Why Compensation Matters in Human Resources Management

February 16, 2024
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Why Compensation Matters in Human Resources Management

There’s one thing that matters to employees more than anything else — their compensation. We’re not just talking about base pay, but the whole package of benefits that make coming to work each day seem worthwhile.

Because of this, getting compensation and benefits management right is critically important.

That’s why many companies are looking to overhaul their compensation management strategies. Find out more about why compensation matters, how to get it right, plus how to keep up with the evolving trends in this space.   

The Integral Role of Compensation in HR

From the employee experience to talent acquisition, human resources management covers a wide range of responsibilities. But arguably, one of the most important is compensation.

Total compensation packages cover the base salary, benefits, and incentives that your employees receive in return for their hard work and expertise. 

Getting compensation right helps companies attract top talent, and can be used as a differentiator to help you stand out in a crowded market. Once that top talent is onboarded, compensation management strategies can be used to help engage, motivate, and retain. 

Research shows that highly engaged employees are more likely to perform better. And when your employees perform their best — wider company success follows. 

Aligning Compensation with Organizational Goals

When creating a compensation philosophy, it’s crucial to tie this to the overall goals and values of your company. Without this link, you may be sending mixed messages to your employees. 

As an example, imagine if your compensation strategy offers bonuses based on individual performance — but one of your company's core values is collaborative work. Employees may be confused as to why they’re being encouraged to work as a team, but rewarded for individual performance. 

Here’s how to get compensation aligned with your company culture:

1. Get clear on your company culture

Defining your company culture is a critical first step because this will impact your pay structures moving forward.

2. Identify behaviours to be rewarded within your compensation strategy

These will vary based on your company culture, for example, in a company with a strong culture of flexibility, collaboration, and belonging, behaviours like loyalty and teamwork are desired. In a company with a data-driven approach, individual performance and driving profits are going to be more important. 

3. Create a compensation strategy based on these behaviours

This step involves deciding how your compensation strategy will reward the behaviours you outlined above. This could include performance-based bonuses, additional paid time off or other incentives for long-term employees, or bonuses awarded for team performance. 

For more information, read our step-by-step guide to aligning your pay structure with your company culture. 

Once you’ve outlined the above, it’s time to draft your compensation philosophy. This should include:

  • A short statement outlining the purpose of the document 
  • Financial compensation, to include fixed salary, performance-related pay, and team bonuses, if relevant 
  • Equity options 
  • A breakdown of all non-monetary benefits (paid time off, healthcare, flexible working, retirement contributions, and more)
  • Perks (for example, gym memberships, home office stipends, and more)

Want some inspiration? Check out Figures’ very own compensation philosophy to see how it’s done. 

Impact on Employee Satisfaction and Retention

The impact of compensation on employee satisfaction and retention can’t be understated. When employees feel like they’re being compensated fairly in return for their skills and expertise, they’re far more likely to be engaged at work, and motivated to do their best. 

And when employees are highly engaged, their performance tends to increase. Research from Indeed shows that when employees are paid fairly, 81% are more productive, and 82% are more engaged

Get compensation wrong, and engagement can plummet. The next logical step from this is employees feeling resentful that they’re not paid their worth, and looking for employment elsewhere. 

Research from Randstad shows that better salaries and benefits are one of the top reasons employees leave their roles. And if you can’t demonstrate your compensation packages are competitive, your employees may be at higher risk of leaving for better pay elsewhere. And with research from Gallup’s State of the Global Workplace 2023 Report finding that globally, 51% of employees are actively looking for a new job, getting compensation right is critical. 

When employees leave, they don’t just take their skills and expertise with them. Companies also need to spend a significant amount of money finding a replacement — estimated to be around €3,000 and upwards per employee.

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Compensation and Talent Acquisition

When it comes to attracting top talent — compensation is again a primary driver, as uncovered by Indeed & Glassdoor’s Hiring and Workplace Trends Report 2023

And in a candidate-driven market, companies need to stand out by offering the most competitive compensation possible. Of course, there’s a wide range of factors influencing this decision — from your market position to the industry, location, and types of roles you’re advertising for. 

Take-home pay isn’t the only factor that attracts top talent — your total compensation package also matters. Research from Mercer shows that often, the benefits on offer don’t match up to employee expectations. Get these benefits right though, and you might be able to save money on compensation. A recent survey found that up to 50% of employees are happy to accept lower compensation in exchange for benefits that meet their needs.      

Crafting compensation packages that include the kinds of benefits employees really want (not what companies think they want) is an effective talent acquisition strategy. Want to know what those workplace benefits are? Here’s the top seven, according to Forbes:

  1. Flexible work options 
  2. Mental health resources
  3. Upskilling opportunities 
  4. Diversity, equity, inclusion, and belonging (DEIB) programmes
  5. Team recognition programmes 
  6. Flexible parental leave options 
  7. Flexible paid time off 

It’s also important to remember that the importance of each benefit can vary depending on the generation of employees you’re looking to attract. This also means that a rigid approach, offering the same benefits to everyone, doesn’t always work.

A better approach is to create tailored benefits packages for each employee, allowing them to handpick what’s important to them. And that makes it even more important to create an effective compensation management strategy, based on accurate data.   

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Considerations for Effective Compensation Management

Designing and implementing effective compensation management practices requires a multi-pronged approach. Here’s what to consider:

  • Market research: salary trends change all the time. The best compensation management strategies use real-time, relevant data to inform your decisions. 
  • Internal equity: Analysing salaries of all employees allows companies to identify — and resolve — any internal inequities. Creating salary bands then helps to promote parity and provide clear guidance when setting salaries.
  • Legal compliance: With new laws coming into place governing pay transparency and pay equity, any effective compensation management strategies need to consider how to meet these regulations. 
  • Transparency: Openly discussing how and why new compensation management practices are being implemented can help boost trust and foster a sense of belonging. 

The Evolving Landscape of Compensation Trends

Compensation trends come and go, and the most effective compensation management strategies will take these into account. That means HR professionals need to stay abreast of these developments and consider how to incorporate them into compensation management 

Some recent compensation trends that we’ve identified include:

1. Pay Transparency 

This one just isn’t going away. Not only are employees demanding more transparency around pay, but the EU Pay Transparency Directive has encouraged a strong shift towards transparent pay practices. 

Employers are also starting to recognise that for job seekers, there’s nothing more frustrating than not knowing the salary of vacancies they’re interested in applying for. And let’s be honest, stating ‘competitive pay’ isn’t much help. Many companies are already starting to embrace the practice of including salary bands within job adverts (which also means your salary bands need to be on point!)

Employees are also demanding full transparency around how their pay is calculated. That means more companies are moving toward publishing salary bands for each role, plus sharing how they’re determined. 

2. Internal equity 

The EU Pay Transparency Directive is also making companies take a long hard look at their pay equity. While previously, employees might only have discovered they’re paid differently to someone else in the same role, this directive stipulates that companies with over 150 employees must start reporting on their gender pay gap.

So now’s the time to first assess, and then correct, and pay inequities. 

3. Total rewards 

We’ve already discovered that benefits and compensation are equally as important for talent acquisition. Even if you’re operating on a tight budget, offering a wide range of non-monetary compensation and benefits can definitely attract top talent. 

That means many companies are looking at creating comprehensive total rewards packages within their budget, that still offer value to employees. 

4. Personalised benefits packages 

Another trend is the move towards bespoke benefits packages. These recognise that not all employees want the same thing, so allow your people to create a blend of benefits that suits their needs.

For example, offering a four-day working week might appeal to parents of young children or those with care responsibilities, while other employees might prefer paid time off to work on voluntary, charitable projects, or meal allowances for food delivery services.

 

5. Combining human insights with the best technology 

When creating modern compensation packages, spreadsheets and manual data collection simply aren’t enough anymore. High-performing HR teams are now shifting towards combining best-in-class tech with their own extensive experience in people management. 

Using tech to create salary bands or move towards pay transparency frees up your HR team’s time to focus on what they do best — looking after your people. 

Want to know more? Read our full guide to the 5 trends that will shape the compensation landscape in 2024

Measuring the Impact of Compensation

You might think you’ve got your compensation strategies right — but how do you know for sure? The answer lies in the data. Here are some of the metrics you need to measure the impact and effectiveness of your compensation:

  • Pay equity 
  • Compensation ratio
  • Salary competitiveness 
  • Turnover cost 
  • Time-to-fill positions 

And what about the tools to help you analyse those metrics in the first place? Of course, we recommend our Figures Compensation Management software

The Pivotal Role of Compensation in HR 

Employees want fair pay — which makes compensation management one of the most critical aspects of HR. From attracting top talent to boosting engagement and performance, compensation has a powerful impact on business outcomes. 

This means that rather than viewing compensation strategies as something to do once and then forget, it’s time to view these as a strategic asset that needs continual evaluation and adaptation. And we’ve got the tools to help achieve just that. 

If you’re ready to supercharge your compensation management strategies, get in touch to discover how Figures can help.   

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