To stay competitive, organisations need to conduct regular salary surveys and market analyses. Analysing sector-specific salaries will help you make better-informed decisions when it comes to your compensation structure. It also helps when there’s a fluctuating job market, giving you a competitive advantage in attracting and retaining skilled talent.
One of your main goals when designing compensation policies is to be transparent. Top-down transparency around salary and benefits helps to develop trust within an organisation, which contributes to staff morale. It also helps to reduce the gender pay gap and creates a more equitable culture altogether.
Effective compensation management is nothing without communication. Invest in regular training, and ensure managers can effectively communicate the benefits and any performance-related metrics. Employees should feel comfortable approaching management with any queries relating to their compensation structure.
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Understanding Compensation Management
Compensation management involves planning, administering, and evaluating pay structures. It covers both financial (salary, bonuses) and non-financial (benefits, perks) rewards. Compensation packages traditionally include:
- Wages
- Salaries
- Bonuses
- Incentives
- Non-financial rewards
How you incorporate these into your compensation management strategy will depend on myriad factors, including industry, allocation guidelines and overall recruitment strategies.
When considering your objectives for compensation management, it’s a good idea to consider the following benefits and requirements:
- Recruiting and retaining talent
Competitive compensation packages help to recruit skilled individuals to your workforce. - Motivating your workforce
Compensation helps to establish the link between your employees’ contributions and their pay. - Maintaining company morale
When people feel valued through their compensation, employee satisfaction increases. - Follow regulations
Compensation practices need to comply with strict employment regulations. - Reflect the job market
Compensation should be adjusted in line with industry standards.
Benefits of compensation management
Compensation packages provide excellent incentives to join a workplace. That helps recruiters attract best-in-class talent and is one of the most effective tools in hiring skilled professionals to join your organisation.
In a competitive job market, a compensation package can help to tip the scales in your favour. It also helps with employee retention: when people are paid what they’re worth, they tend to stick around for longer.
A well-designed compensation structure encourages consistent, high-level performance. When employees establish a tangible link between their contributions and their rewards, it results in a more focused workforce. Performance-based incentives and bonuses help to make the process dynamic and ongoing,
Fair and equitable compensation leads to greater employee contentment. That helps to inspire better job satisfaction, and in turn, boosts productivity.
Key strategies and approaches
When designing a salary structure, fair compensation should be a front-of-mind concern for HR professionals. Employees’ salaries should reflect experience, skills and responsibilities, while also considering the financial benchmarks of the current job market.
Performance-based compensation establishes the link between an individual’s contributions and wider company goals. Pay, bonuses, and non-financial rewards will be intrinsically linked to their performance, which helps to boost productivity.
Effective strategies include raises and performance bonuses as motivational tools. There are also longer-term incentives to consider, like stock options.
A total rewards programme represents a different kind of strategy that isn’t explicitly financially driven. Total rewards span a variety of financial and non-financial rewards, increasingly geared to improving work-life balance.
This could be free technology like a laptop, extra holidays, a budget for self-development or ‘work away’ months. It varies from industry to industry, so consider what’s best for your workforce and how it compares to companies in the same field.
There is evidence to suggest by targeting employees’ diverse expectations, total rewards help to power productivity and help with recruitment and retention.
Variable pay inspires employees by linking rewards to specific company targets. This helps to align individual efforts with wider organisational goals. Traditionally, rewards will be in the form of cash bonuses or equity and shares.
What is compensation management?
Discover ADP Compensation ManagementTools and technologies
Payroll systems manage the payroll process, calculating an employee's salary and tax deductions instantly. Integrated with HRIS (Human Resources Information System), they provide an all-in-one solution for accurate compensation.
Together, they help to streamline company processes, reduce the need for additional resources, limit human errors and provide live, real-time insights for compensation management.
Compensation management software is an easy way to smooth the process. It does the work for you, automating everything from salary ranges to compensation and budget planning.
ADP can help you with budgeting, planning and rewards–using incisive software that gives you real-time insights. That results in increased accuracy and less manual re-keying, thanks to integrations with Payroll, HR Management and Performance.
The software enables informed compensation decisions using up-to-date salary ranges, peer ratios, historical data, and budget allocation. You can create the optimum employee compensation package and save time and resources in the process.
Best practices in compensation management
In compensation management, compliance is key. Any compensation strategies you envision must adhere to strict employment laws and regulations in the UK.
- Employment classification: Correctly classifying your employee, and understanding how employment status affects rights and responsibilities.
- Pay equality: Ensures equal pay for men and women, as outlined in the Equality Act 2012.
- Low and high pay: The National Minimum Wage applies to all workers over 16–and the National Living Wage applies to those 23 and over. The voluntary ‘real’ Living Wage reflects a fairer remuneration. In the banking sector, the FCA can apply a ‘bonus cap’ on high earners.
- Pay fairness and reporting: It’s a legal requirement for all large UK employers to disclose certain earnings data by gender. This is to reduce the pay gender gap and to help ensure fairness and equitably.
Legislative changes are always changing and have a profound impact on compensation practices. Organisations need to be tuned into the latest laws on regulations, as well as ‘optional’ initiatives aimed at improving employees’ quality of life, which can positively affect an organisation’s reputation as an ethical employer.
One of your main goals when designing compensation policies is to be transparent. Top-down transparency around salary and benefits helps to develop trust within an organisation, which contributes to staff morale. It also helps to reduce the gender pay gap and creates a more equitable culture altogether.
Effective compensation management is nothing without communication. Invest in regular training, and ensure managers can effectively communicate the benefits and any performance-related metrics. Employees should feel comfortable approaching management with any queries relating to their compensation structure.
Challenges and solutions
Compensation management comes with a unique set of challenges.
Pay compression is when there’s only a small difference in pay across employees at different levels of seniority or experience. This can breed dissatisfaction, as long-term employees might earn fractionally more than brand-new hires. Another challenge is salary compression, which happens when external industry salaries rise faster than internal salaries. These require incisive solutions, including:
- Regularly researching and updating salaries in line with industry standards.
- Rewarding staff with target-based compensation, making sure compensation reflects individual efforts.
- Clearly defining the criteria for promotions and related pay increases to prevent compression.
A successful compensation package will balance budget restraints with competitive pay. It’s a difficult thing to get right, but effective strategies will be creative in their approaches, using a mixture of the benefits outlined above.
The advent of remote working brings its own set of challenges. WFH employees have different needs, and compensation should be adjusted to the location where they’re based to reflect living costs. In terms of benefits, consider incentives like training allowances, mental health support and work-from-home allowances.
Case studies and real-world examples
Many organisations struggle with resource-heavy manual processes regarding performance reviews and compensation planning. Software like ADP’s Performance and Compensation Management is proven to reduce paperwork and add value, saving time to focus on HR organisational goals.
According to Michele Perry, Director of Human Resources at American Assets Trust, “at least 20 per cent of our time has been saved by no longer managing the awful performance evaluation process that we had in place previously”.
ADP makes compensation management easy
With the right compensation management software, you can empower your teams to strategically manage compensation planning, align rewards to important business objectives, and boost employee satisfaction and engagement in the process.
Fully integrated solutions provide live tracking and real-time insights. This ensures accurate reporting, helping you make better-informed strategic decisions. Get started today.
