Are You Maximising Your Compensation Management Performance? Don't Get Left Behind!

February 20, 2024
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Are You Maximising Your Compensation Management Performance? Don't Get Left Behind!

Getting compensation management right puts companies in a powerful position to attract top talent, boost employee engagement, and drive business success.

One crucial aspect of this is linking employee performance and compensation management — so your team knows that their hard work is being rewarded tangibly. Whether that’s with a salary increase, a one-off bonus, or non-monetary benefits like additional paid time off, this compensation strategy is a key indicator of high-performing companies.  

That means getting compensation management performance right is one of HR’s most important objectives. Here’s everything you need to know about how to maximise this element of HR. 

How to Maximise Your Compensation Management Performance

Transforming compensation management performance strategies requires a strong understanding of the link between performance and compensation, and then implementing an effective, performance-driven compensation strategy that works for your specific company's circumstances. Here’s what you need to know.  

Understanding the Link Between Employee Performance and Compensation

Employee compensation and performance are intertwined. To put it bluntly — without fair compensation, you can’t expect outstanding performance. When employees are compensated fairly, they tend to be more engaged. And when they’re more engaged — they perform better. 

Despite the clear link between performance and compensation, Gallup research shows that only 20% of employees say that performance management at their company motivates them to do their best work. That means there’s a huge amount of room for improvement — which is where performance-driven compensation strategies come in. 

Implementing a Performance-Driven Compensation Strategy

Knowing how closely performance is tied to compensation means it makes perfect sense to implement a compensation strategy that acknowledges this relationship.

Performance-related pay can drive both employee success, and wider business success, but it needs to be implemented in the right way.

We recommend: 

  1. Starting the process of creating a compensation philosophy that includes performance-related pay strategies
  2. Asking for employee feedback 
  3. Creating a compensation philosophy
  4. Communicating the philosophy 
  5. Completing compensation management for each employee
  6. Ensuring pay equity 
  7. Assessing the results on an annual basis, and adjusting the process when needed

The benefits of performance-driven compensation strategies include:

  • Boosting retention, engagement, motivation, and performance 
  • Identifying high-performing employees 
  • Encouraging continuous development 
  • Creating transparent, equitable pay decisions 
  • Rewarding employees for their hard work 

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Best Practices for Compensation Management Performance

Ready to transform your approach to compensation management? We’ve rounded up some best practice tips to set you on the right track. 

Adopting Pay-for-Performance Compensation

Pay-for-performance is a powerful compensation strategy that helps directly link employee performance to the compensation they receive. It’s considered a more equitable way to reward employees for their efforts in the workplace — which is why it’s becoming a popular strategy with forward-thinking companies. It’s also an indicator of high performance. 

The Incentive Research Foundation uncovered that 80% of top-performing companies use the kinds of goal-focused outcomes seen in pay-for-performance compensation strategies, compared to 57% of companies with average performance. 

Knowing you want to adopt pay-for-performance compensation is one thing — but for any strategy to be successful, it’s crucial to design a package that suits your company’s unique needs. 

Designing Compensation Packages that Drive Performance

Not all compensation packages suit all companies — so it’s important to design a system that works for your circumstances. 

Some options to explore include:

  • Incentive-based pay: This package links incentives to performance by an individual or team. Sometimes incentive-based pay is also linked to company success or overall revenue. One of the most popular incentive-based pay models is commissions for sales-based roles, but this model can also be based on non-monetary incentives like additional paid time off or vouchers. 
  • Performance-based pay: This involves employees receiving a bonus for performance, over and above their regular base pay. This may be tracked using specific goals and objectives during performance reviews, usually conducted annually or every six months. If an employee meets their targets, they receive a bonus but their base salary remains the same. 
  • Merit-based pay: Similar to performance-based pay, this compensation management structure ties salary increases to performance. But these increases are linked to base pay, rather than being received as a separate bonus. 
  • Variable pay: This involves awarding bonuses in addition to an employee’s base pay, but in a less predictable pattern than merit-based pay. This model is often used to reward an entire team with a one-off bonus for meeting a specific objective. Rewards may be monetary or non-monetary. 

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Understanding the Basics of Compensation Management

Before you dive deep into the world of compensation management — it’s important to start with the basics. We’ve got you covered. 

What is Compensation Management?

Compensation management involves managing the base pay, benefits, and incentives that each employee receives. The goal is to ensure a fair and transparent approach to compensation. 

Rather than basing an employee’s compensation on their previous salary, or relying on the results of subjective performance reviews, compensation management helps HR teams determine salaries based on the following:

  • Job title
  • Responsibilities 
  • Performance 
  • Company market
  • Salary benchmarking 
  • Salary bands 
  • Current market conditions 
  • Company location

Employee compensation is made up of direct, monetary compensation and indirect compensation. 

Direct compensation includes:

  • Salary
  • Hourly pay
  • Bonuses
  • Commissions

Indirect compensation includes:

  • Paid time off
  • Retirement contributions 
  • Child Care assistance 
  • Insurance (medical, dental, and so on)
  • Profit-sharing
  • Stock options 
  • Relocation expenses
  • Home office stipends
  • Other perks including things like gym membership, subscriptions to wellbeing platforms, social events, and more

Together, these form each employee's total compensation. Many companies choose to create total compensation statements for each employee, with a clear breakdown of their benefits. This can help demonstrate what’s offered in return for your employees’ skills and expertise.   

The Importance of Compensation Management in Performance Management

Compensation makes up the largest percentage of many companies' budgets. And it’s also one of the most important factors for employees. Getting compensation management right can help companies attract top talent, something that’s increasingly important in an employee-led market. Once you’ve attracted that talent, the right compensation can also help engage and retain those employees. 

Employee engagement is a major indicator of wider company success — because engaged employees perform better. Fair pay is a huge driver of engagement, with research from Indeed showing that when employees consider their pay is fair, 82% are more engaged, and 81% are more productive

The Role of Technology in Compensation Management Performance

Technology has transformed the HR landscape in recent years — including how to approach compensation management.

Leveraging Technology for Effective Compensation Management

From saving time to ensuring regulatory compliance, HR tech brings a huge range of benefits, including:

  • Automating processes: technology can save HR teams a huge amount of time, with research showing automation can save HR professionals up to eight hours per week. Examples of HR processes that can be automated include salary benchmarking, incentive calculations, and payroll.  
  • Providing advanced data analytics: HR technology like compensation management software delivers advanced analytics, allowing HR teams to make decisions driven by data, not subjective opinions. This creates fairer, more transparent compensation decisions, which helps drive trust. 
  • Ensuring regulatory compliance: choosing technology that complies with strict regulatory requirements makes it easier to demonstrate how you’re protecting your employees’ sensitive data. 
  • Optimising total compensation: rather than having to manually track each employee’s benefits, technology makes it possible to quickly and easily create total compensation packages that attract and retain top talent. 

The Future of Compensation Management: AI and Machine Learning

AI and machine learning are also shaping the future of compensation management. 

  • Market analysis: AI-powered tools like Figures AI can help HR teams make swift, accurate, and informed compensation decisions. Predict pay ranges based on correlations between location, job role, company size, and more.
  • Driving equity and transparency: AI can identify potential inequities and biases in employee compensation decisions. With regulations like the EU Pay Transparency Directive coming into force, companies must resolve any pay gaps as soon as possible, and AI can make this process significantly faster and less complex.
  • Personalising compensation decisions: not all employees want the same package of benefits, but ensuring everyone is receiving equal benefits can take a significant amount of time. AI can help speed up this process by suggesting personalised packages for each employee.  
  • Salary benchmarking: Before AI, salary benchmarking was a laborious and often inaccurate exercise. Now, it’s possible to access and analyse market data and industry benchmarks within moments. That makes it easier to create competitive compensation packages that boost engagement, retention, and performance. 

Case Studies: Successful Compensation Management Performance

Ready to see how successful companies are already integrating compensation management performance into their pay decisions? Get some inspiration, right here. 

Case Study 1: Klarx Successfully Transforms Its Compensation Management Strategy, with Figures 

When construction machinery rental company Klarx wanted to transform its compensation processes, the natural partner was Figures.

Previously, the HR department relied on manual spreadsheets and review sites like Figures to benchmark their salaries. This was labour-intensive but also relied on potentially inaccurate and out-of-date information from salary review sites like Glassdoor

Our salary benchmarking tool transformed this process — allowing Klarx to run smooth, accurate, and fast compensation reviews. This led to a wide range of benefits, including:

  • Facilitating better conversations around pay
  • Attracting top talent with attractive compensation packages
  • Boosting employee retention

Find out more about how Klarx transformed their compensation management, in our full case study

Case Study 2: How Slimmer Improved Their Compensation Management Performance

When Slimmer AI, an artificial intelligence software company in the Netherlands, wanted to improve its compensation structure, Figures was the obvious partner.

The goal was to ensure all employees receive a fair salary, while at the same time improving transparency around how these salaries are determined. To achieve this, SlimmerAI needed access to high-quality salary benchmarking data. 

Enter Figures. Using our up-to-date, relevant benchmarking data, SlimmerAI was able to create accurate salary bands that confirmed that the majority of the team was being fairly compensated. During bi-annual salary reviews, this data can now be used to frame conversations around performance. Employees with exceptional performance may be eligible for a salary increase, and Figures benchmarking data help inform what those increases might look like. 

Benchmarking data is also invaluable for helping show employees how they can progress with the company — because it’s easier for them to envision how their salary will change as they’re promoted or reach specific targets. 

Find out more about how Slimmer AI transformed their compensation management, in our full case study.

Ready to follow in the footsteps of the companies above, and maximise your compensation management practices? Contact us today — and find out how it’s done. 

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