Investing in your employees also means investing in a strong compensation strategy. It’s difficult to overstate just how critical this is to your ability to build and maintain a skilled and motivated workforce and achieve organizational success.

Your compensation strategy should encompass strategic guidelines and tactical policies that define compensation management and outline how you execute your plan. The true ROI of a strong compensation strategy includes higher retention, positive employee engagement, and greater productivity.

The right compensation tool will support those strategies and policies and help talent management leaders tap into, multiply, and measure that ROI.

You might also like: 'The Top 4 Benefits of Using Compensation Management Software'

Get to the Core of Compensation Planning

Total compensation includes everything a company provides employees in exchange for work—direct compensation (i.e., merit and bonus pay, incentives, and stock grants), benefits, and company perks.

The way employees and organizations view total compensation and its significance differs. Employees report benefits as the third-highest factor contributing to their job satisfaction and performance. Although held in such high regard, a meager 20% of employers say merit-based pay is effective at driving higher levels of individual performance.

The gap between these views has led to dramatic shifts in compensation strategies.

Compounded by transformations in job seeker and employee priorities, these trends have reinforced the need for a strong compensation strategy and streamlined solution.

What Tools are Commonly Used for Compensation Management?

Most enterprise organizations use one of three solutions to plan and track total compensation:

• Spreadsheets
• Enterprise resource planning (ERP) or human capital management (HCM) modules
• Best-of-breed software.

The features, functionalities, and benefits of these tools vary considerably. Interpreting these differences and prioritizing which elements impact your organization’s success will help you select a solution.

1. Spreadsheets

Many companies rely on spreadsheet templates to manage their compensation process. In 2017, the number of organizations that reported they use spreadsheets increased from 35% to 40%. While offering ample user manipulation, spreadsheets can put organizations at an increased risk for costly dangers like

• Noncompliance
• Limited transparency
• Workflow inefficiencies
• Data entry errors and security risks.

Using spreadsheets as a compensation management tool likely won’t scale as your business and employee size grows. And given that labor is a significant portion of operating costs across most industries, companies cannot afford to take unnecessary risks.

Also read: '4 Dangers of Using Spreadsheet Templates for Compensation Planning'

Compensation leaders must consider these risks when evaluating compensation management tools, as they can significantly undermine the implementation of their compensation strategy.

Hear what PeopleFluent's Tom Sykes and Ventana Research's Steve Goldberg have to say about the challenges of compensation management and predictions for 2019 in the excerpt below.

Webinar: Compensation 2019 and Beyond [beginning at 13:45]

2. Human Capital Management (HCM) Modules

While HCM solutions typically offer talent management modules—like a compensation module—they aren’t the primary focus or revenue generator for HCM vendors. Because of this, these solutions are often lightweight, lacking the functionality required to handle the demands of enterprise compensation planning.

For instance, most HCM modules struggle to manage the complexities involved in incentive planning. Nor can they handle unique approval workflows for different compensation components (also known as alternate hierarchies).

For enterprise organizations, this means manual workarounds, which compromises efficiency, security, and the overall effectiveness of their compensation strategy.

Related content: '4 Secrets to Pay Transparency Success'

3. Best-of-Breed Software

Prior to the early 2000s, the trend in enterprise HR was to consolidate HR solutions with a single provider. Today, that trend toward vendor consolidation is reversing.

Faced with changing market conditions, workforce expectations, and technology advances, enterprise organizations are realizing the benefits of a best-of-breed solution.

As a stand-alone solution, best-of-breed software like PeopleFluent Compensation enables organizations to tackle end-to-end compensation planning and execution by

• Automating and streamlining total compensation management in one place
• Enabling accurate, consistent, and equitable execution of pay processes
• Controlling visibility into compensation details based on role
• Delivering data insights to help executives, comp planners, and managers implement your compensation strategy.

Critical Factors to Consider When Choosing a Compensation Management Tool

Based on your research, your team’s next step is to compare the pros and cons of each tool, aligning their strengths with your compensation strategy and processes, as well as your business objectives.

With these factors in mind, you can develop questions to guide your assessment.

1. Comprehensive Capabilities – Does the tool support all elements within your rewards programs (e.g., merit and bonus pay, incentives, stock grants, benefits, and perks)?
2. Flexibility – How well does the tool adapt to support your unique requirements?
3. Administrative Time and Effort – What’s the total time required to configure rules, formulas, and calculations, as well as overall administration during a compensation cycle?
4. Vendor Consolidation – Is the vendor already part of your HR ecosystem?
5. System Compatibility and Integration – How well does the tool integrate with your HRIS, performance management software, and other HR tools?
6. Risk Management – Do the tool’s features guard against errors, inaccuracies, and security breaches? Does it support audit and compliance inquiries? How?
7. Communication and Decision Support – Does the tool help reinforce and communicate your compensation strategy to managers and employees?
8. Total Return on Investment – What’s the total value your organization can expect from the tool (e.g., through retention, performance, engagement, and efficiency), minus the cost of ownership?

Among these considerations, greater administrative efficiency, strategy alignment, and total ROI are the leading factors for many enterprise organizations. Armed with that knowledge, what comes next?

Keep reading: 'Why It's Time to Abandon the Merit Matrix'

How to Compare Compensation Management Tools

Selecting the right tool for your organization is a complex process. To help simplify your analysis, the relative strengths and weaknesses of each of these common compensation solutions can be categorized as follows:

Your Guide to Comparing Compensation Management Tools

As organizations become more nimble and teams more collaborative, the functionalities and capabilities of an organization’s compensation management solution will need to evolve at pace.

Armed with an understanding of what spreadsheets, HCM modules, and best-of-breed software can offer, HR leaders can weigh the benefits, risks, and overall costs of each tool and determine the best solution available. The compensation solution you settle on should maximize your strategy, enabling your organization to attract, retain, and develop top talent.

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