Definition

Compensation Management

Contributor(s): Patrick Thibodeau
This definition is part of our Essential Guide: Talent management system essential guide

Compensation management is a critical part of talent management and employee retention. It uses financial and nonmonetary benefits to attract recruits, reduce turnover, spur performance and boost employee engagement. It is responsible for ensuring that salary and bonuses remain competitive and benefit programs change with the needs of the workforce. The people in this role not only work with data, but are also keen to understanding the complexity of benefits administration.

Compensation management software

Compensation management software is standard in human capital management software suites. It is used to budget employee salaries and provides information about how salary changes with a job role. Although HR has charge of compensation management systems, it can be accessed by managers in a firm.

The software is typically configured to give supervisors a departmental view of the employee data they need to make salary offers, issue raises and grant bonuses. An employee's performance management data may be displayed along with compensation information.

Benefits of compensation management

Ensuring that salaries are competitive is a major benefit of compensation management systems. Compensation data that's in tune with the market gives hiring managers critical data they need when making an offer to a candidate. This applies as well to raises and bonuses to the incumbent workforce. Employees today have opportunities to find out about their peers' salaries and benefits. A good compensation management system is alert to the market, and this can help motivate employees and reduce turnover.

Compensation management requires use of external data. Managers gather salary market data by industry, company size, job role and geography. They can use government data, information from publicly available sites that gather user reported salary data, as well as purchase data from third-party firms that conduct ongoing surveys of salary and benefits.


Indiana University Southeast professor
discusses incentives.

The value of compensation analysis to help set salaries is in debate. Patty McCord, a former chief talent officer at Netflix, argued in a recent Harvard Business Review essay that the compensation analysis is "based on the historical value of what employees have produced rather than on their potential to add value in the future." There is value to benchmarking, but firms should focus their salary assessment on an employee's potential, she wrote.

Compensation management professionals are highly paid

In smaller firms, HR managers may double as the compensation manager. But generally, compensation management is a distinct occupation with a median wage of $119,000, according to the U.S. Labor Department. About 16,000 people work in the U.S. as compensation managers, and this role is growing at about 5% a year. The wage for people who work at lower level jobs in compensation management -- typically, analysts and specialists -- is about $62,000 at the median.

The International Foundation of Employee Benefit Plans, a professional association for people who work in the field of compensation and benefits, says it has 33,000 members.

The changing benefits landscape

Benefits are an important part of a firm's compensation management program. Benefit administration requires staying current with federal and state law changes, but also with workforce trends. Wellness incentive programs, in particular, are having a major impact on employee compensation packages. As such, compensation management software systems need flexibility to handle new types of benefits as well as changes to existing ones.

For example, some corporate wellness technology programs offer activity-tracking smart watches, such as the Apple Watch, to employees at no charge and reduced costs -- if they meet fitness goals. The watch's data, such as number of steps taken per day, is collected. If an employee doesn't meet the goal, they may have to pay the full cost of the watch. There are also programs that offer employer-subsidized DNA testing.

There are other benefit programs, such as flexible work options and phased return to work for new parents. A phased return means a parent may work, but only part time initially. Firms may offer reimbursements for adoption and elder care consultants.

This was last updated in August 2018

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What are the biggest challenges of compensation management?
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We just started using a compensation management software. There are companies out there that build this type of software and nothing else. There is a good unbiased and neutral resource out there called Capterra that rates different companies and has reviews on a variety of companies. We ultimately went with a company called Harvest.
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Nice article it's helped me to prepare for my project viva. Thank You!! Keep Helping Students Through This kind of articles.
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