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What Is Compensation Management and Why Is It Important?

  • Payroll
  • Article
  • 6 min. Read
  • Last Updated: 03/31/2023

two business managers discussing the company's overall talent management strategy

Table of Contents

When thinking about your company's overall talent management strategy, compensation management is one key element to consider, along with recruiting, leadership development, succession planning, and performance management. Given how compensation can correlate to employee retention and engagement and is a reflection of your pay and benefit programs, consider the following to help ensure you're meeting the needs of your workforce.

What Is Compensation Management?

Managing compensation is the process of planning, examining, and providing employees' monetary and non-monetary benefits, including base pay, employee benefits, and incentives provided by an organization. An important part of this process may include gathering and analyzing internal and external pay information, benefits data, employee demographics, and other relevant information to help ensure that base pay, bonuses, and benefits programs are fair, equitable, and competitive. A few pieces of important employee information that HR teams may use to manage compensation strategy include the following data on individual team members:

  • Employee performance
  • Current position
  • Job responsibilities
  • Skills

Compensation management may also pair the above information with insights such as:

  • Job market
  • Competitor data
  • Company budget

The process of developing and implementing your compensation management strategy is critical to employee retention, because unfair or uncompetitive total compensation could lead to job dissatisfaction. Your compensation management strategy can also impact your recruiting efforts and employee productivity.

What Are the Different Types of Compensation?

Compensation management strategies seek to evaluate total compensation packages, including monetary as well as non-monetary incentives.

Monetary or direct compensation could include:

  • Hourly pay
  • Salary
  • Commission
  • Incentives (e.g., shift differential, bonuses, etc.)

Non-monetary or indirect compensation for employees is still considered a financial form of compensation, but employees don't directly receive it in cash form. This would include expenditures such as:

What Is the Importance of Compensation Management?

At a time when job candidates and employees alike may be speaking with competitors or even fielding multiple offers, prioritize employee compensation management to help boost retention rates, performance levels, and overall workforce morale. Workers whose value is recognized by way of receiving fair base pay, generous benefits, and other incentives in return for quality work are much more likely to be motivated, loyal, and high-performing.

Having a thorough understanding of compensation at your business may also be critical to your compliance with pay transparency and equal pay laws. Equal pay laws exist in nearly every state, but increased demand by employees as well as a legislative trend at the state level to mandate pay transparency are leading to more companies disclosing pay information.

Benefits of Compensation Management

A compensation management program may be beneficial for businesses and employees alike in many ways:

  • Helps to ensure that wages and offers to job candidates are competitive.
  • Can be used as part of employee benefits auditing and evaluations.
  • Aids in budget creation.
  • Helps establish the business's compensation philosophy, documentation of company policies regarding wages, bonuses, and benefits, and its commitment to fair and equitable pay.
  • Demonstrates to employees that you prioritize and value their hard work, which can lead to long-term improvements in worker retention, engagement, and morale.
  • Can help HR teams analyze and measure diversity within the company while also identifying areas of opportunity.
  • Helps address complex pay considerations, such as adjusting pay for remote employees who live in low- or high-wage regions.
  • Helps businesses comply with applicable federal, state, and local pay equity laws.

Challenges of Compensation Management

Despite its importance, compensation management can present many challenges to businesses. Whether brought on by economic difficulties, employee perceptions, or other business factors, HR teams may struggle in the following areas:

  • Getting leadership buy-in: A compensation management analysis may reveal necessary next steps such as increasing employee wages to better align with industry competitors. In cases such as these, company leaders may push back on these changes and how they'll impact the bottom line.
  • Presentation of compensation: Employee perceptions of their total compensation are based on their own values, needs, and expectations. Instead of framing compensation conversations, especially pay increases, as "good," "big," or some other qualifier, use objective language and specific numbers when relaying this information.
  • Generational differences in salary and benefits expectations: With multiple generations working alongside one another, there may be stark differences around pay expectations, benefits, and more. For example, Generation Z workers may be enthusiastic about a new benefit offering that helps with college loan assistance, while groups of employees may want an increase in 401(k) matching.
  • Limited access to reliable data: Compensation management requires businesses to conduct competitive analysis. This data may be hard to find, especially if your business has employees in niche roles.
  • Ensuring fairness and equity: As outlined above, compensation management is important for businesses to understand how fair and equitable their pay practices are. But this can lead to some considerable challenges. For example, employees could feel slighted if your organization identifies and takes steps to eliminate pay gaps, as pay transparency could make those gaps even more obvious. Employees may also be confused or frustrated if there is no clear policy in place for how pay rates are determined.
  • Staying competitive: Economic factors as they relate to COVID-19, a tightening labor market, and other circumstances over the past few years have created uncertainty for companies and employees alike. It can be challenging for businesses to both keep up with employee expectations and changes in the larger business landscape.
a hr manager discussing challenges of compensation management with her subordinates

What To Look For in Compensation Management Software

The process of gathering and analyzing data around employee pay, benefits, bonuses, and other compensation information can be an arduous one, which is why many companies use compensation management software to help them with compensation decision-making and execution. When evaluating these types of tools, it may be useful to also have a firm understanding of how compensation management relates to your larger human capital and talent management strategies. Compensation management is one piece of a larger HR puzzle and is related to other important areas such as performance management, payroll, time and attendance, and much more. In addition to compensation management tools that can help you manage, calculate, and organize compensation data, consider how your organization could benefit from optimizing and automating processes across the entire employee lifecycle — in which case, integrated HR technology can offer significant value as well.

Compensation Management Can Help Build a Stronger HR Strategy

Implementing a solid compensation management strategy is imperative as businesses grapple with attracting and keeping high-quality talent. Consider how your overall HR strategy is helping your business address these and other related challenges, including employee motivation and productivity, morale, and retention.


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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.

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