How to Create a Compensation Management Process for Companies

With at least 71% of companies struggling to increase their employees’ base pay even by just 4%, having an effective compensation management process is paramount to ensure that everyone within the company gets paid their worth.

But for what it’s worth, the compensation management process has plenty of factors to consider beforehand that can complicate the entire process. Thus, knowing how to properly conduct it can make or break a company in more ways than one.

Read on to learn more about the compensation management process, some examples that companies can follow, as well as some procedures that companies can follow to start creating their own plan moving forward as well.

What is the compensation management process?

The compensation management process is the way for companies to properly distribute compensation to employees. This includes everything from employee compensation, bonuses, and any additional incentives that they may receive.

Studies have shown that 75.6% of employees are less likely to leave their company if there are no fair compensation practices within the company. This means that proper compensation management efforts allow companies to have better employee retention on top of helping boost employee performance as well.

Since it can play a huge part in a company’s presence, it’s highly suggested for companies to use compensation planning software that’s powerful and relatively easy to manage. The more famous ones out there can even provide valuable help with planning bonuses as well.

What are some examples of the compensation management process?

Listed below are some examples of compensation that companies can manage to ensure better performance among employees as well as make sure that retention rates stay high. It can be classified into two categories: direct and indirect compensation.

• Direct compensation: This type of compensation is defined as the form of compensation that an employee directly receives after working for their respective employer. Some examples of direct compensation include base pay, bonuses, commissions, and hourly pay.

• Indirect compensation: Indirect compensation, on the other hand, deals with compensation that cannot be received directly by the employee. This includes health insurance, employee benefits, and even parking privileges to name a few.

How does the compensation management process differ from the rewards process?

Although both directly complement each other, the main difference between compensation management and the rewards process lies in their frequency. Management compensation is done on a regular basis, whereas the rewards process is done depending on several factors like overall performance and is mostly up to the employer’s discretion.

Compensation management is also generally tangible rewards that an employee receives for the work that they’ve done for the company. Rewards, on the other hand, are more motivational in nature and can either be tangible or intangible in nature.

To simplify it, think of management compensation as a form of direct compensation and the rewards process as a form of indirect compensation.

What is the main purpose of the compensation management process?

The main benefits of the compensation management process are to attract and retain talent further. As mentioned earlier, the better an employee’s pay, the less likely they are to leave the company – and a properly managed compensation process allows companies to pay their employees competitively.

The compensation management plan can also help companies create a more streamlined approach towards compensation moving forward as well, especially if the process is made with the help of a reliable compensation planning tool. A more streamlined compensation process allows for a more standardized approach to compensation, which can also future proof their compensation practice.

Streamline it further, and companies can even turn their compensation practice into a more self-sufficient alternative. Doing so allows employees to remotely access information regarding their compensation as well as allowing them to make requests and ask questions about their salaries on the go.

How to create a compensation management process

Listed below are steps that companies can utilize to create a smooth, reliable management compensation process to ensure competitive compensation packages.

1. Step 1: Develop a compensation philosophy

   The first step to create an effective compensation management strategy process is to choose the compensation philosophy that the company will want to provide its employees with pre-existing compensation data. Starting one from the ground up allows companies to be more transparent with their compensation structure to their employees, further solidifying the trust between both parties.

   

   Not only that but consistently sticking to the philosophy allows companies to future-proof their employee compensation management process moving forward as well.

2. Step 2: Properly explain the philosophy to the employees

   Although every compensation philosophy is good at a base level, properly explaining how it works, how compensation is determined, and its components to employees can help translate the process better for them and allow them to have a full understanding of how they will be paid in the future.

   This step can be done in the employee onboarding, or it can be put in their initial contract before signing their initial job offer.

3. Step 3: Design a compensation plan around the philosophy chosen

   After everything has been chosen and explained, the next step in the process is to design the compensation plan that the company will use. For this step, it’s important for both HR professionals, compensation managers, and the higher-ups within the company to come up with compensation decisions and bonus strategies since it can directly impact every worker within the company to keep the employee compensation management smooth.

   Good compensation management software can provide a good compensation process for any philosophy a company has chosen to implement. Salary.com’s compensation planning software can even help companies map out their bonuses and benefits, essentially making it two tools for the price of one.

4. Step 4: Conduct equity audits

   Next, companies should conduct equity audits to ensure that the company's pay structures remain competitive and observe fair pay, even with changes within the organization or the business world in general. Doing so can help boost employee satisfaction while keeping employee engagement relatively high in the long run.

5. Step 5: Ensure regulatory compliance

   Lastly, the company's compensation strategy should be perfectly legal and in compliance with the state’s current labor laws. Keep in mind that each state has different labor laws and minimum wage, and sticking to these regulatory compliances regarding compensation packages can help companies avoid complications in the long run.

Think of the compensation management program as the foundation to start a good company. A company is only as good as its employees, after all – and well-paid employees perform better than the rest. There are plenty of ways to do this but Salary.com is equipped with everything that a company can need for their compensation practice.