues and your employees

Compensation is one of the most complex disciplines in the field of talent management, or
human resources. Handling employee compensation issues properly requires knowledge of:

 Employment trends
 How to value jobs both internally and externally
 How to adapt to varying financial conditions
Most companies use compensation to help build, motivate and retain a strong, innovative and
productive workforce. The ongoing challenge is to balance employee perception while allowing
for differentiation of pay across the workforce.

Perceived compensation equity among employees

A common belief is that an employee’s compensation satisfaction would be a function of the
amount received—i.e., the higher the compensation rate, the greater the satisfaction. However,
the situation is not that simple. In fact, the reality is that the amount of pay matters less than its
perceived fairness or equity.

Employees each have their own perception of internal equity as it affects them among their
peers, managers and subordinates. If an employee believes they are underpaid, they will typically
react by reducing their effort or performance. This may result in, for example,
increased absenteeism and sick leave, tardiness, unmet deadlines, excessive work breaks, lack of
focus or even a resignation.

What is the right compensation balance in talent management?

Many companies, including startups, struggle to find the right compensation balance between
employee perception and paying for performance. The ultimate goal is to dedicate enough
money to motivate the desired results without paying too much or, worse, motivating the wrong
results.
A lean budget and compensation issues
This balancing act is even more challenging when faced with a lean budget and resources for
compensation are limited. How do you spend your dollars wisely?

Consider how employees view your company’s overall value proposition—that is, everything of
value you provide to your employees, including non-financial rewards.

Do not underestimate the power of a talent management compensation strategy that

differentiates based on performance. Typically, with the right communication plan and decision-
making transparency, employees will understand and embrace this type of compensation
program.

Differentiating effectively: Salary versus performance-based compensation

Increasing your salary and incentive budget is not always an option, so leaders need to make sure
they allocate rewards in ways that clearly differentiate based on performance. Even those
companies that can increase these budgets should focus on this type of differentiation.

Successful companies often must make tough decisions to provide salary increases only to
employees in critical jobs, the highest performers, or any other important employee group, such
as those with scarce skills.

You may find it helpful to reserve a portion of the salary and incentive budget, sometimes called
a “market adjustment budget,” and allocate that amongst a defined group of critical employees.
This ensures that the company’s investment is targeted toward those employees who truly create
value.

Lean budgets, talent management and employee compensation

Sometimes, when finances are especially lean, budgets must be decreased or frozen. It is
important during these times to ensure that employees understand the reasons for the cuts and the
plan to turn the situation around.
If possible, leverage your market adjustment budget to reduce the impact. The best and brightest
employees will still have employment options and may decide to join another organization that
they believe better values their abilities and skills.